On 26 September 2014, the Competition & Markets Authority (“CMA”) issued its final order implementing changes to the UK’s statutory audit market (the “Final Order”). By way of background, this action represents the final step in a process which commenced in March 2011 when the House of Lords Select Committee on Economic Affairs urged the Office of Fair Trading (“OFT”), the CMA’s predecessor, to investigate the UK audit market. Following an initial investigation by the OFT, an in-depth analysis of the market by the Competition Commission (“CC”) – now also subsumed into the CMA – concluded that competition in the audit market was restricted by factors which inhibit companies from switching auditors.

It then fell to the CMA to implement the remedies proposed by the CC. The Final Order sets out a number of mandatory requirements aimed at ensuring that auditors provide an “independent and sceptical assessment” of their clients’ accounts by introducing more competition into the market. In the words of the CMA, “[m]ore regular switching not only opens up the market to greater competition but also reduces the long tenures that can reduce the appearance of objectivity.”

In summary, the Final Order includes the following obligations for FTSE 350 companies:

  • an obligation to organise a competitive tender process in respect of their statutory audit services at least once every 10 years;
  • if a competitive tender process has not been organised in the previous five years, an obligation to specify in audit committee reports when the next such tender process will be held and justify why the chosen length of time is in the best interests of shareholders; and
  • certain measures to strengthen the accountability of external auditors to the audit committees and reduce the influence existing accountants on the management of their clients.

The CMA anticipates that its measures will “strengthen the role of audit committees will underpin the importance of an external assessment that serves shareholders not management” as well as increasing competition by ensuring that “other ‘mid-tier’ [accounting] firms get more opportunities to get a foothold in the market.