After four years of debates and two years of the UK Competition Commission (CC) investigation, the final report on concentration levels in the UK audit market is out and the verdict is that 10-year mandatory retendering is to be implemented by all FTSE 350 companies.
As the initially suggested five-year mandatory retendering remedy caused stakeholder uproar from firms, large corporates, banks, professional bodies and even the government, the final report took that into account. And now, as the CC settles on 10 years, the question many have been asking is: have the Big Four won and will this really go far enough to open up the audit market to the mid-tier?
While the CC’s remedies are not as severe as was perhaps initially expected, the move to 10-year retendering with no comply or explain option is likely to cause changes in the market where the average tenure is currently several decades long.
When the debates first started in the House of Lords Economic Affairs Committee the mid-tier went a long way to demonstrate just how hard it is to break into the FTSE 350 market for audits and, since then, we’ve seen the amended FRC Corporate Governance Code, companies’ attitudes changing, as well as market-driven developments among the largest mid-tier players.
The UK now has three very powerful mid-tier players as Baker Tilly UK and BDO UK both bulked up by M&A and with Grant Thornton UK reporting double-digit organic growth.
The message is clear: the ‘next three’ mean business. The effect of the CC remedies still remains to be seen and perhaps it’s too early to speculate in whose favour they are ultimately going to work, but what does need to be acknowledged is that this is a change, and it has led to mountains of publicly accessible evidence on the market and raised awareness that long audit tenures are incompatible with today’s good corporate governance practice.
It has also cemented the power and responsibility of audit committees. And the changes are far from over.
To everyone’s surprise the Lithuanian presidency of the European Council announced the trialogue between the Council, the European Commission and the European Parliament can now go ahead, and with all three parties agreeing on mandatory rotation, it looks likely European companies might have to apply it.
The final legal document is, at best, going to be finalised early next year, however if the trialogue gets gridlocked there’s still a chance audit reform might be diluted as it’s European election year in 2014 and the battle for power will be unleashed among politicians. Until then all firms are likely to focus their attention on the three EU bodies in an attempt to influence the final outcome and, as one of IAB’s sources says, the lobbying, which has already been called excessive by some MEPs, is only likely to step up a gear.
Call for transparencyAs World Survey time approaches (questionnaires to be sent in early November) I’d like to reaffirm to all our readers and survey participants that transparency in your disclosure to us is essential. In dealings with us you know we try to be fair and address issues that you have highlighted, but in return we need you to allow us access to your information and to be true in your disclosures.
In this issue you can read the latest Russia survey, which is one of our essential surveys this year. However, data disclosure among the Big Four has slipped in the past four years in Russia. We’ve now gone from only missing one of the Big Four to missing the information of three of the largest firms.
As accounting firms and the profession itself are key advocates of good corporate governance and are encouraging their clients to become more responsible, transparent and successful it seems surprising that those values are not applied to their disclosure.
I would kindly call on you to take the lead in transparency and disclosure, not only in order to assist us with our analysis, but also to understand the market in which you operate and to appreciate the growth opportunities and challenges that apply to you and your competitors.