Audit tendering

Tendering is the process of choosing the best or cheapest company to supply goods or do a job by asking several companies to make offers for supplying the goods or doing the work:

Audit tendering is a process through which a company puts its audit engagement to an open tender on a periodic basis. It generally aims at increasing the public confidence in the auditing profession and to increase the competitiveness within the audit market, thus enabling companies to achieve the best possible audit services in terms of cost and quality, and audit firms to innovate in the way audits are conducted (FRC 2013). Traditionally, companies change their auditors relatively infrequently, and when it occurred, it was due to several reasons such as: auditor’s fees; poor audit service; change in the company’s leadership; change in chemistry of the relationship’ between management and the audit firm (Beattie and Fearnley 1998a, 261); change within the company’s structure (e.g. merger, acquisition), lack of auditor’s professionalism and competency (Beattie and Fearnley 1998b); and/or disagreement between the company and the audit firm on particular accounting treatment(s) (FRC 2013). However, the change of auditor was rarely seen as a mark of, for example: good governance (i.e. independence and objectivity), testing the audit market on the quality/price of the audit service, and/or stimulating the incumbent audit firm (FRC 2013). The UK’s Financial Reporting Council (FRC), the independent regulator responsible for promoting high quality corporate governance and reporting, believes that [audit] tendering provides an effective way by which companies can examine whether they have the best auditor available …” (FRC 2013, 1). As such, in April 2012, the FRC released for public comment a consultation document “Revisions to the UK Corporate Governance Code and Guidance on Audit Committees”, among the issued covered was a proposal for audit tendering. In October 2012, in the updated UK Corporate Governance Code, the FRC introduced a new provision on audit tendering requiring FTSE 350 companies, on a comply or explain basis, to put their audit engagement out to tender every ten years.

ADVANTAGES OF AUDIT TENDERING

· It acknowledges the right of companies to choose their auditors in order to obtain the most cost-efficient audit.

· It appears to have led to some increases in audit efficiency as auditors have implemented more efficient and effective audit techniques.

Disadvantages of audit tendering

· It increases the danger for the profession of a potential loss of credibility that could result from a real or perceived loss of independence of the auditor by being placed in a position where there may be an unreasonable threat of dismissal as a result of the auditor’s actions. An example is the practice of ‘opinion shopping’. This may occur where an audit is put out to tender following the issue of a modified opinion by the previous auditor or where a new issue arises that may involve consideration of the issuing of a modified opinion, and the client seeks the views of potential new auditors as to how they would interpret the client’s action in terms of the application of a certain accounting practice

·         It may also subject an auditor to undue pressure because of the cost of the audit examination and the ability to conduct the necessary audit procedures and the impact of ‘low-balling’.

AUDIT TENDERING PROCESS

FRC has issued PN067: Audit Tenders: Notes on best practice. It offers suggestions to improve the tendering process. It is aimed at FTSE 350 companies but could equally be used as guidance for any tender. The best practice key steps highlighted are:

·   establish clearly the objectives for the tender, why it has been initiated and engage with major investors on these points;

·   choose which firms to invite to tender based on clear criteria and the views of investors;

·   ensure the process is led by the Audit Committee chairman;

·   provide audit firms with adequate information for them to understand the company’s needs;

·   make the decision based on audit quality not price and do not rule out the incumbent auditor without good reason;

·   manage an orderly transition to ensure a seamless handover;

·   ensure the regulatory requirements such as independence rules are met;

·   make use of audit inspection reports.