CMA consults on draft Order for audit reform in the UK

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24 Jul, 2014

The Competition and Markets Authority (CMA) has issued a consultation on a draft Order seeking to implement aspects of the Competition Commission’s package of remedies for audit reform in the UK in light of agreement at European level on audit reform.

In October 2013, the Competition Commission (the predecessor of the CMA) announced a final package of remedies to increase competition within the provision of statutory audit services to FTSE 350 companies in the UK.  Among other things, the proposals required that all FTSE 350 companies put their statutory audit engagement out to tender at least every ten years. 

Subsequent to the release of the Competition Commission proposals members of the Council of Ministers adopted a new framework for EU audit reform in the form of a Directive amending the Statutory Audit Directive (Directive 2006/43/EC) (link to Europa website) and a Regulation on specific requirements regarding the statutory audit of public-interest entities (PIEs).  

In light of the EU rules, which the UK must adopt by 2016, the Competition Commission announced that it would review its draft Orders to consider the implications that the EU legislation would have.

The draft Order ‘The Statutory Audit Services for Large Companies Market Investigation (Mandatory use of competitive tender processes and Audit Committee responsibilities) Order 2014’ (“the draft Order”), published for consultation today, seeks to put into force some of the changes proposed by the Competition Commission including requiring that FTSE 350 companies put their statutory audit out to tender at least every ten years.  The draft Order proposes that if a FTSE 350 company has not retendered within five years, the Audit Committee must, in the Audit Committee Report covering the fifth financial year, state the financial year in which it intends to complete a competitive tender process and why this period is in the best interests of the members.  This process must be repeated in consecutive years until retendering is required in the tenth year.  The draft Order also implements measures designed to strengthen the influence of the company’s Audit Committee over the provision of audit services.

The CMA has announced that they do not plan to make an order implementing the Competition Commission’s original proposal regarding auditor clauses in loan arrangements.  EU legislation will, from 17 June 2017, prohibit the use of restrictive clauses in contracts which limit a company’s choice of auditor “in order to promote market diversity” and the CMA considers that the EU measures “are more extensive than its proposed remedy…..and therefore sufficiently address concerns identified in its report in this regard”.

In its Plan and Budget, the Financial Reporting Council (FRC) announced that it would address the consequences of the Competition Commission’s other proposed remedies including introduction of a programme to review FTSE 350 audits on average every five years, increased reporting of the work of the Audit Quality Review, and a change to the UK Corporate Governance Code to require an advisory vote on the Audit Committee Report.

Comments on the draft Order are invited in writing until 24 August 2014.

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