The Big Four accounting firms will face greater competition in the United Kingdom as FTSE 350 companies will be required to put their statutory audit engagement out to tender every 10 years, according to a ruling by the U.K. Competition Commission.

The commission's ruling, issued last month, is designed to increase competition, improve bargaining power of companies, boost the influence of audit committees, and ensure audits better serve shareholders. Large companies would be prohibited from pre-restricting auditor choices to the Big Four – KPMG, PwC, Ernst & Young, and Deloitte – but companies can require any auditor to meet “objective criteria” during the selection process. Incumbents would be allowed to participate in re-tenders.

“Our measures will deliver lasting change in a market where currently a major company putting its auditor out to tender remains unusual enough to be a news story,” Laura Carstensen, the commission's chairman of the Audit Market Investigation Group, said in a statement. “Instead, all this business will be open to competition on a regular basis. The introduction of regular and predictable tenders will benefit shareholders, who will also have a much greater say and knowledge of whether their needs as customers are being met.”

Carstensen also noted that “long, unchallenged tenures” can reduce the appearance of an external auditor's objectivity. The ruling is expected to take effect in the last quarter of 2014.

The decision to force companies to re-tender audit services every 10 years is more lenient than the commission's initial proposal of a five-year requirement. Companies had argued that would be too costly and time consuming.  The commission still said in its ruling that companies would benefit from re-tendering their audit services every five years, but they are not required to do so. If a company chooses not to re-tender after five years, its audit committee must report in which year it plans to do so and why the decision is in the best interest of shareholders.

Michael Izza, chief executive of the global chartered accountants group ICAEW, praised the commission's decision to pull back from the five-year re-tendering requirement.

“The Competition Commission has listened to feedback from the business and regulatory communities about the additional costs and disruption five-yearly re-tendering would cause,” Izza said in a statement. “At a time when economic recovery is still hanging in the balance and businesses need to focus on driving growth, this is the right decision.”

Izza said he was disappointed that the commission did not follow the 2012 guidance by the U.K.'s Financial Reporting Council, which called on large companies to re-tender every 10 years on a “comply or explain” basis, meaning companies could opt not to re-tender after 10 years if they explained why.

The commission is asking the FRC to review all audit engagements for the FTSE 350 every five years. Corporate audit committees would be required to pass along results of those reviews to shareholders. Shareholders also would be asked to vote at annual meetings on whether audit committee reports within companies' annual reports are satisfactory.

The role of the audit committee is increased by new provisions that only the committee, not management, would be allowed to negotiate audit fees and set the scope of audit work, initiate tenders, recommend auditors for appointment, and authorize an audit firm to conduct additional services.

EU lawmakers have been debating whether to enforce mandatory rotation of auditors, targeting what some view as too cozy relationships between longstanding external auditors and corporate clients. No regulation has been passed yet, but an EU law would trump the U.K. body's decision.

Carstensen said her group is aware EU regulations may be on the horizon, but decided to proceed anyway because no concrete proposals at the EU level have taken shape yet. Carstensen addressed why her group declined to endorse mandatory rotation of auditors, saying in part it was because it would reduce choices in tender processes.

“If audits and auditors are regularly being called to account, by being answerable to shareholders and assessed on quality and can be contested by other companies, that will address the concerns we've expressed. We do not think that mandatory switching would add to that,” Carstensen said.

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