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October 18, 2011

EXCLUSIVE: UK govt lobbies against joint audit, audit-only firms

The UK Government has called on European counterparts to lobby the EC into dropping controversial proposals on joint audit, audit-only firms and mandatory audit firm rotation, according to an email obtained by International Accounting Bulletin.

The move is an attempt to garner support against Barnier’s more controversial proposals before they are considered by the College of Commissioners on 23 November.

The proposals being lobbied against, potentially devastating to the Big Four, are described by the Department for Business, Innovation and Skills (UKBIS) as “damaging to growth in the EU as it risks imposing large costs on business”.

Although it was always likely governments would lobby against joint audits and pure audit firms after Barnier publicly announced his audit reform package, the timing and urgency of the email suggests the UK government is determined these proposals do not make the final cut.

Rather than a joint letter from Heads of Government, the UKBIS has asked member state colleagues to send a “briefing of key messages” to the “Cabinet of ‘their own’ Commissioner”. For example, the UKREP will send its brief to Commissioner Ashton.

The UKBIS also circulated a draft briefing for European colleagues to base their concerns upon in an effort to co-ordinate a boilerplate message.

This draft suggest: “We have severe concerns that some of these proposals do not support growth in the EU, impose unnecessary regulation on business and risk damaging audit quality.”

The Audit Proposals Brief To Commissioners’ Cabinets focuses on three key issues: joint audits, pure audit firms and mandatory rotation after nine years.

The proposal said joint audits of large PIEs will:

  • increase cost as the larger auditor will seek to reduce its risk by checking work; and,
  • reduce audit quality as (a) issues fall in between the two audit teams, and, (b) the small auditor may have limited experience in the relevant market, including a lack of major financial institution expertise.

The government’s arguments against audit-only firms are that audit firms will find it difficult to recruit and retain an “appropriate quality of audit staff”. There would also be much less ability to involve ‘in-house’ specialists in their audit work on tax, pensions and property valuations.

The government’s case against mandatory audit firm rotation after nine years is that it will be expensive for companies and auditors and will cause audit fees to increase, an “unnecessary burden on business”.

“We believe that the right to appoint, evaluate and determine the tenure of auditors should be retained formally by shareholders, and exercised in practice by the company’s audit committee.

The proposal also believes mandatory rotation could lead to audit committees being forced to hire a firm that is less capable simply because of rotation rules and this would run counter to improving audit quality.

In a statement UKBIS said it “could not comment on a leaked email”.

“What is important is that the European Commission’s final proposals support growth and do not impose unnecessary regulation on business. The UK Government also wants to see continued commitment to audit quality and auditor independence, where we and the Financial Reporting Council have implemented improved standards and disclosure in recent months,” UKBIS said. 

“We are concerned about the concentrated audit market in the UK, but action at the European level could impose unintended burdens on business. Our current thinking is that reduced concentration could be achieved by ensuring as much support as possible from companies and investors.”

The UKBIS also stated that it supports:

  • National competition authorities dealing with the issue of concentration in each member state where it arises. For example, the Office of Fair Trading is nearing its final decision on whether to refer the UK audit market to the Competition Commission;
  • Audit tendering on a comply or explain basis for the largest companies;
  • The ending of Big Four only clauses;
  • Better dialogue between auditors and financial services authorities; and
  • The removal of restrictions on the ownership of audit firms, which would require changes to the Statutory Audit Directive.

COMMENT: Big Four lobbying

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