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