The Financial Reporting Council (FRC) has published its response to the Competition Commission’s Summary of Provisional Decision on Remedies for the Statutory Audit Market
The FRC welcomes the withdrawal of some earlier proposals such as mandatory rotation of audit firms, compulsory joint audit, and a role for the FRC in the appointment of auditors; it is however concerned that five yearly audit tendering will not achieve the stated aim of promoting competition in the audit market.
FRC CEO Stephen Haddrill said:
“The FRC supports the objectives that the Commission is seeking to achieve through the remedies it has proposed. Nevertheless, our response includes a number of comments and suggestions (below), particularly in relation to the remit of the FRC’s Audit Quality Review programme, and the five year retendering period which need more careful consideration. In particular, we are concerned that tendering on a five year basis will involve additional costs and risks to companies and firms."
The FRC believes strongly that requiring companies to retender their audit contract every five years would be disproportionately costly for companies and audit firms and could undermine the Commission’s goal of promoting competition in the audit market. The FRC is concerned by the risk that tendering at five yearly intervals will not be taken seriously by companies or firms and may result in a sham process which could greatly undermine the serious approach already being shown to ten year retendering introduced in updates to the UK Corporate Governance Code last year. Further, the proposal by the Commission to impose this change via an Order undermines the successful comply or explain approach at the heart of the UK’s corporate governance philosophy.
Audit Quality Review
The FRC supports the Commission’s objective of enhancing the effectiveness of audit committee oversight of audits by increasing the availability of information on audit quality at the main firms auditing public interest entities. However by extending the AQR reporting to include all FTSE 350 companies every five years and increasing the remit to include firms auditing ten or more public interest entities, the proposals could undermine the FRC’s current risk-based approach to the selection of audits for inspection. The FRC would wish to consider how to address this and other matters such as the additional funding needed for a larger investigation remit during its consideration of the Commission's eventual recommendation.
Enhanced shareholder engagement
The FRC has been keen to encourage enhanced shareholder engagement with companies on audit issues and is willing to consider amendments to the Corporate Governance Code, including the remedies proposed by the Commission, to support its own recent changes already made to enhance audit committee reporting.
Competition objective for the FRC
The FRC is not a competition regulator and it does not have the powers which would enable it to function as one. Whilst the FRC has, and will continue to have, due regard for competition issues, its focus must remain the quality of corporate and financial reporting.
Notes to editors:
The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
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