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31 May, 2023

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All sorts of choices when it comes to audit

by Caroline Biebuyck

New rules mean companies will have to put their audits out to tender more frequently. Veteran accountancy commentator Caroline Biebuyck offers five need-to-know issues before changing your auditor.

Allsorts. Image: Shutterstock
Image: Shutterstock

Audit appointments seemed to be forever—at least for audit firms, some of whom have had mandates spanning decades. But all this has changed since the EU audit reform package took effect.

Under rules brought in last year, European listed companies have to rotate their auditors every ten years, with the option of retaining the same firm for 20 years provided there was a tender halfway through.

What should boards be thinking about when putting an audit out to tender to get the best result for their companies?

1. Set objectives and consult shareholders

Just because companies need to put their audit out to tender every decade doesn’t mean this is the only time they will do it.

There could be other reasons, such as wanting a fresh view of the company’s financial affairs. There might have been a change in the group structure or business direction. Or a company might want to test the water and see how the audit service and price have changed since the last tender.

Each of these reasons will give the board a different set of objectives in appointing a new auditor.

Whether the decision to put the audit to tender is for business or regulatory reasons, the first priority is to consider selection criteria: what are the most important features the company wants from its auditors and the audit service? Following on from this, the next question is to establish how to assess tenders. And then it’s worth starting to involve major shareholders early in the process—after all, the new auditors will report to them.

2. Choose who to invite to tender

Many companies decide which audit firms to invite to bid based on the firms’ experience in their industry and regulatory environment, geographic coverage, and reputation. This last point is the most difficult one to judge, but the most important one to get right.

With companies keen not to be on the front page of tomorrow’s paper for the wrong reasons, it’s important to only invite firms that emphasise high-quality, robust audits.

3. Decide who will run the tender, and how

The audit committee chairman should be in charge of the process, possibly from the point of deciding to tender, up to making the final recommendation to the board.

Potential auditors will need access to a great deal of company information and access to key personnel in order to make a bid, and this will have to be managed carefully.

Procurement specialists might be asked to help make sure the tender process is independent and objective. However, all judgement calls need to be made by the audit committee, with the chairman taking the lead.

4. Decide who to recommend to the board

A company’s reputation rests on the trustworthiness of the information it makes public. For this reason it’s important not to cut costs on the audit—to put quality above price.

The thorny question is: what is audit quality? This is something that each audit committee will have to decide in the context of the company by looking at the audit tenders in detail. Does the prospective auditor show a good understanding of the company’s business, the industry it operates in, and the risks that flow from its operations and circumstances? Is there a clear audit plan detailing the audit approach, particularly to high-risk areas?

Auditors must make judgement calls in the course of their assignments: the tender could include some difficult scenarios to enable companies to show how the prospective auditors would exercise their judgement, whether they would provide an appropriate degree of professional scepticism, and whether they would be prepared to challenge the board constructively.

5. Manage an orderly transition

Saying goodbye to a firm as auditor does not mean the end of the relationship.

The firm will want to be one of the first the company turns to for non-audit services and, of course, to be in the running next time the audit tender comes around. This means it should be in everyone’s interests to have a smooth transition from one mandate to the next.

However, the process still needs to be properly managed by a dedicated transition manager appointed within the company, and with enough time given for both the outgoing and incoming firms to transfer information and discuss any major issues arising from the last audit of the outgoing firm.

Again, a firm’s ability to deal with this could be assessed in the audit tender by asking prospective auditors what they would do in the first six months after being appointed as new auditors.

Caroline Biebuyck is a business writer and editor specialising in governance, accounting, tax, finance and diversity.

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For thoughtful journalism, expert insights on corporate governance and an extensive library of reports, guides and tools to help boards and directors navigate the complexities of their roles, subscribe to Board Agenda

audit reform, Audit tenders, EU legislation, finance, governance

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