* Watchdog toughens up audit tendering
* Compulsory auditor switching rejected by watchdog
* Auditors challenge tender cost estimate from watchdog
* Big Four could face further restraints from EU law
By Huw Jones
LONDON, July 22 Britain's competition watchdog
has ditched its more radical ideas for shaking up an accounting
market dominated by the "Big Four" audit firms, leaving any
tougher action to the European Union.
Auditors are under pressure to change how they operate after
giving banks a clean bill of health just months before several
lenders had to be rescued by taxpayers in the financial crisis.
Britain's Competition Commission set out on Monday the
changes it plans to introduce in an a market dominated by
PricewaterhouseCoopers and Ernst & Young, with
the principal reform being a requirement for companies to put
their audit work out to tender every five years.
That is a significant hardening of a new rule from the
sector's regulator, the Financial Reporting Council (FRC), which
has asked companies to consider once every decade putting their
audit work out to tender.
The FRC said it had a number of concerns over the
competition body's proposals and their related costs, adding
that it had already called for more time for the new voluntary
tendering approach to prove itself.
However, the watchdog decided against forcing companies to
actually switch auditor on a regular basis or to require two
auditors to check the books of a company. It also did not impose
more curbs on the type of advisory work an accountant can offer
a company whose books it already checks.
Smaller accounting firms like Mazars, BDO, Grant Thornton
and Reeves have called for regulatory intervention to help them
compete more effectively with the Big Four.
"We are not there to give any particular competitor a leg up
but I am confident these measures will result in a much more
competitive audit market," Laura Carstensen, chairman of the
Competition Commission's audit market probe, told Reuters.
BDO said the package could accelerate much needed change,
but would be limited in its impact if only the small number of
big accountants were invited by companies to tender for work.
Deloitte said five-year tendering was unlikely to improve
audit quality or increase competition, while Ernst & Young said
competition between audit firms was already healthy and robust.
KPMG said regular tenders would cost far more than the 30
million pounds ($45.8 million) the competition body has
estimated in total for companies and accountants annually.
"Five year audit tendering will feel relentless to many
companies ... with the possible end result that the process of
tendering becomes an empty box-ticking exercise," KPMG added.
Carstensen said once tendering was normalised it would
become streamlined and efficient.
The watchdog said Britain's top 350 listed companies could
defer putting out their accounting work to tender by a further
two years in exceptional circumstances.
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Although it has rejected the mandatory switching of auditors
or more curbs on their advisory work, the watchdog faces being
overruled by a draft European Union law now undergoing approval.
Carstensen said the results of her inquiry did not support
the idea of making the switching of auditors mandatory, a step
Britain's government is against at the EU level.
In the United States the House of Representatives voted on
July 8 to block the country's auditor industry watchdog from
forcing companies to switch accountants.
The Competition Commission said the FRC would get powers to
boost competition and be required to review every audit
engagement at the top 350 companies roughly every five years.
However, Ernst & Young questioned whether the FRC has enough
The Competition Commission is also giving shareholders a
vote on audit matters and banning banks from inserting clauses
in loans to companies that insist auditing is done by one of the
The plans will be put out to public consultation before
being published in final form in October for implementation,
though no major changes are expected.