On February 8, 2017, the Investment Association published guidelines setting out the expectations of its members when companies tender their audit. The guidelines cover planning the tender, tender candidates, the tender process and the tender decision. The guidelines are aimed at companies whose shares are admitted to the Premium and Standard segment of the Official List of the UK Listing Authority, to trading on AIM, and to the High Growth Segment of the London Stock Exchange’s Main Market.
Planning the tender
The guidelines state that the audit committee should direct the planning and oversee the process of the tender, including identifying candidates, setting the criteria for selection and the interviews and that the whole of the audit committee should be involved, not just the chair of the audit committee. The tender process should be planned carefully and well in advance since managing a mix of non-audit services is now more complex and likely to need time and input from a range of stakeholders. A company planning to enter into a tender should issue an RNS announcement so that its investors can, if they wish, engage with it on the process and major shareholders should be engaged on the timetable and process, how the audit committee intends to assess audit quality, the selection criteria and assessment mechanism to be applied and the conclusion reached. In relation to giving advance notice of a tender and the timetable, standardised disclosure should be avoided and the company should explain why it is proposing to tender at that time, particularly if it is re-tendering well within the new statutory limit.
The guidelines point out that audit committees need to consider the range of firms invited to tender, ensure that they are objective and independent and also whether the incumbent is to be included. The guidelines note that investors expect a wide range of audit firms to be invited to tender and, where practical, firms other than the four largest should be included. Depending on each group’s circumstances, the guidelines state that investors believe only the larger multi-national groups may have to restrict their choice to the four largest audit firms. Any conflicts or perceived conflicts of interest between audit committee members and firms tendering need to be managed. The guidelines state that investors generally prefer that at least three years should have elapsed from when a company director was a partner in, or employed by, an audit firm before the firm can be considered for appointment as auditor. Where the incumbent auditor is being invited to tender, the tender process should address any potential advantage the incumbent firm, or an audit firm with a substantial business relationship with the company, may have and ensure there are appropriate mitigating factors and there should be transparency about how the audit committee decided on the candidates to be invited to tender.
The tender process
The guidelines state that for the tender process to be successful and focused, clear objectives should be set as to what it wants to achieve and what is looked for in an auditor. When the interviews are held or presentations given, the interviewee/presenters from the audit firm should be the same individuals that will be working on the audit if their firm is appointed and the guidelines set out a number of factors which audit committees should consider when deciding on the preferred candidate. The guidelines state that investors would appreciate audit committees disclosing the selection criteria used, for example, audit quality, cultural fit, industry expertise and transition experience.
The tender decision
The guidelines state that it is important that the audit committee ensures that in making its recommendation to the board as to the preferred firm, it puts audit quality as its main criterion. While fees should be reasonable, they should not be the main deciding factor, particularly in the early stages of the tender process. Major investors’ views should be sought before the appointment is made, particularly if there are issues they want to discuss and at the time the decision is confirmed, there should be an RNS announcement rather than delaying any announcement until the final annual report and accounts is issued. If investor input is received, then the report of the audit committee in the annual report should consider explaining how it went about that engagement and the outcome.
(IA, Audit tenders: IA guidelines, 08.02.2017)