Shareholders and management clash over CC findings

By: Penny Sukhraj, AccountancyLive

Shareholders of the UK’s largest companies have clashed with company managers in their direct support of the competition authority’s findings and proposals in its investigation of the statutory audit services market.

The Competition Commission’s proposals included mandatory tendering and mandatory auditor rotation.

And support for these suggestions – from the National Association of Pension Funds, whose members operate nearly 1,300 pensions schemes with combined assets of nearly £900bn; US Investment managers BlackRock, with US$3.792 trillion (£2.5bn) assets under management and not-for-profit UK Shareholders’ Association – has come in direct opposition to company managers and auditors.

The NAPF pointed out in its response that the CC ‘importantly recognised that that it is the shareholders who are the “primary customer” of the audit… not reflected in current practices. Instead, auditors are often seen as insufficiently independent from executive management and insufficiently sceptical in carrying out audits; this is as the report identifies because the current system incentivises auditors to satisfy management rather than shareholders.’

Auditor tenure was a concern for the NAPF – which called for a cap on the number of years that an external auditor holds its audit contract.

BlackRock supported mandatory tendering, but not mandatory rotation, saying it would provide the audit committee with flexibility to select the most qualified auditor and encourage a periodic review of company practices.

‘We believe there are risks associated with mandatory rotation, such as loss of auditor institutional knowledge and reduced incentive for audit firms to invest in the audit relationship,’ BlackRock said.

But in strong opposition to the CC and shareholders are several industry management lobbying groups, including the legal counsel of the FTSE 100, GC100; BHP Billiton, the International Federation of Accountants (IFAC) and CIMA and the Hundred Group, which represents the finance directors of the FTSE 100 and the Royal Bank of Scotland.

Taking up the issue of misaligned incentives – following the CC’s finding that auditors compete to satisfy management rather than shareholder demands – GC100 said that this ‘is not the experience of audit committee chairs and members in the top 100 companies’.

The group further said that auditors ‘are sensitive to the need to protect their reputation and therefore highly incentivised not to risk that reputation by failing to fulfil their role properly. Such failings can lead to professional disciplinary proceedings and serious sanctions, which may include withdrawal of the right to practise.’

In defence of the four largest auditors, the Hundred Group said that the services of the Big Four are of a ‘high quality’. audit

‘Being truly international companies that value significant quality in our audit, there are only a few audit firms that can genuinely service our needs in this regard.’

The group criticised mandatory rotation, saying it would ‘just further increase concentration by removing the incumbent from a small group of competitors.’

‘We would prefer to see smaller firms merging to provide effective competition to the Big Four… look very carefully at what has prevented the firms that say they wish to compete for this business from developing the necessary scale and expertise,’ the Hundred Group said.

RBS opposed mandatory tendering and rotation while BHP Billiton opposed mandatory rotation, saying: ‘The risks associated with mandating change at every company in the FTSE 350 over too short a timeframe are likely to be high.’