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April 30, 2008

Firms respond to EC audit proposals

Firms respond to EC audit proposals

European Commissioner for Internal Market and Services Charlie McCreevy has released an audit package that sets forth the EC’s position on several key audit issues. Carolyn Canham speaks to a variety of firms about what they think of McCreevy’s proposals.

An imminent recommendation from the EC asking EU member states to limit auditor liability has been welcomed by the accounting profession. A key element of the audit package released by European Commissioner for Internal Market and Services Charlie McCreevy in December is that he intends to make a recommendation on liability within the next three months. McCreevy said he does not intend to impose the means by which liability is limited, which will be for each member state to decide.

KPMG Europe public affairs partner Neil Sherlock calls the recommendation a “pragmatic proposal”. He says its release will be “a big moment for the profession” and something that will “mark McCreevy’s time” as a European commissioner.

“I think what he’s sensibly doing is recognising that there should be liability reform, but it should be up to member states to pick the liability limitation that suits their own domestic circumstances,” Sherlock says.

A long journey PricewaterhouseCoopers UK head of professional affairs Peter Wyman says the recommendation will be a helpful step in what has been a long journey. “Is it the final solution? Undoubtedly not,” Wyman says. “At some point we need to get to a single method of limitation and a single amount of limitation if possible around the world, certainly across Europe, but that is for the future. For now this is a really welcome step, I would not have been pushing him to do more than he has done, the time is not right to go further politically.”

UK firm BDO Stoy Hayward also supports liability reform but “would not play up the competition and choice message to liability reform in the way that McCreevy has”, says the firm’s national head of audit, Don Hutchison. “[McCreevy] latches on to what we would regard as essentially the Big Four message in terms of the auditor liability piece as being the main barrier to the competitive side and we don’t agree with that,” Hutchison explains.

McCreevy’s announcement that it is too early to decide whether International Standards on Auditing (ISA) should be applied in the European Union was not as well received by the firms.

Hutchison finds the decision “curious” and suggests there could be a political player involved. “It’s exactly the methodology that wasn’t applied for the accounting standards [IFRS], which, in fact, have been considerably more problematic than auditing standards. I’m not quite sure who or what has leaned on [McCreevy] in that regard because I’d have said that getting some kind of commonality within the EU on ISA ought to be pretty straightforward,” Hutchison says.

Hutchison suggests the EC’s ultimate aim should be to have common pan-European auditing standards within about three years. “Apart from everything else, it makes life considerably easier with regard to third-country regulatory co-operation,” he says.

Wyman had also hoped for a more positive message. “We understand why Europe can’t move immediately to adopting ISA, but we are a little disappointed that there isn’t a stronger endorsement,” he says. “We would have been happier if it had been much clearer that there is an expectation that we will be adopting ISA in the short term. If the main objective is high audit quality, which it certainly should be, and then as a subsidiary objective delivered as efficiently as possible, then international audit standards adopted as far as possible right the way around the world, starting here in the European Union, make perfect sense.”

The element of the audit package that dealt with firm ownership structure received a cautious reception from the firms. A public consultation on this issue is due to be launched within the next three months.

The critical thing about different ownership models is whether mid-tier firms see it as an opportunity to find other forms of investment to allow them to become serious competition to the Big Four, Sherlock says. “We are relaxed about it and think that’s something to be welcomed because it creates more choice in the marketplace, which is a good thing, but equally there are clearly issues around independence and those sorts of [things] that would need to be carefully thought through,” he says.

Hutchison says it is a mistake to think that the ability to bring in external capital or non-professionals could be an overnight solution for firms wanting to scale up to the equivalent of the Big Four.

BDO Stoy Hayward believes the individual firm public reporting concept, which is being implemented by the UK regulator this year, is a better aid for dealing with the competition and choice issue. “The more information that is out there in the public domain about the ability and quality of firms other than the Big Four in terms of the kind of audits they can actually deal with and deal with effectively, the better in terms of delivering different messages,” Hutchison says.

The regulation of audit firms and inspection independence was also touched on in McCreevy’s audit package.

McCreevy’s package

The six proposals the EC will tackle:

• auditor liability; • audit firm ownership restrictions; • audit quality and inspections; • implementation of the Statutory Audit Directive; • international standards on auditing; and • co-operation with third countries.

Source: EC

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