The audit profession is concerned about several EC’s audit reform proposals with a clear division between mid-tier and Big Four firms.
Key proposals include mandatory audit firm rotation every six years, further restrictions on non-audit services and a significant cap on audit firms providing financial audit services to their clients, which could threaten the Big Four model.
Mandatory joint audits, a mid-tier favourite in the original EC Green Paper on Audit, has been ditched but companies who opt to choose joint auditors could have their mandatory rotation period extended from six years to nine years.
Deloitte UK chief executive and senior partner David Sproul said creating audit-only firms and introducing mandating rotation will result in unnecessary disruption and cost without addressing the objectives of improving audit quality.
PwC UK head of public policy and regulatory affairs Pauline Wallace told International Accounting Bulletin she is “struggling with this disconnect because there isn’t any evidence at all that somehow providing non-audit services to audit clients is going to impair the quality of your audit”.
Crowe Horwath International chief executive Frank Arford said its “unfortunate” mandatory joint audits were carved out of the proposals, while RSM International chief executive Jean Stephens said she understood this proposal could be reinstated as the horse trading continues.
Former BDO International chief executive Jeremy Newman is sure joint audits were taken out as result of lobbying and said he has it on good authority that one of the Big Four firms has 60 people working on lobbying over the audit reform across Europe.
A proposal that is universally unpopular, and likely to be ditched due to its impracticality, is mandatory rotation after six years. In the original Green Paper the period was nine years and even then it was considered far too short.
“Mandatory rotation is a flawed concept that will add cost, and not only cost, but also the less quantifiable cost in terms of the impact on audit quality,” Wallace said.
BDO’s global chief executive Martin van Roekel told International Accounting Bulletin that mandatory rotation after six years will be “too challenging” while Stephens, a former auditor, agreed it seemed “too aggressive”.
Proposals that received support included a ban on Big-Four only clauses, more transparent tendering process and enabling auditors to work with fewer restrictions more easily across the continent.
The proposals are still at an early stage as they must navigate a path through the EU’s political process and lobbying is expected to escalate in the coming months.