The Financial Reporting Council (FRC) has welcomed the Competition Commission’s (CC) preliminary findings on the statutory audit services market.
Stephen Haddrill, chief executive of the FRC, noted the importance of investigating the audit market and how it serves investors, while making three key suggestions on the CC’s findings.
The primary issue for the FRC is the CC’s preference for mandatory audit rotation as opposed to mandatory retendering. The FRC prefers retendering, believing full rotation to have a potential "adverse effect on audit quality, artificially constraining businesses’ choice of audit firm."
It would also prefer any tendering to be on a ‘comply or explain’ basis, as this "allows for flexibility" and "recognises the role of the investor in key governance decisions."
However, the FRC supported the CC’s aim to reinforce the external auditor’s accountability to the audit committee, recognising that the UK Corporate Governance Code has given the audit committee’s reporting responsibilities to investors.
However, it says that newly introduced extended reporting requirements have increased the remit of both auditors and audit committees, and that these changes need time to take effect, with the impact being monitored.
On the topic of audit quality review, the FRC says that as a strong inspection regime is "an important component of giving confidence to investors", it agrees with the CC that more frequent AQR inspections "should be considered" in some cases of higher risk.
Haddrill said early signs hinted that the FRC’s autumn revision of the UK Corporate Governance Code, which included provisions on 10 year retendering and increased reporting responsibilities of audit committees to investors "are already making a difference."
He added: "We are keen to discuss with the Commission the case for further steps once there has been sufficient time for these changes to take full effect."