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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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