EY comments on Competition Commission final report on the audit market

15 October 2013

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London, Tuesday 15 October 2013: Commenting on the Competition Commission’s (CC) final report into the audit market, EY has welcomed those measures which will enhance competition and quality.

Fierce competition in the audit market

Hywel Ball, managing partner assurance at EY, says, “Overall the process and evidence over two years has confirmed that competition between audit firms is healthy and robust and that for the most part audits are done well - the service we provide to our clients is effective and diligent.

He adds, “We are pleased that the provision for mandatory re-tendering is now every 10 years – the five year provision was, the CC admits, universally opposed by shareholders and Audit Committee Chairs. This compliments the Financial Reporting Council’s (FRC) regime of 10 year ‘comply or explain’. The market has already responded to this regulatory guidance, with a doubling of FTSE 100 audit re-tenders in 2013 and a further increase expected in 2014.”

No evidence of a lack of competition

However, EY says that after two years of investigations and several thousand pages of evidence, the CC has failed to provide evidence of a lack of competition stemming from the conduct of auditors and that any issues that have been identified are a general symptom of the market.

For instance, the CC has concluded that:

  • “We were not able to reach a conclusion on whether audit firms were making profits above competition levels or otherwise in this market…” (paragraph 10 page 2)
  • “We also found that auditors had incentives to challenge executive management…” (paragraph 27 page 5)
  • It did not find sufficient evidence to support and therefore dismissed a number of other theories in relation to the market, outlined in paragraph 29

Given these findings, Ball says it is very puzzling that the CC has reached the conclusion that it has on the adverse effect on competition (AEC) in the UK audit market (paragraph 34). “We are at a loss to understand how the CC has reached the conclusion that, in their view, companies are offered higher prices, lower quality audits and less innovation, particularly given that the CC has found no evidence to suggest that auditors are profiting from audit above competitive levels, that we fail to challenge management or exert undue influence on the market,” he remarks.

Ball says that overall the CC process has been significant in rejecting mandatory rotation, joint audits and further limits on the provision of non-audit services. “Mandatory rotation, as the CC acknowledges, weakens competition and studies have shown it adversely affects audit quality. However, mandatory firm rotation and non-audit services remain on the agenda of the European Commission (EC) whose process continues.”
 
He adds that measures such as open book re-tendering, removal of restrictive clauses in loan agreements and more shareholder involvement will help ensure audits work better. “Throughout this whole process we have been consistent in our views, both in written and oral submissions to the CC, that we support any changes that are both in the public interest and improve audit quality.”

In that regard we support:

  • Open book re-tendering (a remedy proposed by EY)
  • The removal of restrictive clauses in loan agreements
  • Strengthening the role of the Audit Committee (part of EY’s recommendations)
  • More shareholder involvement in auditor selection

Ball concludes: “Now that the proposals are finalised, we will work closely with our clients, investors, the CC, FRC and others to ensure their practical success. In every audit we bid for, win, or look to retain, our primary driver continues to be audit quality, which is firmly in the public interest and the interests of the shareholders of the companies we audit.”