Grant Thornton welcomes UK proposal to investigate restrictive covenants
30 March 2011
Grant Thornton, one of the world's largest accounting organisations, welcomes the UK government's recommendation that the Office of Fair Trading investigates the impact of restrictions on auditor appointment.
April Mackenzie, Global head of public policy and external affairs at Grant Thornton, said, "This is an encouraging development. Increasingly audit regulators and competition authorities are making public statements that restrictions on appointment of auditor are undesirable and should be removed. We recommend that all countries support the *OECD position and take action to remove the harmful effects of restrictive covenants."
Requirements are sometimes imposed by third parties on companies which restrict who the company may appoint as auditor. Such restrictions contravene the principle of a free market for services and impair a company's auditor selection decision, and thereby can act to compound audit market concentration.
April Mackenzie concludes, "Regulators around the world acknowledge that audit market concentration is a problem and that it can pose a risk to the capital markets. Removing auditor appointment restrictions would the most basic of steps to help reduce audit market concentration."
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*OECD Competition Committee report: competition and regulation in auditing and related professions
The Organisation for Economic Co-operation and Development (OECD) acknowledged that restrictions are undesirable and that unwarranted restrictions should be removed. The OECD Competition Committee report on competition and regulation in the auditing and related professions (the Report) was published in May 2010.
The Report stated that, "If regulators and competition authorities take the lack of competition in the accountancy services market seriously, therefore, regulatory and market barriers impeding such expansion [should be] addressed."
The Report also noted that, "Where a company wishes to use a non-Big Four auditor certain market practices may prevent or discourage it from doing so. Market practice has emerged in some jurisdictions including the US, Germany and the UK, whereby third parties such as lenders, impose covenants on the company which restrict the company's choice of auditor to a Big Four firm or apply more punitive terms and conditions to loan finance where a non-Big Four firm is appointed. Such restrictions are not based on a qualitative assessment of the pool of audit firms available and prevent excluded audit firms from competing with the Big Four firms and thus entering or expanding further into the audit market for large or quoted companies. The positive impact of other initiatives which aim to increase the number of suppliers of large international audits is thus impaired by unnecessary buy-side restrictions."
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