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

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

“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
  • 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

Big Four lobbying