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"If you're thinking of getting all the big-4 firms to compete on your tender you may be in for a surprise. Audit Review have already encountered situations where firms have declined due to a high level of profitable consultancy fees or because after assessing the risk and the work required to respond professionally they have judged these too high. Add to that conflicts with other services such as tax and internal audit and things may narrow considerably. Now a new factor has emerged. There are so many tenders taking place that big-6 firms may be reluctant to respond to tenders in their 'busy season' between January and March.

Those who don't have a December year end need to consider the timing implications. Management of the relationships with audit firms together with a sound tender strategy and a robust timetable are going to become even more critical."


News and information from Audit Review

24th October 2013

Impacts of the Competition Commission report on the UK external audit market for large companies in the UK



On the 15th October, after a long period of consultation and investigation, the Competition Commission (CC) concluded that competition is restricted in the external audit market and published remedies intended to

  • open up the UK audit market among FTSE 350 companies to greater competition
  • ensure that audits better serve the needs of shareholders.

This is essentially an attempt to open up a market which has been dominated by the Big-4 since a series of mergers and takeovers among large audit firms which started over 30 years ago. The final report is very extensive, running to 327 pages and, while it does provide greater clarity in the UK market, the situation in Europe is still unconcluded.

Summary of the main remedies

FTSE 350 companies must put their statutory audit engagement out to tender at least every ten years. No company will be able to delay beyond ten years. It has been estimated that almost one quarter of FTSE 350 companies will now have to reassess audit tender dates as the CC remedies effectively overrule the current flexibility of the FRC’s regime. The FRC will also have to amend its articles of association to include an object to have due regard to competition and its Audit Quality Review (AQR) team should review every audit engagement in the FTSE 350 on average every five years.

‘Big-4-only’ clauses in loan agreements will be prohibited although specifying that any auditor should satisfy objective criteria is permitted.

Shareholders must vote at the AGM on whether Audit Committee Reports in company annual reports are satisfactory.

The accountability of the external auditor to the Audit Committee is strengthened and influence of management is much reduced by making the Audit Committee solely responsible for

  • negotiating audit fees
  • influencing the scope of audit work
  • initiating tender processes
  • making recommendations for appointment of auditors
  • authorizing the external audit firm to carry out non-audit services.

The Audit Committee should report to shareholders on the findings of any AQR report concluded on the company’s audit engagement during the reporting period.

These changes are effective from the 1st October 2014 with some transitional rules. The position in Europe will remain unconcluded until a final text of the current draft directive expected in February 2014.

The remedies will require further changes to the UK Corporate Governance Code and the Stewardship Code.

Audit Review comment


Only time will tell if the CC remedies will really improve competition and open up markets beyond the Big-4 rather than promote a recycling of audits among themselves. Audit Review believe there is sufficient evidence (not least from the CC’s own research) that the large majority of Audit Committees and senior financial management in the FTSE350 would feel very uncomfortable about appointing a firm outside the Big-4. Crucially this view seems to become more entrenched the larger the companies become.

There a many reasons for this and Audit Review believe the most important are ingrained perceptions that firms outside the big 4 cannot match the following criteria

  • depth and scale of resources
  • depth of technical expertise and specialist support
  • geographical coverage and ability to co-ordinate an international audit
  • depth in quality of partners and senior staff
  • industry sector knowledge and expertise in complex sectors
  • a whole raft of proactive board technical support and advice.

There is also a strong perception that shareholders feel more comfortable with a Big-4 audit and Audit Review believe that, with the exception of some specific sectors, non-Big-4 firms will find it difficult to break into the FTSE 350 market for some time.

Audit Review also believe that the shift of power in the external audit relationship from management to the Audit Committee will result, at least initially, in even greater conservatism and focus on quality leading to a reinforcement of the domination of the Big-4. It is also unlikely that entrenched relationships with auditors and management will not continue to exert influence over scope of work and fees. The ability for lenders to specify objective auditor criteria despite ‘Big-4 only’ clauses being prohibited, will also not help greatly.

There is a possibility, however, that larger firms outside the Big-4 might pick up audits of subsidiaries or compete in specific sectors where they have demonstrable expertise and a clear capacity and capability to cope.

Tender processes
The CC was of the view that tender processes produced strong competition between the firms. However, there is a danger that with so many tenders of large companies being undertaken in any year (with huge numbers in the early years), competition will actually reduce in the tender process.  Audit firms will be unable to resource tenders to the extent they have historically been used to.

