UK regulator creates 10-year retendering requirement

Companies in the U.K. FTSE 350 will be required to place their audit contracts out for bid every 10 years under new rules announced Tuesday by the U.K. Competition Commission (CC).

The rules represent a softening of the five-year mandatory retendering proposed earlier by the CC. Some businesses and regulators, including the U.K. Financial Reporting Council (FRC), voiced opposition to the five-year retendering proposal.

But the CC’s rules are stronger than those imposed in 2012 by the FRC, which merely required companies that did not go to tender every 10 years to explain their reasons for not retendering.

“After listening carefully, in particular to shareholders whose interests have been our main focus, and the FRC, we have decided that 10 years is the appropriate backstop period for mandating that the audit engagement be put out to tender,” Laura Carstensen, chairman of the CC’s Audit Market Investigation Group, said in a news release.

The CC said in a news release that it is aware that its rules may be affected by audit reform measures the European Union (EU) is considering. But the CC said it is acting based on the evidence of its own investigation in the absence of definitive EU proposals. The CC said it will be able to amend its rules, if necessary, if the EU agrees upon measures.

The EU is considering a possible mandatory audit firm rotation requirement. The European Parliament’s Legal Affairs Committee voted in April in favor of a draft law that would require public-interest entities such as banks, insurance firms, and listed companies to rotate audit firms every 14 years. That period could be extended to 25 years when certain safeguards are put into place. But a final agreement must be reached with EU member states and approved by Parliament before rotation is required.

The CC also will:

• Require that the FRC’s Audit Quality Review (AQR) team review every audit engagement in the FTSE 350 every five years, on average. Company audit committees would be required to report to shareholders the findings of any AQR report.
• Prohibit Big Four-only clauses in loan agreements, although it will be possible for agreements to specify that any auditor should satisfy objective criteria.
• Require a shareholder vote at the annual meeting on whether audit committee reports in company annual reports are satisfactory.
• Include measures to strengthen the accountability of the external auditor to the audit committee and reduce the influence of management. The audit committee would be the only entity permitted to negotiate audit fees, influence the scope of audit work, initiate tender processes, recommend the appointment of auditors, and authorize the external audit firm to carry out nonaudit services.

“We are pleased that the Competition Commission has listened to concerns over the appropriate period within which FTSE 350 companies should put their audits out to tender and has brought it in line with the time period in the Corporate Governance Code,” said Nick Topazio, CGMA, head of corporate reporting policy for the Chartered Institute of Management Accountants. “The emphasis on audit committee reporting, and accountability of audit firms to the audit committee, will help to further improve governance in this area.”

The CC said it will publish its full report shortly and will work toward drawing up an order for the elements of the remedy package it can require and make recommendations for the others. The requirements are expected to come into force in the last quarter of 2014.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.