Competition Commission’s Provisional findings: EY submits response

10 April 2013

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EY has submitted its response to the Competition Commission’s (CC) provisional findings and remedies in relation to the UK audit market for large listed companies.

Commenting on the submission, Hywel Ball, head of assurance, UK & Ireland, at EY, says:

“We remain focused first and foremost on audit quality – it is our primary responsibility and directly in the interests of the shareholders of the companies we audit.

“There is a useful debate to be had about corporate governance, including the role and value of audits. And we support measures that improve audit quality – our number one priority. For instance, we support giving shareholders a greater involvement in auditor selection.”

FRC is already making significant impact – Corporate Governance Code

Ball continues: “There have already been significant steps towards improving audit quality, led by the FRC in its recent changes to the Corporate Governance Code, based on ‘comply or explain’. We have been fully engaged in this and believe the changes, including mandatory retendering every 10 years, which are already starting to have a positive impact on the market. It is premature of the CC to suggest that further changes need to be made to the Code.”

CC fails to fully understand the corporate governance regime

“Many of the Competition Commission’s findings and conclusions suggest a misunderstanding of the entire UK corporate governance regime, which is an extensive regime of finely balanced rules and principles. The aspects of the regime applicable to audits is only one element of a much more extensive corporate governance framework. The CC has focused on limited elements of the regime and largely ignored the roles of Chairman, non-executive directors, Senior Independent Director, and the over-arching role of the unitary board.

“Aspects of the CC provisional report and remedies are frankly flawed, unsubstantiated, lack evidence and explanation and fail to account for unintended consequences.”

EY supports...

The decision to adopt proposals for tenders on an open-book basis

It will involve audit committees working with the incumbent auditor to develop a document setting out the principal audit risks, staffing model to respond to those risks, breakdown of audit hours by staff/ grade, single audit issues accounting for more than 5% of audit hours

The removal of clauses in loan documents

This limits auditor choice to the Big 4 firms. We are therefore fully supportive of this proposal. But we think it could go one stage further and consider extending the prohibition to all standard forms used by banks.

Practical recommendations to strengthen role of the Audit Committee

However, the CC undervalues the power and influence of ACs, and ACCs in particular, to secure audit quality and auditor independence in the interests of shareholders. 

Measures to give shareholders a greater involvement in auditor selection.

 

EY do not support...

Increasing the frequency of mandatory retendering

The FRC 10-year proposals have been in place only for months and it’s unclear on what basis is the conclusion they are inadequate. No analysis or evidence is offered as to why five or seven years would be appropriate.

The results might be expected to include more audit firms deciding not to respond to bids, submitting less detailed bids, and being more selective. Under the revised UK Corporate Governance Code it is expected tender processes would be initiated in 35 FTSE 350 companies each year. CC proposals would raise that to 50 or 70.

As a simple matter of practicality audit firms will be unable to devote the effort and resources in responding to 70 tenders a year. The shorter time frame would increase the focus of competition at set intervals, but limit the active ongoing competition we currently see.

Mandatory firm rotation

Experience in other countries where this has been adopted demonstrates many of the problems: that enforced limitations on audit tenure can result in greater concentration and increased overall costs, while threatening audit quality.

CC’s lack of approval for ‘comply or explain’

The UK Corporate Governance Code makes clear Comply or Explain is the ‘”trademark of corporate governance in the UK...strongly supported by both companies and shareholders”. Companies could be forced to initiate a tender process at a time when it is not in their interests, or that of its shareholders.