Audit Tendering in the UK: A Review of Stakeholders' Views

• Author: Amir Allam,Amr Kotb,Noha Ghattas,Mohamed Khaled Eldaly
• Date: 01 March 2017
• DOI: http://doi.org/10.1111/ijau.12076
• Published date: 01 March 2017

Audit Tendering in the UK: A Review of Stakeholders’Views

Amir Allam,

1

Noha Ghattas,

2

Amr Kotb

1,3

and Mohamed Khaled Eldaly

4

1

Cairo University, Egypt

2

American University of the Middle East, Kuwait

3

Prince Sultan University, Saudi Arabia

4

University of B radford, UK

This study reportsthe results of a content analysis of thecomment letters sent to the UK FinancialReporting Council

(FRC) in response to its consultation document on the 2012 revisions of the UK Corporate Governance Code,

concerningthe proposal for mandatory audittendering. The results indicate a general support forthe FRC’sproposals

with a number of key concerns related to audit quality, auditor independence and audit cost. There is also clear

conflicts of interest among some stakeholder groupssuch as audit firms and companies on one side and institutional

investors on the other. There is evidence of conflicts of interest between Big 4 and non-Big 4 audit firms. Implications

for future consultations and legislation are also discussed.

Key words: audit change, audit market structure, audit quality, Audit tendering, content analysis, corporate

governance, FRC , independence

INTRODUCTION

In 2011, the UK’s Financial Reporting Council (FRC), the

independent regulator responsible for promoting high

quality corporate governance and reporting, indicated its

intentions to take action with regard to the client–auditor

relationship in a report titled ‘Effective company

stewardship: next steps’(FRC, 2011). The report stressed

that some auditor–client relationships ‘have lasted for over

half a century and that necessarily calls into question the

nature of the relationship and the degree of institutional

(if not personal) familiarity that has developed’(FRC,

2011, p. 20). The report highlighted that similar concerns

have also been expressed by the European Commission –

those concerns being based on institutional familiarity

(FRC, 2011, p. 20). Further, the FRC pointed out the lack

of competition and auditor choice in the audit market and

its concentrated structure as an issue calling for

intervention. For instance, the Big 4 audit firms audit 99

of the FTSE 100 companies and receive 99 per cent of all

audit fees paid by all FTSE 350 companies, and switching

rates from one audit firm to another are low, on average 4

per cent for listed companies and 2 per cent for FTSE 100

companies (Oxera Consulting, 2006). The House of Lords

Economic Affairs Committee and the European

Commission has expressed similar concerns with regard

to the audit market structure, with the latter planning for

regulatory intervention to restructure the market (FRC,

2011).

As such, through amending the UK Corporate

Governance Code, in April 2012, the FRC (2012b) released

a consultation document for public comment in which

audit tendering was proposed to be part of the UK

Corporate Governance Code, and in October 2012 a new

provision required FTSE 350 companies, on a comply or

explain basis, to put their audit contract out to an open

tender at least once in every ten years or explain their

non-compliance.The FRC expressed that ‘[audit]tendering

provides an effective way by which companies can

examine whether they have the best auditor available’

(FRC, 2013, p. 1). It generally aims at increasing the public

confidence in the auditing profession and to increase the

competitiveness within the audit market (FRC, 2013).

A review of the literature reveals a lack of prior research

on studying the viewsof the different stakeholders affected

by audit tenderingwith the exception of the work of Beattie

and Fearnley (1994, 1995, 1998a, 1998b), who mainly

focused on exploring the views of only one stakeholder

group, management. Thus, this study attempts to fill an

apparent gap in the literature by contrasting the different

views of various stakeholder groups on audit tendering.

More specifically, the present study reports the results of a

content analysisof the comment letters written in response

to the FRC consultation document on the 2012 revisions to

the UK CorporateGovernance Code. The revisionscovered

a number of issues; however, the scope of the study is the

comments made on the tendering proposal only. In order

to highlight the different stakeholder groups’views,

comment letters were categorized into eight groups of

stakeholders basedon their business core and/or interests:

auditing firms, companies, professional bodies, consul-

tancy firms, institutional investors, lobbyist association,

advisory, and private capacity.

1

The findings indicate a general support for the FRC’s

proposals with a number of concerns expressed by

different groups of stakeholders. The main concerns are

related to audit quality, auditor independence and audit

cost. There is also clear conflict of interest among some

groups such as audit firms and companies on one side

and investor relations on another side. There is evidence

of conflict of interest between Big 4 and non-Big 4 audit

firms. To the best of our knowledge, this study is the first

to take advantage of the comment letters made available

online by the FRC and fills a gap in the literature. The

findings could be a source of guidance for the FRC and

potentially influence future revisions of the UK Corporate

Governance Code with regard to tendering, and should

contribute towards enhancing policy makers’under-

standing of the position taken by each group of

stakeholders.

The rest of the paper is organized as follows. The

background section presents the recent developments in

the UK that led to the revisions proposed by the FRC in

2012 and then reviews the literature on the impact of long

Correspondenceto: Amir Allam, Faculty of Commerce, Cairo University,

Giza P.O. Box 12613,Cairo, Egypt. Email: a.allam@foc.cu.edu.eg

International Journal of Auditing doi: 10.1111/ijau.12076

Int. J. Audit. 21:11–23 (2017)

©2016 John Wiley& Sons Ltd ISSN 1090-6738