Question to the Department for Business, Energy and Industrial Strategy:

To ask the Secretary of State for Business, Innovation and Skills, for what reasons the Government is not proceeding with joint auditing or increased tendering in its transposition of EU Regulation No. 537/2014 on statutory auditing of public-interest entities.

The Government does intend to implement provisions relating to increased tendering as part of the implementation of the EU Audit Regulation and Directive. This is in line with the recommendations of the Competition and Markets Authority (CMA).

The Government’s implementation of the EU Audit Directive and Regulation will include measures to require regular tendering of auditor appointments. Under implementing regulations currently laid before Parliament, all companies that are banks, building societies or insurers, or which have securities admitted to a regulated market, will be required regularly to subject their audit engagement to tendering. The maximum duration of an audit engagement will be limited to 20 years (currently there is no maximum duration). This will be introduced on a phased basis with some longstanding engagements given a further 4 or 7 financial years after the regulations come into force before they must be brought to an end and tendered to new auditors.

The provision on joint audit in the EU Regulation would act as an exemption from having to retender with the frequency envisaged by the Competition and Markets Authority (CMA). The Government consulted on the implementation of the Audit Directive including this option, and concluded the option should not be taken up.

Joint audit is not a practice followed in the UK, though it is expressly permitted by the Companies Act and legislation on some other entities. The Department for Business, Innovation and Skills has consulted on whether to take up this derogation. In response to our discussion document in December 2014 on auditor regulation, only 4 of 25 respondents supported its implementation.

It is unclear that increased joint audit would encourage competition. The option in the EU Regulation could result in prolonged audit engagements (up to 24 years) and fewer changes in auditor. This would be contrary to the objective of the CMA, which is to increase retendering of audits.

The CMA considered the impact of joint audits on competition and concluded that promoting joint audits would have little effect on barriers to entry, expansion and selection. The CMA’s conclusions were based on views provided by a range of stakeholders. The CMA was not able to quantify the potential cost of imposing joint audits, but did state that they believed that across the market the costs would be potentially significant. They state that a lot of weight was placed on the views of investors, who were almost universally opposed to joint audits on the grounds of additional costs and risks to audit quality.