The mandatory 10 year tender will cause major problems with companies subject to the SEC’s Auditor Independence Rules, where auditors are not permitted to have any financial links with banks, insurers and investment managers they audit.  As, for instance, all a firm’s and partners and staff bank accounts might need to change when an auditor changed, these rules remain a major practical stumbling block to audit changes in the financial sector.                                                                                                                                                                 

Shareholders' interest 
Audit Review believe that shareholders will welcome the shift of power in the external audit relationship from management to the Audit Committee. Many high profile scandals in the past can be traced to a far too cosy relationship between auditors and management. There is little doubt that this should further  increase the transparency of the audit process and disclosure in Audit Committee reports.

The Audit Committee’s focus on quality is likely to result in less emphasis on cost and less aggressive fee negotiation and it is possible that audit fees may increase. Audit Review believe that shareholders and other stakeholders will see this as a price worth paying.  The changes will, however, emphasise the need for strong and experienced audit committee chairs who are prepared to wrest control of the audit process from company finance functions and finance directors.  Audit Committees may need access, where appropriate, to independent advice including that on audit scope and fees.

The fact that shareholders will have to vote at the AGM on whether Audit Committee Reports in company annual reports are satisfactory will further intensify the spotlight on the Audit Committee and ensure their new roles and responsibilities in relation to external audit are held to account.

Audit Review believe the CC remedies signal an interesting and challenging period for external auditors, Audit Committees, and all users of annual reports.

To discuss the contents of this release please contact

18th June 2013

New audit report disclosures - what they might mean

Further audit report disclosures to increase investor confidence and create debate around key audit areas

The changes set out in the FRC's revision to ISA 700 covering audit reports are a further response to increasing interest by investors and other stakeholders in the quality of the audit and the usefulness of the audit report. If properly adopted, we believe they will continue to help reinforce investors confidence in a robust and independent audit. These additional disclosures are those which we already report to our clients on when we are engaged to provide an Audit Effectiveness Review.

Download the Audit Review's technical note on the revision together with our commentary

Summary of Audit Review's commentary on ISA 700 revisions

Many investors have long commented that auditors’ reports currently contain largely standardised language and a growing number believe that further company-specific information will provide a 'hook' on which they could start a more useful dialogue with a company. We concur with the FRC’s belief that this may help close any audit expectation gap and the consultation paper contained a selection of investors’ responses to back this viewpoint.

Boards and Audit Committees expressed the view that to make these new disclosures in their report would be uncomfortable as this is seen most naturally in the auditor’s domain and appropriate for such information to be disclosed in the auditor’s report. Auditors have, not surprisingly, raised the potential risks to them in moving away from a binary audit opinion.

We believe the additional disclosures around audit focus should provide a useful trigger for Audit Committees and boards to ensure that material issues are disclosed and discussed in the financial statements, the operating and financial review or the Audit Committee report. As such, they could provide useful additional information for investors and better hold boards and Audit Committees to account. However, we expect concise descriptions of how audit materiality is derived to prove challenging.

Audit Review further expects that, where investors engage with companies and their auditors, attention will fall on levels of both materiality and the level of uncorrected misstatements. In our experience, the level of misstatements, which are often currently unadjusted in the financial statements, can be material in the context of stock market forecasts. We believe it will become essential for Audit Committees to adopt a written policy for when it expects misstatements to be corrected in the financial statements.

Crucially, greater transparency of materiality levels will allow benchmarking against comparable companies and promote more informed debate between Audit Committees, management and all stakeholders in an important area of auditor judgement which might, in the past, have been seen as a bit of a dark art.

It is vital that the new disclosures which are expected from auditors are 'company specific' and will only be of use if auditors resist the temptation turn the disclosures into formulaic standardised additional paragraphs. In our view, investors and other stakeholders will need to follow through on their apparent wish to trigger further discussions with companies on their audits for the additional disclosures not to become further boiler plating.

These changes add to the responsibilities falling upon Audit Committee Chairs. Whilst audit committee chairs have yet to achieved the prominence accorded to the remuneration committee chairs, these changes will further increase the public attention directed at the role.

The implementation of these changes for accounting periods which have already begun mean that the audit profession and Audit Committees need to consider very quickly the impact of these changes on their year-end timetables.

To discuss the contents of this release please contact

8th January 2013

Audit Review finds FTSE350 Companies beginning to respond to new Audit Tendering disclosure requirements

Audit Review has undertaken a detailed analysis of the disclosures made on audit tendering by those FTSE 350 companies who published accounts in the final quarter of 2012.  The FRC published revised Guidance on Audit Committees in September 2012 suggesting increased disclosures around audit tendering.  Whilst the changes only apply to accounting periods beginning after 1st October 2012, the FRC encouraged companies to consider whether it would be beneficial to adopt some or all of the new provisions in the revised code earlier than formally expected.

