The Competition Commission began an investigation into statutory audit services to FTSE 350 companies in 2011 following a request from the Office of Fair Trading.  They found that there were features within the UK market for the supply of audit services (such as barriers which prevented companies from switching auditors) which either combined or individually resulted in an “adverse effect on competition” (AEC).  The Competition Commission noted: 

As a result of the AEC, we provisionally found that companies are offered higher prices, lower quality and less innovation and differentiation of offering than would be the case in a market without the features, and shareholders and investors (as potential future shareholders) have demand which is unmet

The proposals of the Competition Commission are intended to address what they see as lack of competition within the provision of statutory audit services in the UK and ensure that competition is directed towards satisfying the demands of shareholders.  The Competition Commission comments that: 

The remedy package includes 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 proposals are also intended to increase the influence of audit committees, something that the FRC has re-emphasised in publishing their guidelines for an efficient audit tender process. 

The proposal requiring FTSE 350 companies to put their audit out to tender at least every five years halves the timeframe for retendering recently introduced by the Financial Reporting Council (FRC) as part of their revisions to the UK Corporate Governance Code.  

The Competition Commission were of the view that ten years is “too long a time for an audit engagement not to be subject to the high level of scrutiny and competition that that we found takes place within a rigorous tender process”. 

In response, the FRC have commented that they would like the Competition Commission to “respect the ten year audit tendering cycle introduced to the Corporate Governance Code in 2012 and give that timeframe the opportunity to prove itself”.  They also comment that “the Commission’s proposed five year cycle for tendering also removes comply or explain which is a central tenet of the UK Corporate Governance Code”. 

The Competition Commission notes that “Companies may defer this obligation by up to two years if there are exceptional circumstances” and propose that there is a five year transitional period before the requirements take effect. 

Aside from the proposals for five year audit tendering, the Competition Commission also proposes a number of other measures to increase competition in their ‘Summary of provisional decision on remedies’: 

There are a number of other measures that the Competition Commission have not included in their provisional remedies such as mandatory auditor rotation and further constraints on non-audit services .  The FRC has commented that it supports the removal of original proposals for mandatory auditor rotation, however they highlight that the proposed measures will result in increased costs to shareholders.

The Competition Commission will consider comments until August 2013 and expects to publish a final report in October 2013.  Interested parties should respond in writing to the email/address provided in the attached press release. 

Click for:

Competition Commission Press release (link to Competition Commission website)

Summary of provisional decision on remedies (link to Competition Commission website) 

Other documents supporting the Competition Commission proposals (link to Competition Commission website)

FRC press release (link to FRC website)

 @ukaccplus provides a comprehensive news service for all our news articles, publications and more.

The participants discussed traditional G20 agenda including the G20 Framework agreement for strong, sustainable and balanced growth, the financial regulation reforms, and market transparency. The final communiqué contains the usual sentence urging convergence stressing this time how convergence can contribute to financial stability:

We reiterate our call on the IASB and FASB to finalize by the end of 2013 their work on key outstanding projects for achieving convergence on a single set of high-quality accounting standards. We recall the crucial importance of making swift progress on this issue in order to enhance resilience of financial markets.

Another topic of discussion was also the question of how long-term financing can be encouraged. A research group led by Indonesia and Germany presented information on the experiences and country-specific practices of stimulating long-term investment. Short-termism in investor behaviour is currently a much debated topic, and the question has been raised whether the use of fair value accounting principles has led to it. In a response to the European Commission Green Paper Long-term financing of the European economy, the IASB has already made clear that it "does not believe that fair value accounting principles have of themselves led to short-termism in investment behaviour".

The G20 Leaders' Summit will take place in St. Petersburg on 5-6 September 2013.

Please click for the following information on the G20 website:

• Press release
• Final communiqué

Scepticism regarding uniform application and enforcement of IFRSs has often been raised. The Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers published by the Staff of the US Securities and Exchange Commission (SEC) in July 2012 for example finds that “enforcement structures around the world differ widely by jurisdiction” and adds that “rigorous enforcement is important to avoid false comparability where the requirements of the standards in each jurisdiction are the same but the interpretations and practices are inconsistent.”

Professor Leuz’ research (links to all papers below) suggests that these concerns are well founded (his paper Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why is quoted in the SEC report). However, he also shows that enforcement differences are not the only reason for reporting variation – he has identified many other institutional differences across countries “in capital markets, securities regulation, investor protection and economic development, to name just a few” that influence reporting practice and will continue to contribute to non-comparability despite of continuing IFRS adoption around the world.

Further research also showed that it is even doubtful whether the expected capital market effects that were observed in some cases when countries adopted IFRSs can indeed be attributed to IFRS adoption, i.e., the new accounting regime. In Mandatory IFRS Reporting and Changes in Enforcement the authors come to the conclusion that the change in accounting standards seems to have had little effect on market liquidity. They show that the liquidity benefits are found only in a few countries and that these countries concurrently or later tightened their enforcement of financial reporting. Furthermore, the authors show that similar liquidity effects occurred around enforcement changes in Japan without having first moved to IFRS. Thus, the results suggests that changes in reporting enforcement appear to play a critical role for the observed liquidity benefits, rather than IFRS adoption.

In light of this and other research, Professor Leuz suggests a new and different approach to global accounting convergence. The basic idea is to focus only on those companies for which international comparability is likely important and going to yield positive capital market effects. He proposes to create a ‘Global Player Segment’ (GPS) in which firms would be required to use the same reporting rules (i.e., IFRS), face the same enforcement mechanisms and have the same incentives for transparency in their reporting. These would be firms that operate internationally and (seek to) raise money in international markets. Importantly, firms would opt to become members of the GPS and on joining (and after a screening) would submit to strict reporting regulation and enforcement established within the segment for all members. Letting companies choose for themselves is likely to enhance the credibility of firms’ commitment to transparency but also addresses concerns that not all firms equally benefit from globally converged reporting standards.

