Big Four could face further restraints from EU law as audit tendering toughened; Compulsory auditor switching rejected by watchdog; Auditors challenge tender cost estimate from watchdog

Reuters/London

Britain’s competition watchdog has ditched its more radical ideas for shaking up an accounting market dominated by the “Big Four” audit firms, leaving any tougher action to the European Union.

Auditors are under pressure to change how they operate after giving banks a clean bill of health just months before several lenders had to be rescued by taxpayers in the financial crisis.

Britain’s Competition Commission set out yesterday the changes it plans to introduce in an accounting market dominated by Deloitte, KPMG, PricewaterhouseCoopers and Ernst & Young, with the principal reform being a requirement for companies to put their audit work out to tender every five years.

That is a significant hardening of a new rule from the sector’s regulator, the Financial Reporting Council (FRC), which has asked companies to consider once every decade putting their audit work out to tender.

However, the watchdog decided against forcing companies to actually switch auditor on a regular basis or to require two auditors to check the books of a company. It also did not impose more curbs on the type of advisory work an accountant can offer a company whose books it already checks.

Smaller accounting firms like Mazars, BDO, Grant Thornton and Reeves have called for regulatory intervention to help them compete more effectively with the Big Four.

“We are not there to give any particular competitor a leg up but I am confident these measures will result in a much more competitive audit market,” Laura Carstensen, chairman of the Competition Commission’s audit market probe, told Reuters.

BDO said the package could accelerate much needed change, but would be limited in its impact if only the small number of big accountants were invited by companies to tender for work.

Deloitte said five-year tendering was unlikely to improve audit quality or increase competition, while Ernst & Young said competition between audit firms was already healthy and robust and KPMG said regular tenders would cost far more than the 30mn pounds ($45.8mn) the competition body has estimated in total for companies and accountants annually.

“Five-year audit tendering will feel relentless to many companies ... with the possible end result that the process of tendering becomes an empty box-ticking exercise,” KPMG added.

Carstensen said once tendering was normalised it would become streamlined and efficient.

The watchdog said Britain’s top 350 listed companies could defer putting out their accounting work to tender by a further two years in exceptional circumstances.

Although it has rejected the mandatory switching of auditors or more curbs on their advisory work, the watchdog faces being overruled by a draft European Union law now undergoing approval.

Carstensen said the results of her inquiry did not support the idea of making the switching of auditors mandatory, a step Britain’s government is against at the EU level.

In the US the House of Representatives voted on July 8 to block the country’s auditor industry watchdog from forcing companies to switch accountants.

The Competition Commission said the FRC would get powers to boost competition and be required to review every audit engagement at the top 350 companies roughly every five years.

However, Ernst & Young questioned whether the FRC, which had no immediate comment, has enough resources.

The Competition Commission is also giving shareholders a vote on audit matters and banning banks from inserting clauses in loans to companies that insist auditing is done by one of the Big Four.

The plans will be put out to public consultation before being published in final form in October for implementation, though no major changes are expected.