Public Law

The Competition Commission has issued a summary of the remedies it proposes to impose on the audit market, following its provisional decision back in February that the market dominance of the ‘Big 4′ audit firms – PWC, Ernst & Young, Deloitte and KPMG – has had the effect of restricting competition within the market. Laura blogged about that decision at the time.

The CC’s main proposals are:

  • FTSE 350 companies should tender for their auditor at least every five years. Companies may defer this by up to two years in exceptional circumstances. There will be a transitional period of five years before this measure comes into full effect.
  • The Financial Reporting Council’s (FRC’s) Audit Quality Review (AQR) team should review every FTSE 350 audit engagement on average every five years. A company’s Audit Committee should report to shareholders on the findings of any AQR report relating to it.
  • The FRC should adopt a secondary objective to have due regard to competition.
  • A prohibition of ‘Big-4-only’ clauses in loan documentation.
  • Shareholders to vote on whether Audit Committee Reports contain sufficient information.
  • Measures to strengthen the accountability of the external auditor to the Audit Committee and reduce the influence of management, including a requirement that only the Audit Committee may negotiate and agree audit fees and the scope of audit work, initiate tender processes, make appointment recommendations and authorise the carrying out of non-audit services.

The CC had previously suggested that it may propose the mandatory rotation of audit firms, so it is notable that that does not feature. That has led to at least one accusation that the Commission has gone soft, though some smaller audit firms have commented that mandatory retendering may have a broadly comparable effect to mandatory switching. The Big 4 firms are in any event not entirely on board with the proposals (which raises the possibility of a challenge in the Competition Appeals Tribunal), and as always there is the possibility of unintended consequences.

The CC will publish its full provisional decision on remedies shortly, and interested parties are invited to comment by 13 August. The CC is then required to publish its final report by 20 October this year.

Please feel free to get in touch if you’re interested in submitting comments to the CC, or if you would like any advice on this investigation or investigations generally.


Charles Livingstone

Latest posts by Charles Livingstone (see all)