Of the 40 companies producing accounts, 7 are constituents of the FTSE100 index.  8 are investment companies.

Audit Review’s analysis shows:

  • Disclosures are generally better in FTSE100 companies, reflecting both the increased resources available to audit committee chairs at the biggest UK companies and increased investor concerns resulting from higher average auditor tenures in the FTSE100
  • Disclosures are best by those companies who have carried out a tender of their audit since 2000
  • A number of companies with the best disclosures made similar disclosures in their 2011 accounts, demonstrating the support which some Audit Committee Chairs show for the new Code provisions
  • Investment companies are yet to make public disclosures, which may reflect lack of guidance on the new Code provisions by The Association of Investment Companies, which is expected shortly
  • Some audit committees have indicated a new policy on audit tendering or that they intend to consider this during their current financial year

Commenting on the research, David Young, a director of Audit Review said: “The new Code tendering requirement and related disclosures are beginning to be taken seriously.  It is perhaps no surprise that companies who have had the same auditor since 2000 are more reluctant to make disclosures.  From our discussions with Institutional Shareholders, we have found strong views on the audit tender debate.  We would encourage FTSE350 companies who are considering not making the disclosures in the coming reporting season to reconsider that view or risk looking to be seen as an exception.”

The revised Guidance on Audit Committees published in September 2012 made a number of changes to the public reporting by audit committees and around audit tendering.  Whilst the revised Code and Guidance only applies to accounting periods beginning after 1st October 2012, the FRC encourages companies to consider whether it would be beneficial to adopt some or all of the new provisions in the revised code earlier than formally expected.

The Guidance suggests that the audit committee section of the annual report should include:

  • an explanation of how the committee has assessed the effectiveness of the external audit process and
  • of the approach taken to the appointment or reappointment of the external auditor, in order that shareholders can understand why it recommended either to reappoint or change the auditors.
  • information on the:
    • length of tenure of the current audit firm,
    • when a tender was last conducted, and
    • any contractual obligations that acted to restrict the audit committee’s choice of external auditors.

To discuss the contents of this release please contact

24th October 2012

An early audit tender may gain competitive advantage

The FRC's recent move to a 'comply or explain' basis for tendering audits every 10 years will mean many companies will come under increasing pressure to tender their audits. While some companies will hold out as long as possible others will see advantages in tendering earlier than they are required to.

The Competition Commission's in-depth interviews of 10 FTSE 350 companies makes it clear that Audit Committee Chairs and FDs have a lack of belief that firms outside the Big-4 can provide consistent standards across the globe or service a complex listed global operation. In addition, certain specific sector expertise is only available within the Big-4. This significantly narrows the field, especially if conflicts are considered important.

According to Audit Review Director Lawrence Reed: "the advantages of an early tender are that companies will miss the rush and be able to be more selective in picking the very best partners and audit firms. We are aware of at least one company which timed its tender to take advantage of a particular partner rotating off the audit of a competitor. Missing the rush could also result in greater attention to detail by those selected to tender".

This will become quite a strategic issue over the coming years for Audit Committees and FDs who will need to keep a close eye on the competition to ensure they are not outmanoeuvred and left with a less than perfect choice. Audit Review recommends that audit committees should consider their position on whether and when they will tender and the complexities involved well before they have to draft the committee report in their next Annual Report.

You can download Audit Review's new Technical Note on the requirements of the revised Code and Guidance on Audit Committees in relation to audit tendering.

30th September 2012

The FRC tighten up audit tender requirements

Under the new revisions to the FRC's UK Corporate Governance Code, listed companies in the FTSE 350 will be required to tender their audit every 10 years or explain why they haven't done so. This does not mean auditor rotation but it intended to ensure companies benchmark their auditor's performance and ensure they are getting the best quality, effectiveness and value for money. There is a clear implication that regular tendering should become best practice for all quoted companies and the requirements may, in future, be extended to smaller companies subject to the Code.

Many will initially see this as an unwelcome chore that creates a pressure point on resources. However, there is a growing body of evidence that tenders create an opportunity to increase value for money through the application of fresh ideas and new approaches. Using specialist consultants to carry out the audit tender will help firms maximise these benefits while reducing any adverse impact on day to management. It will also ensure that the tender is independent and objective.

