Regulatory threat hangs over long-term auditing links

June 24, 2013 12:06 am

Regulatory threat hangs over long-term auditing links

By Alison Smith and Adam Jones

When the accountancy firm that is now KPMG was first appointed as auditor to Cookson, sterling was still on the gold standard and the Empire State Building was being built.

The appointment that began in 1930 – and has survived last year’s demerger of the engineering group so that KPMG audits both the successor companies – is one of the most striking examples of the longstanding relationships that regulators worry makes auditors too cosy with those they are supposed to be vetting.Associated British Foods has been audited by KPMG since 1936, the year of Edward VIII’s abdication, while earlier this year Marks and Spencer disclosed that it had been audited by PwC and its ancestors since 1926 – when silent movies were still in vogue.

The Competition Commission is considering whether to impose a policy of mandatory rotation, which would force big companies to change audit firms periodically, perhaps as often as every seven years. According to data it has compiled, other large quoted companies that have had the same auditor for more than 25 years include VodafoneBarclaysLegal & GeneralTesco,Unilever and BAE Systems.

With 30 per cent of FTSE 100 companies estimated to have had the same auditors for more than 20 years, groups are coming under increased pressure to change firms.

Last year the Financial Reporting Council changed corporate governance guidelines to encourage the UK’s largest quoted companies to put their audit out to tender at least once a decade – though the tender might well result in no more than the incumbent firm being reappointed.

And two institutional investors – USS Investment Management and RPMI Railpen – say they will vote against the reappointment of audit firms at FTSE 350 companies if they have been in place for more than 15 years.

Last week Tate & Lyle became the latest FTSE 100 group to say it would put its audit contract out to tender. It follows similar moves by M&S, RSABG Group andLand Securities. KPMG, which has been vetting HSBC since 1991, is now at risk of losing the UK’s biggest audit after the bank said in March that it would formally check out rival firms.

Spirax-Sarco Engineering, which has been vetted by KPMG for more than 50 years, has also just begun the process of putting its audit contract out to tender.

Deloitte, one of the leading audit firms, says that the low-key nudging by the FRC means that half the companies in the FTSE 100 will need to put their audits out to tender between now and 2015. It argued in a hearing in May that the Competition Commission’s planned crackdown did not recognise how much the market was already changing.

Companies that have longstanding relationships with their auditors say that changing the lead audit partner within the firm on a regular basis secures independence.

ABF said that each year the audit committee has to satisfy itself of KPMG’s independence. Vodafone similarly said the audit and risk committee “considers the reappointment of the external auditor annually and also assesses their independence on an ongoing basis”.

Companies point as well to the complexity and cost of changing auditor. They also say that rules on conflicts of interest can mean that large swaths of business would need to be transferred to other auditors when a change happened, which might be a disadvantage to the auditor taking on the group.

The Competition Commission is expected to say in July whether it will insist on mandatory rotation.

An EU-wide reform of auditing is also being negotiated, although an aggressive package of measures proposed by the European Commission – including enforced changes of auditors – is likely to be diluted.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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