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 reform.
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 said.
“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 European ‘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 today.
“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 2010.