Mandatory Audit Firm Rotation in the FTSE 350

Posted by Jessica McKeon - May 26, 2020

This analysis was originally posted by Audit Analytics.

Thirty-four FTSE 350 companies are required to rotate audit firms or conduct a tender process by 2023, according to EU Regulation 537/2014. The intention of mandatory audit firm rotation is to improve audit quality by limiting risks of repeated inaccuracies, encouraging fresh thinking, and strengthening skepticism.

EU member states do have the authority to modify these rules to some extent. For example, UK regulation requires that audit firms rotate every ten years, with member state options to extend an additional ten years if the company puts the audit out for tender after ten years. In addition, there is a transitional period for long-term audit firms intended to prevent a flooding of the market at the time the regulation came into effect.

All of the companies due to rotate have announced that a tender process is either planned or underway. Bellway PLC has engaged KPMG since 1979, the year of its listing on the London Stock Exchange. In 2020, “the incoming auditor will sit alongside KPMG during the 2020 audit to ensure a smooth transition takes place,” bringing KPMG’s tenure of 41 years to a close.

However, recent guidance from the Financial Reporting Council (FRC) relating to COVID-19 may impact the timing of the 2020 tenders. On March 26, in a Joint Statement with the PRA (Prudential Regulation Authority) and the FCA (Financial Conduct Authority), the FRC announced that it was acceptable to postpone auditor tenders “even when mandatory rotation is due.” Companies desiring an extension must formally apply to the FRC for permission.

In recent news, Ernst & Young LLP’s audit of former FTSE 100 member NMC Health is currently under investigation by the UK Financial Reporting Council; NMC Health was placed into administration and has been delisted from the London Stock Exchange amid allegations of fraud. EY served as NMC Health’s auditor since its listing in 2012 and would have been due to rotate this year.

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