Article:

Audit tenders - best practice

13 March 2017

The Financial Reporting Council (FRC) has recently published ‘Audit Tenders - Notes on Best Practice’ (the guidelines)’. The guidelines replace the guidance published in July 2013 and are timely update as recent changes to legislation require the audits of public interest entities to be tendered after ten years and mandatory rotation after twenty years in office.

In order to draw up Guidelines, the FRC held roundtables with the chairs of audit committees that had recently gone through an audit tender process (or were about to do so), investors and senior audit engagement partners from the larger audit firms. The key message from the Guidelines is that planning the tender process, maybe years in advance, and engagement with the investors are two of the most important elements of a successful tender process.
 

Investor engagement

The ultimate client of the statutory audit is the investor not the company so, unsurprisingly, investors view transparency of the audit tender process as being of key importance to them. These include the criteria used to select those invited to tender and the reasons for selecting the auditor at the end of the process. Significant investors want early notice that the Audit Committee is looking to tender the audit to give them an opportunity to engage.
 

Timing

One of the key aspects of planning the tender is planning when to do it. Legislation may require a tender at ten yearly intervals but that may not be the most suitable time for the company. The Audit Committee will need to consider what other changes are happening in the company:

  • Are there planned board rotations?
  • Are other group entities in other jurisdictions required to tender at intervals other than ten years?
  • When is the current audit partner due to rotate?

Combining these and other factors may lead an Audit Committee to tender prior to the ten year maximum.
 

Process

The Guidelines set out a useful overview of the tender process from before the start of the formal process to the decision which auditor to appoint. The Guidelines consider not only the selection of the firm invited to tender but recommends the Audit Committee ask to meet two or three partners from each firm to ‘pre-select’ the partner they want to lead the tender to enable them to assess their fitness for the role and their sector knowledge. The Guidelines further recommend requiring firms to submit their succession planning as part of the tender process enabling the Audit Committee to assess the auditor’s ability to operate a gradual rotation program.

The legislation requires the Audit Committee to validate or approve a report on the tender and appointment process. The Guidelines states that this requirement may be satisfied by a combination of some or all of:

  • The paper prepared by the Audit Committee to support its deliberations and recommendations to the Board for appointment
  • The Board paper which sets out the Audit Committee’s assessment and recommendations, and
  • Disclosures contained in the annual report of the Audit Committee.

Copies of the Guidelines are available on the FRC website.

For help and advice on the audit tender process please get in touch with your usual BDO contact or Julian Frost.
 

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