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State Board Report

March 2013

The United Kingdom’s Competition Commission on February 22 announced it has “provisionally found” an adverse effect on competition in the supply of statutory audit services to large UK companies. The Commission set out “possible remedies” and invited comments or suggestions for additional or alternative remedies to be submitted to them by March 18, 2013. Among the remedies proposed were: mandatory tendering; 2- mandatory rotation of audit firm; 3- expanded remit and/or frequency of audit quality review team reviews; 4- prohibition of “Big Four only” clauses in loan documentation ; 5- strengthened accountability of the external auditor to the audit committee; 6- enhanced shareholder-auditor engagement; and 7- extended reporting requirements. Several of these have been considered by the European Parliament and the Public Company Accounting Oversight Board.

This UK Commission’s study began in October 21, 2011. They found 31 percent of Financial Times Stock Exchange (FTSE) 100 companies and 20 percent of FTSE 250 companies have kept the same auditor for more than 20 years, and 67 percent of FTSE 100 companies and 52 percent of FTSE 250 companies for more than 10 year. The overwhelming majority of these audits are being prepared by one of the Big Four. The Commission’s February statement said that, as a result of an adverse effect on competition, they “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.”

Reuters reports that final binding UK recommendations are expected by the end of this year. Reuters also reports the European Parliament’s legal affairs committee will vote next month on audit requirements, having delayed their work to learn of the UK Commission’s findings. The European Commission’s Green Paper of October 13, 2010 on “Audit Policy: Lessons from the Crisis” (COM(2010)0561) had resulted in the Parliament’s September 13, 2011 resolution that starts out by stating: “Whereas the recent financial crisis has called the work of auditors into question…”

Putting the external audit contract out to tender at least every 10 years, or requiring management to explain why they have not done so, is one of the remedies the UK Commission is exploring.

They are proposing for comment five and seven year tender periods, but they are willing to consider other periods if supported by relevant evidence. They are also viewing mandatory audit firm rotation every seven, 10 or 14 years.

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