Competition Commission stops short of requiring Mandatory Rotation of Auditors

by K&L Gates LLP

As part of its ongoing investigation into the UK audit services market, the Competition Commission ("CC") has provisionally decided on a package of remedies that will require FTSE 350 companies to put auditing contracts out to tender at least every five years, encourage shareholder engagement in the audit process and ban "Big-Four-only" clauses in loan agreements. However, in a move welcomed by the top accountancy firms, the CC has declined to impose a mandatory rotation of audit firms.

The CC’s Investigation
The CC has been conducting its market investigation since October 2011, although the audit services market had already been under scrutiny for many years - for example the Office of Fair Trading conducted a provisional investigation following the collapse of Arthur Andersen and Enron concluding in 2002. The CC's February report [1] had found that the dominance of the largest accountancy firms (the "Big Four") is protected by the difficulties of comparing alternative services and the cost of switching auditor. The CC also expressed concerns that auditing contracts were protecting the interests of company management rather than those of shareholders.

The CC has found that when tender processes do take place, they are thorough, fair and transparent and produce effective competition but that more are required. The Financial Reporting Council has already imposed a 10-year tender rule but the CC hopes that more frequent tendering will ensure that companies make regular and well-informed assessments of their auditor. Under the CC's proposal, the five-year tender requirement will be extended to seven years in exceptional circumstances.

The other primary measures proposed by the CC are as follows:

  • the Financial Reporting Council’s Audit Quality Review (“AQR”) team should review every audit engagement in the FTSE 350 on average every five years. The Audit Committee should report to shareholders on the findings of any AQR report;
  • “Big-Four-only” clauses in loan documentation should be prohibited, which would encompass all clauses that limit a company’s choice of auditor to a preselected list;
  • shareholders should vote on whether Audit Committee Reports in company annual reports contain sufficient information;
  • measures should be introduced to strengthen the accountability of the external auditor to the Audit Committee and reduce the influence of management, including a stipulation that only the Audit Committee is permitted to negotiate and agree audit fees and the scope of audit work, initiate tender processes, make recommendations for appointment of auditors and authorise the external audit firm to carry out non-audit services.

Some more dramatic measures were rejected by the CC, including requiring companies to change auditors periodically and limiting auditors' ability to provide other financial services. Laura Carstensen, chairman of the audit market investigation group, commented, "We gave careful consideration to other measures including mandatory switching, but we think that the measures that we have provisionally chosen will be the most effective and proportionate way to address the problems we have found. We do not see a competition problem with audit firms retaining business if they do a good job - but they will have to demonstrate this on a regular basis.”

Nevertheless, some argue that even the CC's proposed remedies go too far and are excessively costly. The UK head of audit at one of the Big Four commented, "Large, global companies are inescapably complex; when these businesses put their audits out to tender it creates a substantial burden and the process can take up to two years of preparation." The CC estimates that the cost to the industry of these reforms will be less than £30 million a year once it is up and running, but the Big Four argue it will be “far higher” than that.

What happens next?
The proposals will be open to public comment until 13 August 2013. The CC's indicative timetable states that it hopes to publish its final report during September 2013 and its statutory deadline falls on 20 October 2013. In any event, if the CC proceeds with the proposed five-year tender obligation, there will be a five-year transitional period before this requirement takes effect.

The audit industry was widely criticised during the financial crisis for not doing enough to flag up concerns about company balance sheets and not scrutinising banks' books in enough detail. These concerns have resulted in the European Union also considering action in this area. It seems likely that, if approved, the EU initiative will go farther than the CC, for example in proposing mandatory switching of auditors every 10-25 years and potentially imposing curbs on their ability to provide advisory work.

[1]   Its provisional findings announced on 22 February 2013.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.