The European Commission has proposed radical reforms
that could change the shape of the audit market, including
mandatory audit rotation, a ban on non-audit services to audit
clients and changing the role of an auditor to become inspectors
hired by regulators.

In its widely anticipated Green Paper on Audit
Policy: Lessons from the Crisis
, the EC Internal Market and
Services Commissioner Michel Barnier presented a
wide range ideas that it believes will improve the value
of audit, independence concerns and market concentration.

The green paper is essentially a discussion
paper that seeks stakeholder feedback on ideas to help shape

Mandatory audit rotation not welcome

One of the most controversial ideas is the mandatory rotation of
auditors, which the commission believes could improve objectivity
and dynamism in the audit market. However, audit firm leaders
have told the International Accounting Bulletin they
are opposed to mandatory rotation and that it could have the
opposite effect.

“Audit rotation tends to lead to a more
concentrated market as rotations are either among the big firms or
they go from smaller to bigger ones and not the other way around,”
E&Y EMEIA public policy leader Jeremy Jennings

“Also, we have independent oversight now
over the EU and inspectors are coming to inspect the work that has
been done and that I think provides the additional safeguard that
addresses the issue of a cosy relationship with the client.”

BDO International chief executive Jeremy
Newman agrees, adding: “I don’t think audit rotation dynamises the
market but it has the opposite effect as research shows once the
auditors and clients enter the Big Four arena they just rotate
within it.”

A European audit passport

Among the more interesting proposals is an
oversight overhaul that involves creating a single European
oversight body that monitors auditors who have a
‘audit passport’. Newman believes this proposal should make
market integration easier across the continent. From an operational
standpoint, it will also help auditors better serve clients
that are based in several countries. 

The mid-tier will welcome an
EC proposal to create a
European quality certification for
audit firms, which would formally recognise their aptitude to
perform audits of large listed companies. The EC would also like to
explore ways to abolish contractual arrangements that lenders
sometimes impose on companies that state they must hire Big
Four auditors.

Barnier said the financial crisis has highlighted failings in
the audit sector, which need to be explored and changes would be
made. The accounting profession has broadly welcomed the document
which addresses some of the most pertinent issues facing auditors

“I think the examination into what auditors do
and why is very important so that audit remains relevant for the 21
Century,” Jennings said.

Comments are being sought until 8 December