Commenting on its summary of provisional findings released this morning, the Competition Commission (CC) has been receptive to market sentiment that points raised represent a potentially bold challenge to the status quo with regard to audit market concentration.
Laura Carstensen, chairman of the CC’s audit investigation group, told IAB the summary contained "some quite radical suggestions" in terms of measures under consultation, and which addressed the fundamental question of "whether there should be a culture shift from relationship-based auditing to something else".
Carstensen explained the remedies proposed addressed "the issues around familiarity – they are a nudge to behavioural change of quite a deep kind. I do regard them to represent, if we go down that route, quite a change, but there is a lot of consultation to come and I think we should discuss it."
In the summary released today, the CC announced findings that auditors tended to have a greater focus on the needs of client businesses’ management, rather than those of shareholders.
"This is not a question of anyone behaving badly" said Carstensen, "more of system design – shareholders and investors felt they have very little visibility on auditor selection and the audit process. In actual fact, management tends to come up with recommendation and they tend to go straight through." With this culture in place, she said, "it’s unsurprising that auditors get very familiar with management. In that situation, we are asking: where do incentives lie, and could we do something to adjust the situation?".
Addressing concerns raised by PwC UK’s UK’s head of reputation and public policy Richard Sexton that the CC had "grossly underestimated" the role of the audit committee in protecting the interests of shareholders in a legal environment where auditors are legally prohibited from communicating with shareholders, Carstensen argued: "There is of course a point about preferential communication with some shareholders over others, so we are aware there are limitations – with good reasons – on what can currently happen." "We do want to consult specifically on whether measures can be introduced – at AGMs for example – to allow more communication to take place" Carstensen added. "The aim is to see what could give shareholders more visibility on the whole process. Information arms you to have a view, and without that, it’s very difficult for shareholders to exercise power".
On the subject of mandatory tendering every 7 years as opposed to the 10 currently suggested by the FRC, Carstensen reminded IAB that the findings were still very much at the stage of consultation, and that further recommendations would be contingent on what responses were received.
Commenting further on the subject, Carstensen said "There is evidence there is a price benefit to tendering, but we have to weigh up the costs and benefits – we want to know how we can find a point of equilibrium where the benefits are captured, but in such a way that it is not unduly costly or burdensome."
Concluding that the CC was "Genuinely open minded" on the subject of remedies, Carstensen told IAB she expected today’s comments and future findings from the commission to have an impact on the continuing EU debate on audit reform. "Brussels has a lot of respect for our process as very rigorous and very evidence based. I would expect Brussels to be very interested in what we conclude, and the basis on which we reach it."