Auditor provisions in credit agreements

The Competition Commission (CC) has been conducting a market investigation into statutory audit services and has been reviewing clauses in loan agreements relating to the appointment of auditors. The CC has now issued its final report and one of its package of remedies is a ban on provisions in loan agreements limiting auditor choice (although the CC has back-tracked somewhat from what it originally proposed). However, loan agreements in effect at the date of the relevant order (expected by 1 October 2014) will be exempt and so there is no immediate need to change credit agreements.

Following a referral from the Office of Fair Trading (OFT) in October 2011, the CC has been conducting a market investigation into statutory audit services for large UK companies and, after a period of consultation, published a provisional package of remedies in July 2013. Following a further round of consultation, the CC has now published its final report.

One area of focus of the CC has been on provisions in loan documents that prescribe who a company’s auditors may be. As a result of its investigations, the CC has concluded that restrictions on auditor choice contained in loan agreements have added ‘to the reputational barriers mid-tier [audit] firms face in expanding within or entering the FTSE 350 statutory audit market’. In effect, they give the Big 4 audit firms an unfair advantage. Accordingly, as part of a wider package of remedies, the CC has decided to impose restrictions on such provisions. However, the CC has pulled back from the blanket ban it proposed in its July provisional decision on remedies…

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