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August 28, 2013

UK mid-tier firm opinions split on the benefits of five year retendering

Responding to the UK Competition Commission’s (CC) provisional decision on remedies most UK mid-tier firms have welcomed the proposed five year mandatory retendering provision for FTSE 350, however some have raised concerns over the provision.

BDO UK said in its letter to the CC that it is in favour of the proposed market remedies and that mandatory retendering "backed up by the force of law" will energise the market for audit firms.

The package of remedies provisionally decided by the CC is a reasonable step in the right direction" Grant Thornton UK said.

However, the firm said "the package would be even more effective if additional provisions were included, which are needed to address "investor concerns over the current length of audit tenures in the FTSE 350".

Mazars said that while it supports the provisional decision on remedies it does not believe that it will be effective. Mazars said that to be effective the CC’s provisional decision on remedies should encourage joint audits and contain "much stronger restrictions than currently apply on the provision of non-audit services by the incumbent auditor".

The mid-tier firm also warned that the reforms must be monitored to ensure their effectiveness since previous market-based reforms "have been notable for their lack of success".

Similar to the Big Four and other responses received by the CC the main arguments against five year retendering were in relation to cost and going against the every 10 year retendering provision in the recently revised UK Corporate Governance Code.

"We are concerned that requiring tendering every five years, rather than ten, will lead to excessive costs for businesses and indeed for audit firms," Kingston Smith said in its response.

The firm said: "In our view ten years, or two partner rotation cycles, would be sufficient and would be less disruptive". The firm added that while the provisional decision on remedies will improve competition between the Big-Four companies, it is less hopeful that it will improve competition in the wider market.

Kingston Smith suggested to the CC that it be a requirement to include at least one non-Big-Four firm in the invitations to tender.

UK Praxity member firms said in their joint response to the CC that "the proposals will guarantee that there will be further costs in the system without necessarily there being a requisite benefit".

Praxity members said mandatory retendering would lead to a "material reduction in the number of ‘valid’ tenders, as non-Big Four firms in particular realise that this is simply a process, required by law, but where the result is not in doubt at the start".

The CC is expected to issue the final decision on remedies and a full report in the autumn.

Written by Sebastian Clark

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UK large corporates and banks against five-year retendering

Five year retendering unnecessary and expensive: PwC

Five year retendering could result in a "sham process": FRC

Analysis: Is five year retendering going to have the desired effect?

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