Accountancy firms should be banned from immediately selling other services to lapsing audit clients, an industry body has said.
The Association of Chartered Certified Accountants (ACCA) has told regulators they should consider introducing a “cooling off” period of two years, in which auditors are banned from the lucrative practice of selling additional products to firms they have recently audited.
Read more: The audit sector faces a perfect storm
In its response to the Competition and Markets Authority (CMA) review of the sector, seen by this paper, the ACCA said the change “may help to allay public concerns that the auditor’s judgement in the final year of the audit relationship could be affected by the firm’s desire to sell consulting services to that entity in the following year”.
The CMA is looking to drive competition in the audit market, which is dominated at the top end by four firms.
Under laws introduced in 2016, listed firms must tender their audit contracts every 10 years, and can be audited by the same firm for an maximum of 20 years if their contract is renewed.
Andrew Gambier, the ACCA’s head of audit, told City A.M. there was a “threat to the independence” of auditors in their final year, when they have an opportunity to start selling different services to clients.
Non-audit services, which include regulatory advice and consulting, are a lucrative sideline for professional services firms – most of which began as purely audit-focused entities but have diversified substantially. Audit fees make up a minority of income for all of the sector’s Big Four firms.
Permissible fees for non-audit services are currently capped at 70 per cent of a client’s audit fees, but embattled watchdog the Financial Reporting Council (FRC) has said it is looking at banning firms selling non-audit services to audit clients.
Gambier said some firms might feel a pressure to maintain good relations with audit clients as they approach the end of a contract, which could lead them to “go easy” on companies.
The ACCA offered tentative support for the creation of a national audit body – similar to the National Audit Office (NAO), which monitors government spending – to carry out audits for large firms with heavily UK-focused operations.
It warned that the CMA, which is aiming to make an initial report by the end of the year, should endeavour to gather more data on the impact of mandatory rotation of firms, which was introduced as a combination of new EU regulations and recommendations from a previous review into the sector by the Competition Commission.
Last month, the FRC said mandatory rotation has so far only served to further entrench Big Four domination of the listed audit market.