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February 6, 2011

EC AUDIT REFORM: Contingency plans could reduce risk

The audit market is not currently faced with systemic risk, according to stakeholders responding to the EC green paper on audit reform.

In the summary of the 688 responses, a general consensus is that there is a level of risk in the current market that could be addressed through greater contingency planning.

Most of the respondents such as the professional bodies, investors and public authorities believe the market could cope if one of the Big Four was to collapse, but warn of undesired consequences.

The investors said that if the Big Four were to be reduced to the Big Three this could undermine financial stability and market confidence, though not necessarily cause an economic crisis.

Mid-tier firms and some public authorities warned of systemic risk, saying they believe the clients of a ‘collapsed’ Big Four firm would find it difficult to find a new auditor in the short term, which could lead to severe disruption in the capital markets.

The respondents all backed creating a contingency planning with public authorities saying it would reduce the disruption caused by a Big Four firm leaving the market.

Investors called for the introduction of living wills to address the impact of a firm failure although all other groups of participants dismissed this idea.

Reversing consolidation

All of the respondents opposed the possibility of reversing some of the consolidation involving Big Four firms or the forced break up of the Big Four. Such actions could in itself disrupt the market and cause additional problems, investors said.

The mid-tier said they would like to see the Big Four banned from further acquiring significant mid-tier firms, such as Ernst & Young’s recent acquisition of former Grant Thornton member Terco in Brazil.

This month, the International Accounting Bulletin will publish a round-table discussion on the EC Audit Green Paper proposals. This discussion includes the views of public policy leaders from the PwC, E&Y, mid-tier firms, the ACCA and De Montfort University.

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