Full details of the new regulations can be found in Audit Review's Technical note: Audit tendering: the requirements of the revised Code and Guidance on Audit Committees

30th September 2012

Audit Review has today issued a Technical Note - Which Businesses Need an Audit? This free to download publication reviews and offers insight into the audit requirements and exemptions affecting small companies, dormant companies and subsidiary companies.

In September 2012, the Department for Business Innovation & Skills (BIS) announced changes to the exemptions from audit for certain UK companies and Limited Liability Partnerships (LLPs). According to BIS nearly 200,000 smaller private companies, subsidiaries and dormant companies would not now need an audit, saving millions of pounds in audit fees...

27th June 2012

Submission to the Financial Reporting Council

Audit Review has today made a submission to the Financial Reporting Council’s Consultation on revisions to the UK Governance Code and Guidance on Audit Committees.

Audit Review has made a number of suggested changes to the proposed guidance on the tendering of external audits designed to ensure that:

  • the tender process is overtly fair both to the incumbent and any other audit firm with the requisite skills, resources and experience who wishes to tender
  • the process gives all firms sufficient access to key decision makers so that their personnel are able to form the relationships which, in our experience, are necessary to secure an audit appointment
  • audit committees are able to engage internal or external resources which are independent of the finance function to run the tender process
  • decisions are made on objective quality grounds and not just on cost.

Making the submission, David Young of Audit Review said

“In our experience, tenders vary greatly in their approach, quality and independence. They can often be overtly influenced by small numbers of people, particularly in the finance function (the main function which is audited). This can lead to promotion of audit firms where the Finance Director/CFO has an established relationship. Given the “Big 4” training of the vast majority of FTSE 350 finance directors/CFOs and the substantially greater connections which the Big 4 can bring to bear to win an audit relationship (based on their size, greater breadth of services and their centralised marketing resource), the running of tender processes by the finance function will continue to discriminate against firms outside the 'Big 4'”.

8th May 2012

Audit Review has today published a guide to Auditor Independence Policy, which contains a specimen policy on Auditor Independence for use by a typical UK listed company.

Launching the guide, David Young of Audit Review said

“Demonstrating that an auditor is independent of the company it audits is a core plank of corporate governance and is vital in achieving objectivity. It provides stakeholders with confidence in the company’s financial reporting. Developing and adhering to a strong policy on auditor independence is essential and this guide will make developing a policy easier for companies."

20th April 2012

FRC to Require FTSE 350 Companies to Tender their Audits

The FRC has published a consultation which will require FTSE350 companies to put their audit contract out to tender at least every 10 years. This change will be implemented by a new provision of the UK Corporate Governance Code.

A firm timetable for implementation is not included, but the implication is that this will be for in October 2012 or possibly from January 2013. The FRC is firm on the need to make changes in the UK despite the fact that EU changes may be announced over the next 12 months. Responses to the Consultation are Expected by 13th July 2012.

The proposed revisions include adding to Provision C.3.7 of the Code a recommendation that companies disclose the length of tenure of the current audit firm and when they last put the external audit contract out to tender. This is currently recommended in the Guidance on Audit Committees but the FRC’s monitoring exercise in 2011 found that only about one-third of companies disclosed this information. Therefore FRC considers it would be appropriate to incorporate this recommendation into the Code, making it subject to the ‘comply or explain’ requirement.

So that there is time to undertake an effective and open tender process, the audit committee section of the annual report should announce the company’s intention to carry out a tender the following year, rather than announcing it after the event. Shareholders should be advised when the company intends to put the contract out to tender.

The FRC recognises that the introduction of regular tendering for the external audit contract, even on a ‘comply or explain’ basis, will need to be carefully managed. If all those companies that have not gone out to tender in the last ten years were to do so in the first year following the change to the Code the market would struggle to cope. It would also favour the Big 4 audit firms with their greater resources.

For this reason the FRC has revised its original proposal and intends only to apply the new provision to FTSE 350 companies in the first instance. There is a presumption that it will be extended to all companies with a Premium Listing in due course. While this will alleviate potential problems to a certain extent, the FRC considers that transitional arrangements may be needed to ensure that the introduction of tendering is phased over a suitable period.

Accordingly the FRC proposes that the timing of any tender should be linked to:

  • When the current audit engagement partner is due to rotate. Although it would be open to companies to tender at any time in the audit cycle that they consider appropriate, the FRC does not wish to promote tenders that could disrupt the existing audit engagement partner cycle; and
  • The length of time since the audit contract was previously put out to tender.

The FRC proposes that where a company has put the audit contract out to tender in or after 2000, the tender process could be deferred until the latter stages of the incoming audit engagement partner’s term (in other words, for a further five years).

Views on these transitional arrangements are sought in the consultation