Auditors should not be excluded from tendering for an audit if they already provide other professional services.
The view comes in a new report from the Financial Reporting Council (FRC), which has revealed that investors are concerned that audit firms, especially those outside the main Big Four audit suppliers, should not be dismissed from tendering if they already provide another professional service to a client.
The report, Audit Tenders: Notes on Best Practice, says: “Audit Committee Chairs have queried how to manage the conflicting requirements of different professional services and whether to prioritise the audit relationship. It is clear from discussion with investors, that they consider that audit should be the ‘lead’ service.”
An investor is quoted saying: “Due to the importance investors place on a high quality external audit, the audit tender must take priority over all other non-audit activity.
“As an investor, we would not look favourably on potential bidders refusing to participate or not being invited to tender due to non-audit activity being undertaken for a company.”
The report comes in the wake of changes to the law governing audit made by the European Union and introduced in June last year, which increased the responsibility of audit committees for the audit tender process and made it mandatory for audits to be tendered every ten years.
The Statutory Audit Regulation and Directive introduced new rules, including demands that an audit tender process should not exclude non-Big Four firms; that it should find at least two audit firms to offer to company boards for consideration; and that audit committees should produce a report on the selection procedure demonstrating that it was transparent and non-discriminatory.
The FRC said in its report that in addition to meeting with compliance obligations, “retendering and auditor rotation contributes to improved confidence in audit and we have also seen evidence of competition on grounds of audit quality”.
Melanie McLaren, executive director, audit and actuarial regulation at the FRC, said: “In the UK, and now across Europe, testing the market for audit on a regular basis is required.
“Feedback from companies that have changed auditors since this requirement was introduced, is that there are benefits to be gained from fresh insight. Even if the current firm is reappointed, the experience of the tender process can reinvigorate the audit approach.”