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August 12, 2013

Five year retendering could result in a “sham process”: FRC

The UK Financial Reporting Council believes that five year mandatory audit retendering for all FTSE350 suggested by the Competition Commission (CC) could be disproportionately costly for companies and audit firms and could undermine the CC’s goal of promoting competition in the audit market.

In its response to the CC’s provisional remedies announced last month the FRC said: "FRC is concerned by the risk that tendering at five yearly intervals will not be taken seriously by companies or firms and may result in a sham process which could greatly undermine the serious approach already being shown to ten year retendering introduced in updates to the UK Corporate Governance Code last year."

Commenting on the enhanced FRC Audit Quality Review (AQR) process suggested by the CC to be extended out for every audit engagement in the FTSE350 on average every five years, the FRC said the proposals could "undermine the FRC’s current risk-based approach to the selection of audits for inspection".

"The FRC would wish to consider how to address this and other matters such as the additional funding needed for a larger investigation remit during its consideration of the CC’s eventual recommendation."

The FRC also emphasised that it is not a competition regulator and "it does not have the powers which would enable it to function as one". "Whilst the FRC has, and will continue to have, due regard for competition issues, its focus must remain the quality of corporate and financial reporting."

The CC said in its remedies document that the FRC should amend its articles of association to include a secondary objective to have due regard to competition.

Related articlesNo mandatory audit firm rotation, but five year audit retendering for UK FTSE350: CCAnalysis: Is five year retendering going to have the desired effect?

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