Professor Leuz has outlined this approach and makes more detailed suggestions how it could be implemented in a short paper with the title A New Approach to Global Reporting Convergence: The Global Player Segment. He has also presented his ideas to the public on two occasions recently and has kindly allowed us to post corresponding slide decks.

The understanding that especially global players benefit from IFRS adoption has also been picked up in discussions about possible IFRS adoption in the US. At recent event in Berlin that also saw the presentation of the GPS proposal, IASB chairman Hans Hoogervorst conceded that he did not expect the United States to adopt IFRSs for all entities and that his expectations were rather that the Unites States would make IFRSs an option for large, internationally-oriented companies that would benefit from an IFRS adoption.

Please click for Professor Leuz’ papers and presentations referred to:

• A New Approach to Global Reporting Convergence: The Global Player Segment (also available in Spanish translation)
• Slightly modified slide deck presented at the 74th Annual Meeting of the German Academic Association for Business Research (VHB) in Bozen/Bolzano (slides in English)
• Slide deck presented at the symposium held in celebration of the 15th anniversary of the German Accounting Standards Board (GASB) in Berlin (slides in German)
• Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why published in Accounting and Business Research (ABR)
  • available through Taylor & Francis Online (there is a charge for downloading)
  • and also available through SSRN (free of charge, scientific citation requires use of the version published in the ABR)
• Mandatory IFRS Reporting and Changes in Enforcement (available through SSRN)

ESMA has decided to review the CESR standards in order to reflect the experience gained by their use since 2005. The new guidelines are based on the same principles, however, they have been reformulated throughout and have been combined into one document.

Also, the objective of enforcement has been revised in order to reflect the importance of compliance with the relevant financial reporting standards and transparency of financial information. Additionally, the concept of enforcement has been extended in order to include, in addition to the enforcers’ review of the financial information, any other actions which might contribute to enforcement such as for example issuing alerts.

Regarding the scope, ESMA noted that investor protection requires the extension of the scope of enforcement to the whole financial reporting framework applicable to listed issuers on the EU Single Market. This includes national GAAPs from the EU jurisdictions and third countries' accounting standards, which have been declared equivalent to IFRS.

The proposed guidelines would apply to all competent authorities and any other bodies from the EU undertaking enforcement responsibilities under the Transparency Directive and the IFRS Regulation.

Please click for access to the consultation document and a corresponding press release on the ESMA website. The closing date for responses to the consultation is 15 October 2013 and ESMA expects to publish the final guidelines in 2014.

Highlights were the publication of:

• three draft Endorsement Advice:
  • Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36) and Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)
  • IFRIC Interpretation 21 Levies
• two final Endorsement Endorsement Advice:
  • Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36) and Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39)
• two draft comment letters on the IASB EDs:
  • Leases
  • Agriculture: Bearer Plants (Proposed amendments to IAS 16 and IAS 40)
• two final comment letters on the IASB EDs:
  • Financial Instruments: Expected Credit Losses
  • Defined Benefit Pension Plans: Employee Contributions (Proposed Amendments to IAS 19)

Additional topics discussed in the newsletter are:

• Insurance ED
• Macro Hedge Accounting project
• IASB Discussion Paper on Conceptual Framework
• EFRAG Public Consultation Is there a need for specific financial reporting for long-term investing activities business models?
• EFRAG/ANC/FRC Proactive Project The Role of the Business Model in Financial Reporting
• EFRAG/OIC/ICAC/DASB Proactive Project Separate Financial Statements

Click for the EFRAG Update (link to EFRAG website).

The article covers two key issues from the discussion paper that investors should take note:

1. “the reporting of performance, including what should be reported in profit or loss and what should be reported outside profit or loss in other comprehensive income”; and
2. “the accounting for items classified as equity and the dilutive effects of some financing instruments on common shareholders.”

Click to view:

• Investor Perspectives Framework rethink will shape the landscape for investors (link to IASB website).
• IAS Plus article on the Discussion Paper for a new Conceptual Framework.
• Archive of the Investor Perspectives series on the IASB's website.

The TEG is the arm EFRAG operates through. Its 12 voting members are selected from a range of professional and geographical backgrounds from throughout Europe and EFRAG is looking for corresponding applications. The full text of the call for EFRAG TEG applicants available through the press release on the EFRAG website details the requirements regarding technical competence, background, experience and geographical spread.

Our comment letter includes the following points:

• We agree that Integrated Reporting responds to a demand from market participants for better information, but note that it is not clear what role an integrated report plays in relation to existing financial, sustainability, and corporate governance reports, and that it would not replace these reports
• We agree that an integrated report should aim to become a primary communication document, telling the value creation story, rather than being compliance-focused. We think that flexibility in Integrated Reporting is critical to foster innovation
• We agree that the primary audience for integrated reports should be providers of financial capital in order to support their financial capital allocation assessments, but note it would be useful for the Framework to acknowledge explicitly that providers of financial capital are rarely a homogeneous group, allowing companies flexibility to meet the information needs of various types of providers of financial capital
• We believe a better and clearer articulation is required in the Framework on how materiality for an integrated report is distinct from materiality for other reports such as financial reports, and how to handle the tension between application of materiality and achieving conciseness
• We are of the view that the Framework should contain only the objectives, concepts and principles and minimum content elements for an integrated report in order to allow for experimentation and believe it would be premature to portray it as a reporting standard at this stage
• We agree that the ability to obtain independent third party assurance on the information presented will be of utmost importance to the integrity and credibility of an integrated report, and believe that an international standard or applicable assurance guidance specific to Integrated Reporting will be required.

Click for the full comment letter.