New Auditor Rules to Promote Effectiveness

Auditors must be reviewed every five years, the UK’s Competition Commission has declared.

(July 23, 2013) — Britain’s big four auditors breathed a sigh of relief yesterday after it was revealed businesses won’t be forced to change their auditors every year.

Large UK companies will however be forced to look every five years at whether auditors other than the incumbent will provide a better service, following a decision yesterday from the Competition Commission.

The decision is likely to be seen as a win of sorts for the big four auditors-KMPG, Deloitte, Ernst & Young, and PricewaterhouseCoopers. A ruling to force auditors to pitch for business every year would have been disruptive, particularly for those that operate over long time horizons, such as pension funds, according to previous media reports on the proposals.

The Financial Reporting Council, a UK body responsible for promoting high quality corporate governance and reporting to foster investment, welcomed the removal of annual tendering from the Competition Commission’s recommendations, but remained concerned about the forced five-year reviews.

“We have previously urged the Commission to respect the 10-year audit tendering cycle introduced to the Corporate Governance Code in 2012 and to give that timeframe the opportunity to prove itself. The Commission’s proposed five-year cycle for tendering also removes ‘comply or explain’ in this respect, which is a central tenet of the UK Corporate Governance Code,” it said in a statement.

“We will consider the proposal to increase the volume of audit inspections and reporting carried out by the FRC, particularly in view of extensions to our inspection work being proposed at European level. We will also take into account the balance of costs to shareholders as well as any potential benefits and how this would impact our risk based approach.”

The Competition Commission first started looking at the need for auditor rotation after it became concerned that 95% of FTSE 350 businesses’ books were being examined by the KPMG, PricewaterhouseCoopers, Deloitte, or Ernst & Young.

Mid-tier firms, such as BDO and Grant Thornton, have long argued it is nearly impossible to compete in what is viewed as a closed club, claiming that they miss out on the chance to rake in a fair portion of £800 million in fees.

The Competition Commission’s call to enhance the quality of auditing practices comes at a poignant time, as the Serious Fraud Office was forced to abandon a second trial for the directors of healthcare technology giant iSoft, accused of fraud through misleading the market about the company’s financial position.

The case against iSoft’s Patrick Cryne, Stephen Graham, Timothy Whiston, and John Whelan was originally made in 2006 by the Financial Services Authority (FSA). It took six years to come to trial, and when the jurors failed to reach a verdict a retrial was ordered.

A spokesman for the FCA said legal argument arose when old file notes dating back to 2009 were disclosed to the defence, resulting in procedural problems that could not be resolved.

Tracey McDermott, director of enforcement and financial crime at the Financial Conduct Authority (FCA), which has in part replaced the FSA, said: “This is of course a disappointing outcome. The problems that have arisen in this case result from a particularly unusual set of circumstances, which are unlikely to recur. As with all our cases, win or lose, we will look to see what lessons can be learned for the future.” 

Martin Wheatley, chief executive of the FCA, added: “This decision not to seek a second retrial does not undermine our determination to bring and prosecute difficult cases. The FCA will continue to use our enforcement powers as one of the ways that we bring about a change in the culture of firms that operate in the UK markets. We have to make sure markets work well, and that firms operating within them put the interests of their customers’ and investors–and not self-interest–first.” 

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