London: Britain's Big Four professional services firms are heaving a big sigh of relief this morning after The Competition Commission (CC) indicated that it would not restrict their ability to offer consulting services.
Yesterday the Commission published a provisional decision regarding the remedies it is considering introducing when it publishes its final report on the supply of statutory audit services to large companies in the UK this autumn.
Whilst the CC's deliberations have concentrated on audit competition and quality, it confirms in passing that it, "has decided against ..., further constraints on audit firms providing non-audit services." The Big Four firms had lobbied vociferously against further limiting of their ability to offer lucrative consulting services to audit clients.
There is similar, if not unqualified relief, that the CC will not insist on mandatory switching of auditors; joint audits; shareholder or FRC responsibility for auditor reappointment or independently resourced risk and Audit Committees.
James Chalmers, head of assurance at PwC, said, "This is a significant package of remedies clearly focused on competition, transparency and quality. The proposed halving of the retendering period from the Financial Reporting Council's recently introduced 10 year regime to five years is a significant change which will have a major impact on UK companies. It will be critical to get the transition right in order to manage the cost for businesses and potential market disruption.
"It is positive to see recognition of the importance of the role of the Audit Committee and the effectiveness of tenders, which the Commission recognises are thorough, fair and transparent.
"We have long argued against mandatory rotation because of its adverse effects on competition. After careful and detailed consideration of the evidence and listening to the concerns of the market, the Competition Commission has arrived at the same conclusion."
Laura Carstensen, Chairman of the CC's Audit Market Investigation Group, said, 'This is a comprehensive set of measures that will ensure that shareholders are better served by a more competitive market for statutory audit which is more responsive to their requirements. More frequent tendering will ensure that companies make regular and well informed assessments of whether their incumbent auditor is competitive and will open up more opportunities for other firms to compete. A more dynamic, contestable market will reduce the dangers that come with over-familiarity and long, unchallenged tenures.
"We have found that tender processes are thorough, fair and transparent processes which produced effective competition--but we need to see more of them. We think that a five-year period is an appropriate period to subject the engagement to scrutiny and challenge--and it is also aligned with existing FRC guidelines on rotating the Audit Engagement Partner, making it an appropriate time to put the service out to tender.
"The audit function is too important to be left undisturbed for longer than five years. Audit provides a vital role in providing assurance to shareholders on the reliability and accuracy of corporate reporting and an audit market in which shareholders can have increased confidence will have benefits for the economy more widely. Whilst there are costs involved in going out to tender, we think that they are outweighed by the benefits of a more competitive market in which shareholders can have increased trust.
"We gave careful consideration to other measures, including mandatory switching, but we think that the measures that we have provisionally chosen will be the most effective and proportionate way to address the problems we have found. We do not see a competition problem with audit firms retaining business if they do a good job--but they will have to demonstrate this on a regular basis.'
The CC says it is aware that its proposed package of remedies may be affected by measures currently being discussed by the EU — which do include proposals for restricting the provision of advisory services by auditors. However, it points out that there are as yet no definitive EU proposals, and so it has "proceeded on the basis of the evidence produced by our inquiry."
The CC will publish the full provisional decision on remedies shortly and consider all responses before publishing its final report by 20 October 2013.