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Publication
Merger law reform in Australia: What next after the Exposure Draft?
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
United Kingdom | Publication | April 2019
On April 18, 2019, the Competition and Markets Authority (CMA) published its final report following its market study of the statutory audit services market. The market study was launched in October 2018 and the CMA published its provisional findings in December 2018.
The final report considers the reasons for shortcomings in audit quality in the UK. It notes that some of the problems with the market are caused by longstanding, deep-seated and intractable features and comments that audit committees are only a partial solution to the problem of companies playing the primary role in selecting their own auditors. The CMA considers the market to be a fragile one with high barriers to entry and a lack of resilience and choice. It also believes that accounting firms are less and less focused on audit. As a result, it makes four recommendations in the final report which are intended to increase the effectiveness of audit committees across the FTSE 350, increase resilience and choice in the market and address the problems in terms of focus on quality and choice, caused by audit firms having combined audit/non-audit services structures. The final report notes that the changes will need concerted action by the government and will need to be overseen by the new regulator to be formed following the independent review led by Sir John Kingman. In addition, the final report notes that the changes it recommends should in time be complemented by what emerges from the review by Sir Donald Brydon into the quality and effectiveness of audit.
The recommendations in the final report as follows.
The CMA recommends that audit committees should come under greater scrutiny by the new regulator as this should increase their accountability and focus their selection and oversight of auditors on audit quality, while also mitigating any bias against non-Big Four firms.
The CMA recommends that the government legislate so that the new regulator should have the powers and a requirement to mandate minimum standards for the appointment and oversight of auditors. The regulator should then have the powers and the requirement to monitor compliance with these standards, including the ability to require information and/or reports from audit committees, as well as placing an observer on an audit committee if necessary. The regulator should also take remedial action where necessary, for example, by issuing public reprimands or making direct statements to shareholders in circumstances where it is unsatisfied with audit committees.
The CMA notes that this remedy could be complemented through enhancing engagement between audit committees and shareholders and it suggests that some of the recommendations of the UK government’s Department for Business, Energy & Industrial Strategy’s (BEIS) Select Committee, which published a ’The Future of Audit’ report in April 2019, could be implemented, such as, transparency of fees and requiring the auditor to present at the audited company’s annual general meeting.
The CMA notes that it considered the more radical step of moving the responsibility for selecting auditors to an independent body and while it identified legal barriers to this change, it remains of the view that this would be worth keeping under consideration in the long-term.
The CMA believes that to ensure acceptable choice and improve resilience of the audit sector, between five and seven firms are needed to audit the largest companies in the UK in the medium to long term, rather than the existing four. As a result, the CMA recommends that the Secretary of State legislate to give the regulator flexible powers to implement a joint audit regime, key elements of which are likely to be the following
So that challenger firms can gain experience and reputation with the biggest companies, the CMA recommends that the regulator should have the power to appoint peer reviewers for a selection of companies that are not included in the joint audit remedy. Apart from in exceptional circumstances, the reviewer should not be one of the Big Four, reviews should take place in real time and the peer reviewer should report to, and be accountable only to, the regulator. The peer reviewer should not sign the audit opinion and should not be liable for the accuracy of the accounts, and the regulator should consider how to select peer review targets.
The CMA considered a market share cap remedy as a potential alternative way to break down the barriers to non-Big Four firms and while it does not exclude it as a possible solution in future, depending on how the market develops, it is of the opinion that share caps present a number of problems and so has concluded, on balance, that the best route for early action lies with joint audit, plus the option for audit committees to choose between joint audit and a sole challenger auditor.
The CMA recommends that the government put in place an operational split between the audit and non-audit practices of the biggest firms in the UK, initially only the Big Four, but with the regulator able to add other firms in later years when they have grown closer to the Big Four’s size.
The regulator should be given the powers to design the specific details of the remedy and refine it over time but key elements of the operational split are likely include the following
The CMA also suggests that, as suggested by the BEIS Select Committee, a cooling-off period could be introduced after the end of an audit, during which the firm would not be allowed to carry out any non-audit work for the company concerned. It suggests that this be considered by the regulator in the context of its existing review of its Ethical Standard.
The CMA recommends that after five years of full implementation, the new regulator should review progress and assess the effectiveness of the overall package of remedies.
There are a number of other ideas that the CMA is not including as part of its recommended package of remedies but which it suggests merit careful consideration by the government and/or the regulator. They include remuneration deferral and clawback for audit partners, audit firm ownership rules, technology licensing, measures to improve information for shareholders, notice periods and non-compete clauses that act as barriers to challenger firms growing and introducing different requirements on tendering and rotation periods.
The CMA suggests that the Secretary of State should take forward these recommendations at the earliest opportunity. The CMA has decided to make recommendations rather than a market investigation reference, partly because recommendations enable the sector to move forward without delay, while a market investigation could take up to two years from the point at which it starts and might conclude with recommendations in any event.
(CMA, Statutory Audit Services Market Study, Final summary report, 18.04.2019)
(CMA, Statutory Audit Services Market Study, Final report, 18.04.2019)
In May 2018, the European Commission published a proposed regulation to amend both the Market Abuse Regulation (MAR) and the new Prospectus Regulation in relation to the promotion of the use of SME growth markets. On April 18, 2019, the European Parliament resolved at first reading to adopt, with amendments, the European Commission’s proposed regulation.
The provisional version of the adopted texts includes a number of changes to the European Commission’s proposals, including the following
In April 2018, the European Commission published a proposal for a directive amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. On April 18, 2019, the European Parliament resolved at first reading to adopt, with amendments, the European Commission’s proposal.
According to the provisional version of the adopted texts, changes to the European Commission’s proposal include the following
In April 2018, the European Commission published a proposal for a directive amending Directive (EU) 2017/1132 regarding the use of digital tools and processes in company law. On April 18, 2019 the European Parliament resolved at first reading to adopt, with amendments, that proposal.
Based on the provisional version of the adopted texts, the changes to the European Commission’s proposal include the following
The UK’s Streamlined Energy and Carbon Reporting (SECR) framework was introduced on April 1, 2019. This simplifies existing energy and carbon reporting policies while reducing the administrative burden imposed on companies. SECR replaces the Carbon Reduction Commitment Energy Efficient Scheme. This Norton Rose Fulbright briefing summarises the SECR.
Publication
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
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