British Competition Regulators Tell Companies To Open Their Arms To New Auditors

The U.K.’s Competition Commission is proposing regulations designed to promote competition among auditors of major companies and to ensure that auditors are satisfying the demands of shareholders.

The Competition Commission’s provisional decision seeks to remedy the lack of competition among auditors that serve large British companies.  This problem would be addressed by a requirement that companies open up their audit contracts every five years to new bidders.  Companies, however, would not be required to switch auditors.  These “major” companies would include the 350 largest companies listed on the London Stock Exchange.

 The Competition Commission views audits as a crucial part of reassuring shareholders of the accuracy and dependability of corporate reports. 

In February, the Competition Commission published provisional findings that concluded that competition was restricted in the audit market due to factors that inhibit companies from switching auditors and by the incentives that auditors have to focus on satisfying management instead of shareholders.  Four companies have dominated the auditing sector for years due to companies being hindered from switching auditors.

The remedies being proposed by the Competition Commission include measures to “improve the bargaining position of companies and encourage rivalry among audit firms; measures to enhance the influence of the AC in a company’s relationship with its external auditors; and measures to promote shareholder engagement in the audit process.”  The requirement that companies open their audit contracts to bidders every five years is designed to force auditors to demonstrate that they are doing a good job.  The requirement would also allow other auditors to compete for business on a regular basis.

Another proposed change would be to give shareholders a vote on whether or not the audit reports in the company’s annual reports have enough information in them.  The goal of this proposal would be to ensure that auditors are meeting shareholders’ needs, and not just making management happy.

According to the Competition Commission, “an increase in competition and a refocusing of competition towards shareholder demand should increase audit quality and have important beneficial effects on shareholder value.”

The Competition Commission is seeking comments on the provisional remedies until August 13, 2013.