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UK CMA and European Commission take hard stand on new rotation rules

UK FTSE 350 companies which have recently retendered or changed their auditor in the UK are most likely going to have to do so again as early as 2016 under the new audit rules introduced in the UK and the European Union (EU).

In its draft order on statutory audit services for large companies, UK Competition and Market Authority (CMA )ruled that businesses which had recently appointed their auditors will not benefit from the transition period and under these rules would be the first to put their audit out for tender again, some as early as June 2016.

The CMA's stand was later supported by the European Commission (EC) which published a letter in early September stating that the EU regulation was to be interpreted in the same way by other EU member states.

The profession had expressed its concern on the matter while answering the public consultation launched in July this year by CMA on its draft order which aimed to align the EU audit regulation with the findings of the UK Competition Commission (CC's) investigation.

PwC UK partner Gilly Lord said: "As the CMA is saying we want 10 years tendering and the EU says you must rotate after 20 years if you tender after 10 years, it looks like the two regimes will overlap neatly."

However the profession is concerned over the transition periods adopted. In their draft order CMA aligned with the provisions of the EU regulation which divides companies in three categories, as of 17 June 2014 (date the regulation was issued): Companies which had an auditor for 20 years or more will have six years to comply with the new rules; Companies which had the same auditor between 11 and 20 years will benefit from a nine year transition period.

But for the third category: companies which had the same auditor for less than 11 years, the EU provision could be interpreted in different ways.

"One way to read it was to say that these companies would beneficiate from a 12 years transition period, which is quite logical," Lord said. "Another way of reading the rule is to say that these companies would be moved straight on in the new regime without transition."

Businesses, which had appointed an auditor in 2005, would then have to put their audits to tender as soon as June 2016 (date at which the regulation will be enforced). In their draft order CMA chose the second interpretation.

"We don't believe that this interpretation is the right one," Lord opposed. "And it is the most fundamental point we are making in our response to CMA."

ICAEW head of integrity and markets Tony Bromell said the profession had hoped the rule would not be interpreted in this way. "But it is the one CMA adopted and it is the one that in the last week the European Commission has also adopted," he said referring to an open letter by EC Internal Market and Services director general Jonathan Faull which aims to clarify the EU rules.

In his letter Faull clearly states that PIEs which appointed their auditors on or after 16 June 2003, "will need to change their given audit firm or statutory auditors by 16 June 2016".

Lord highlighted that this letter was published nearly two months after CMA launched their consultation and a few weeks after accounting firms and professional bodies had sent their replies.

"That letter is not legally bidding," she added. "But having said that I suspect it will be very influential when CMA decides if they want to make any changes to the order."

Related article:

UK competition authority launches consultation on draft order for audit market remedies

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