Gavin Hinks, Accountancy Age, Friday 4 June 2010 at 07:28:00

Watchdog says it will look for new measures this years to improve auditchoice


Measures introduced to open up the market for big public company audits tofirms outside the Big Four have shown no evidence of success, according to areport from the Financial Reporting Council (FRC).

The FRC, now under the leadership of Stephen Haddrill, has announced it willnow re-examine the issue before the end of the year to see what others stepsmight be taken.

"To date there is limited evidence that the recommendations have had asignificant impact on market concentration and the risks arising from thatconcentration. Over the next six months the FRC will develop proposals on whatfurther action in this area is appropriate, and if so what form that actionmight take," the report said.

In October 2007 15 recommendations were unveiled which aimed at improvingefficiency in the audit market and improving auditor choice for big publiccompanies.

In particular one of the recommendations targeted the problem of companiesbeing restricted in their choice of auditor to the Big Four through contractualobligations, mainly to banks.

The FRC wanted companies to report on the issue publicly but the latestreview reveals that companies have responded poorly to the request.

Of 200 companies sampled just 28 reported on contractual restrictions and allof them said they were under no obligation.

The rest of the companies were silent on the issue and the FRC said: "It isunclear how many of those which were silent on the issue are subject to someform of restriction from lenders or others."

The report added that the watchdog "continues to receive anecdotal reports ofcontractual restrictions, but without greater disclosure in the area bycompanies it is difficult to assess whether the practice remains widespread."

In a further disappointment for the regulators just seven companies reportedon what would happen if they lost their auditor and of those five merely saidthat the issue had been considered "without any indication of the outcome ofthat consideration".

Barely a quarter of the companies reported on the "tenure' of their incumbentauditor and "many of those that did failed to state exactly how long therelationship had lasted, noting that the firm concerned had been auditor for'many years' or 'a number of years'."

Just two companies in the 200 tested reported on having a formal policy ofputting their audits out to tender.

The FRC also concluded that that "the biggest challenge to increasing choicein the audit market remains the question of perception."

After speaking to a number of audit committee chairman the FRC found that a"majority" were reluctant to select a non Big Four for "perceived reputationalreasons".

After testing proposal documents from the big audit firms the FRC concludedthat "the largest firms focused heavily on size in their proposal documents. Thefirm's size, together with its brand, was marketed as a proxy for quality."

The FRC said this was surprising because the companies involved had straightforward audit requirements.