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August 16, 2013

Five year retendering unnecessary and expensive: PwC

PwC UK said five year mandatory audit retendering for FTSE350 companies would prove to be costly and warned it could devalue the tender process.

In an open letter to the Competition Commission (CC) responding to the provisional remedies document issued in July, PwC UK said it was concerned that the CC had significantly underestimated the cost of switching from 10 to five year retendering.

The CC estimated the cost for companies would be anywhere from £10m to £30m per annum, however PwC UK said that the CC’s calculations do not "acknowledge the significant costs which have been introduced to the market since the start of the investigation from implementing the Financial Reporting Council’s (FRC) ten year tendering regime".

PwC UK said it estimates the cost of 10 year tendering to be around £44m per annum or 4% of annual FTSE 350 audit fees."We believe that the additional costs of tendering every five years, as compared with at least every ten years, will be around £52m per annum (5% of fees), significantly higher than the CC’s estimates," the firm said.

UnnecessaryPwC UK also argues that, aside from being expensive, moving to five year mandatory retendering would be unnecessary as the current 10 year provision is "already proving effective".

The firm said 50 FTSE companies are expected to tender in 2013, and a similar number are expected to do so in 2014 and that the CC did not take this fully into account in its considerations.

Additionally, the firm said five year tendering could be counterproductive as it takes two to three years for an audit firm to become familiar with a client, "companies will be less likely to switch after just five years, which would reduce the incentive for audit firms to participate in a tender, turning the five year retender into an expensive compliance exercise".

Furthermore, as audit firms need to develop strategies to maximise the prospect of winning either audit or non-audit work, PwC UK argues that the five year period will reduce the number of firms able or willing to participate in a tender where they are delivering non-audit services.

As an alternative, PwC UK recommended to the CC that the Audit Committee (AC) be required to explain to shareholders one year in advance of the audit engagement partner rotation (which can’t exceed five years) whether or not a tender is to be held at that point, and justify a decision not to tender at the five year point, if that is the AC’s recommendation.

"The AC would need to justify any recommendation not to tender at the five year point by explaining to shareholders how the current audit arrangement has been reviewed. This will empower shareholders, via their advisory vote, to confirm the AC recommendation or to register their dissatisfaction so that the AC can respond appropriately at the five year point."

"Secondly, the order would require companies to tender at least every ten years with the possibility of explaining a deferral for a maximum of two years. Although we do not believe that mandating tenders is necessary given the effectiveness of the UK Corporate Governance Code, we recognise that the CC’s proposal to limit deferrals to a maximum of two years would enforce good practice," the firm said.

The CC has until the autumn to finalise its report and remedies for the market.

Related linkPwC response to the CC

Related articleNo mandatory audit firm rotation, but five year audit retendering for UK FTSE350: CC

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