The Universities Superannuation Scheme, the UK’s second-largest pension scheme and an advocate of audit reforms, has welcomed steps taken by the country’s Competition Commission to loosen the stranglehold of the Big Four.
The UK Competition Commission this morning proposed to increase the frequency of audit tendering by FTSE 350 companies but stopped short of requiring them to change firms regularly.
Under the proposed rules, FTSE 350 firms will have to re-tender their audit work every five years. The Financial Reporting Council, the UK’s corporate governance regulator, currently says firms must do this every 10 years or explain why they are not doing so.
The provisional changes come after a February report in which the commission said competition in the market was inhibited by the current rotation system and that auditors were often more focused on pleasing senior management than considering shareholder interests.
Under the new measures, only audit committees will be allowed to negotiate audit work and fees, a move to limit the influence of finance directors, whom the commission said have “considerable influence over the audit relationship”.
The commission also proposed banning ‘Big Four-only’ clauses in loan documentations, which limit the auditors firms can hire to Deloitte, KPMG, PwC and Ernst & Young.
The Competition Commission’s provisional decision is now open to public comment through August 13. The commission will publish a final report by October.
USS Investment Management, which manages £40 billion on behalf of USS, has led a group of institutional investors in calling for audit reforms since last autumn, including mandatory rotations of auditors every 15 years. The group now includes more than 30 investor groups with assets of more than €2 trillion.
Daniel Summerfield, co-head of responsible investment at USS Investment Management, said the firm welcomed rules that change the status quo, but planned to continue a push in Brussels for EU-wide reform.
He said: “How it will work in practice remains to be seen. There is a risk that the incumbent will be re-commissioned. We hope that by allowing this process to kick in, it will encourage other audit firms to come forward and compete for that particular tender.”
USSIM and RPMI Railpen, which manages investments for the Railways Pension Scheme, said in April that they would begin to vote against proposals from FTSE 350 companies to re-appoint audit firms that have worked with the company for more than 15 years.
A spokesman for corporate governance advisor Pirc said the group was very positive about all of the recommendations and pleased that the commission had resisted lobbying form the “Big Four” which the group said are “more powerful than the banks because unlike the banks, they are represented in every market globally”.
He added: “Pirc very early on supported mandatory rotation. That would have been ideal, but this is still good.”
James Roberts, senior audit partner at BDO, which is not among the UK’s Big Four professional services firms, said in a statement that the measures would “accelerate” change in the audit market. Roberts added, however, that more clarity was needed on the tendering practice.
He said: “We would have welcomed proposals to facilitate a more transparent tender process, drawing on the best features of procurement practice.”
The FRC introduced the 10-year comply or explain rule in October. In a statement, the regulator said it had concerns about some of the proposed rules and their costs, adding that it had previously urged the Competition Commission to give the 10-year tendering cycle “the opportunity to prove itself”.
The Big Four, meanwhile were also critical of the proposed mandatory retendering rule.
Tony Cates, UK head of audit at KPMG, said the five-year re-tendering process would “feel relentless” to firms, their audit committees and investors. He added that the process could result in tendering becoming “an empty box-ticking exercise”.
David Barnes, Deloitte’s UK head of public policy, said in a statement that the mandatory re-tendering was “unlikely to advance audit quality or increase market competition, nor will it lead to benefits for shareholders or companies”.
James Chalmers, head of assurance at PwC said in a statement that it agreed with the commission’s decision not to pursue mandatory rotation but warned that the shorter re-tendering period would have a “major impact” on companies.
Hywel Ball, managing partner for assurance in the UK and Ireland at EY, said in a statement on the shorter re-tendering cycle: “We’ve yet to see any compelling evidence from the CC to support this change. It is not in the public interest and will likely only serve to increase the financial burden on companies at a time of ongoing economic uncertainty.”
