Competetion Comission Suggests Audit Market is not Focusing on Shareholders

The Competition Commission suggests in their provisional report regarding audit market that due to the limits on competition, switching auditors have become difficult for companies. According to them, the auditors focus more on the management needs which is why they are failing to look into the interest of the shareholders.

The Competition Commission says that due to difficulty in comparing the company’s auditor with other alternatives, a lot of switching cost involved and preference for continuity, companies are unwilling to change auditor and therefore they are lacking bargaining power.

Other than the Big Four, it is difficult for other audit firms to get the audit engagement of FTSE 350 companies, since they find it hard to display their reputation and experience.

The CC feels that to encourage better competition, it is necessary to strengthen accountability as well as independence by making shareholders and audit committees to have more control over external audit, increase transparency and information with the help of frequent reviews and reporting and compulsory rotation and tendering. The CC is also considering other ways to solve the problem which includes increasing the Financial Reporting Council’s Audit Quality Review remit and barring the clause of ‘Big Four only’ in loan documentation

According to the CC reports, it seems that the Big Four is using undue influence on the regulatory body with the help of their far-reaching alumni network or over forming of the regulation. They are also targeting the mid tier firms with low prices. Apart from this, the report also suggests that companies are paying more for audits of lower quality and also the incentives are uneven between the management and the shareholders. Instead of focusing on the interest of the shareholders, the auditor is more occupied with thinking about the management needs.

Cartensen said that though it will be difficult to change the system that has been there for so long but they will make sure that the situation changes and for that they will ensure that there is more information and transparency, so that shareholders can compare the service. He also made many other proposals to overcome this situation.