Audit tendering process will force procurement professionals to go beyond traditional boundaries by Jon Hansen

Posted on January 22, 2015


Traditionally I have not been a fan of press releases.  This of course should come as no surprise to anyone who has been following this blog for any length of time.

Generally speaking, press or news (and I use the word “news” loosely here) releases, are little more than self-serving flatulations of meaningless proclamations, designed to somehow elevate the profile of the writer be it a company or individual.  Let’s be honest here, how many of you out there have upon reading a press release, jumped up out of your chair to proclaim “I gotta get me that!”

All this being said, and similar to the frequency in which I ingest chemical-laced sweet heat chili nacho chips from Doritos – my one only real vice – I actually do read almost all of the press releases that cross my virtual desk.  It is the ultimate indulgence in literary junk food.  Most of the time I come away from my experience thinking “there is another 30 minutes of my life that I will never get back.”  However, there are those rare exceptions in which a press release provides a glimmer of information that promises, with deeper investigation, meaningful insight.

One such example was a January 16th Proxima release bearing the title “Audit market regulations show FTSE350 in ‘teenage’ stage.”

For those not yet familiar with this story, it involves the regulatory requirement for UK companies to implement an audit firm rotation, based on a mandatory tendering directive.  The primary purpose for this legislative edict, is to avoid the complacent familiarity that led to scandals such as what happened at Enron, and more recently Tesco.  Specifically, and as Proxima’s Richard James put it, the idea is to bust up the kind of “cozy relationships” between company and auditor that undermine the creditability of the process.

There is also a second element to the regulatory requirement that is centered around what James referred to as “breaking the oligarchy of the Big Four* accounting firms,” by opening up the market to more tier two players such as Grant Thornton and BDO.  For those in the public sector, think of this in terms of a set aside program to engage small, women and minority-owned businesses.  In fact, there is even incentive for European-based companies to utilize the audit services of these smaller firms on a sub-contracting basis through the larger firms.  Specifically, if one of the Big Four engages a second tier firm to perform audits for their large corporate clients, the contracting company will not have to go to tender as frequently relative to satisfying the audit rotation requirement.

While interesting, Proxima’s James does not envision the smaller firms gaining any real business in the foreseeable future.

The question is how does this all tie into the procurement process or why, beyond the tendering requirement, should this be of interest to you as a procurement professional?  Even more interesting of a question, and given Proxima’s business focus, why would it matter to them?

In addressing the former, I will respond to the latter question.

Proxima’s objective is to distinguish itself as a knowledge source relating to the profession’s evolution from functional to strategic.

By sharing this information in the form of a news release, James believes that it forces procurement professionals to look beyond the traditional boundaries that have defined their duties.  This he believes, will create a direct path to the executive table, and a meaningful presence in terms of influencing corporate direction.

Or to use a direct quote from the press release by Proxima’s Chief Client Officer Guy Stafford – who it should be noted is a Chartered Accountant; “This shake-up of the audit market presents an opportunity for forward thinking procurement leaders to align themselves with a highly topical, largely untouched area of business spend.”

It's time to think outside of the box!

It’s time to think outside of the box!

The North American Perspective

Of course not everyone supports the requirement for mandatory auditor rotation through tendering.

In Canada for example, the Canadian Public Accountability Board or CPAB, opposes the idea citing the following reasons:

“CPAB does not support mandatory firm rotation or tendering.  We are concerned that either approach could result in a lengthy procurement exercise, diverting resources from audit quality – leading to a “race to the bottom” on audit fees. Additionally, the threat of a tender or auditor change can pressure an auditor to not challenge management.  Both these consequences could result in a deterioration of audit quality.”

Does this make Proxima’s intentional focus on non-traditional procurement practices any less relevant to professionals on this side of the pond?  From a practical sense, for many it might. However, the underlying value associated with becoming aware of the discussions surrounding topics such as these in terms of gaining a broader strategic perspective remains valid.

* Big Four Firms include KPMG, PWC, Ernst & Young, Deloitte


Posted in: Commentary