New EU audit rotation reforms, due to take effect in June, are going to have significant cost implications for UK corporates and yet one in five companies are ‘woefully unprepared’, reveals a survey of FTSE 350 business leaders by EY.
EU audit reform: UK PLC underprepared and face rising costs
EY’s survey of 100 CFOs, tax directors and audit committee chairs showed that 19% of respondents didn’t know when their company needed to tender or rotate its audit. And of those that did, almost half hadn’t yet put a strategic plan in place. Twenty-eight percent of firms said they also lacked full understanding of the proposed restrictions on non-audit services, with a handful (7%) stating they had no knowledge of the changes at all.
When asked about the impact of the new reforms, businesses cited transition costs as a major concern, along with general disruption and possible changes to accounting judgements. Twenty-one percent of respondents said the transition costs will be 20-50% of their current annual audit fee, while the majority of respondents (57%) expect the transition cost to amount to 10-20% of the current annual audit fee.
Clock is ticking
Hywel Ball, EY’s managing partner of assurance in the UK & Ireland comments: “As expected some companies have been moving ahead of the regulations, with over half of the FTSE 100 having tendered their audit since the spectre of the regulations loomed. But we haven’t seen the same level of preparation among the rest of the FTSE 350, with less than a quarter having tendered so far.
"This was never going to be a cost free exercise. Choosing an auditor and managing the mix of non-audit services is one of the biggest procurement decisions a company has to make. It requires a major time investment when going through the tender process and then bringing the new team up to speed, all of which carries an internal cost to the company.
“But despite these cost implications, regulators should be encouraged that audit committees have been placing audit quality at the heart of their decision making processes, rather than focusing purely on fees.”
Jason Lester, EY’s managing partner for tax in the UK, says that this wasn’t just an audit issue and that the new rules would have big implications for the procurement of other professional services right across their company.
Jason explains: “Eighty percent of the companies in our survey said they expected to tender for their audit in two to five years' time, which will be after the new non-audit restrictions come into force this summer. These restrictions mean that many companies will have to review their non-audit professional services providers before they pick their auditor.
“It’s therefore really concerning that there are a group of companies who are woefully unprepared and who haven’t yet got to grips with these new regulations. Particularly as the clock is now ticking, with the reforms due to come into effect in just two months’ time.”
Meeting policy objectives?
Some of the key objectives of the EU reforms were to improve audit quality, restore investor confidence in financial information and contribute to a more dynamic audit market in the EU - including increasing choice of auditor.
When asked to rank the possible benefits of changing auditor, 58% of companies pointed to ‘increased sector expertise.’ Although one of the biggest risks of change cited was challenges to existing accounting judgements (42%).
While 61% of those surveyed said they are planning to invite tenders from at least one non Big Four firm, these intentions aren’t necessarily becoming a reality. In the last six months there have been 25 audit tenders completed by FTSE 350 companies, but none have been awarded to a non Big Four firm.
Hywel Ball concludes: “On the face of it, the survey findings will be encouraging to regulators as audit committees are placing audit quality and service at the heart of their decision making. However, we remain sceptical as to whether the reforms will create greater choice in the audit tender market. In fact the planned restrictions to non-audit services may mean that some companies may actually have less choice, if they decide to keep one of the audit firms as their tax or corporate finance advisor.”
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