5:00 The HoL session has come
to an end. This one off session has shed some insight into the
thinking of the EC behind the proposals. Faull survived the
grilling by the Lords and all of Lord Lawson’s concerns over the
use of IFRS.
As Faull said the Danish presidency is working hard on the
proposals and we are too see more clear draft legation towards the
end of the year.
Please send in your comments to ana.gyorkos@vrlfinancialnews.com.
Have a nice evening.
4:46pm Lord Lawson asks about
the role of IFRS and Faull’s views. “We had evidence there is a
serious problems with IFRS and banks? “
Faull: “I think there is a problem and I think
it is being tackled. The assessment of going concern for a bank is
very important and therefore the challenge for IFRS is that it
could be made to understand the weaknesses in the banking sector of
2008.
“There are different financial structures for banks and
therefore careful attention is needed, It is important to further
push the IASB to issue new standard more sensitive to this issues
and that is already happening. We expect the IASB to complete IFRS
9 very soon and that is very important as it addresses the call by
the G20.
4:40pm Baroness Kingsley: Would you say a fifth
force would be a good way to tackle the issue of an oligopoly?
Faull: I think it would loosen the problem but
it still might be considered an oligopoly. I’m not sure a move from
four to five would solve the problem.
4: 36pm Lord McGregor: “How has lobbying
affected the final proposals and when do you expect to form a final
decission?
Faull: “The EC is an
independent institution that makes the decision in the best
interest of EU states. We think we have struck a good balance. The
Danish presidency is working hard on this and we are looking to
make a lot of progress in the first 6 months. The Parliament is
looking to publish a final report in the last quarter of the
year.
“I think we are looking at a parliament document and final
legislation somewhere at the end of this year [or] early next
year.
IAB – Wasn’t exactly denying the influence
of lobbying. Striking the right balance between
lobbying via MEPs and what Barnier hopes to achieve.
4.33pm Lord Smith: Why are audit committees not
mandatory for some public companies?
Faull: “It is because of the nature of some of
the institutions that don’t lend themselves to have an audit
committee model. Again, this might be something that might get
added at legislative stage.
4:24pm HoL “Big Four buyouts in the emerging
markets?
Faull: “Firstly, this is
dependent upon the competition authority in the state the
takeover has happened. In the past 15 years, the number of
acquisitions by the Big Four has remained steady and we have seen a
decrease in the UK, but an increase in France where two Big Four
firms took over large mid-tier players. This has happened in
Denmark last year as well. This is something that is outside the
regulator’s power as it is a free market and it is up to state
competition authorities. Essentially, if this happens outside the
EU it is very hard for us to intervene.
IAB – This viewpoint will certainly disappoint
the mid-tier, but it is a fair point that such issues should be
dealt with by competition authorities.
4:17pm Lord Shipley: Joint
audits why were they banned?
Faull: “The view was taken
that it was not appropriate to propose it. We have the four eyes
principle and based on some of the experience from some member
states showed that might not be most appropriate.
“Unsurprisingly the Big Four did not like it, but we have heard
from other players reasons against. The level of support for it in
the Green Paper stage was very limited.
IAB – Would ‘other players’ refer to certain
MEPs?
4:15pm HoL:
We had evidence that the mid-tier were not enthusiastic to take on
FTSE100 market, but would step up to the FTSE250. So we found a
reluctance to audit such companies?
Faull: “There used to be 8
now it is 4. I hope there are dynamic mid-tier firms that will be
ready to take on this challenge. And it’s not easy and there is a
vicious circle over experience that is needed for such audits and
it will take time.
4:13 Baroness Kingsley asks about the role of
audit committees?
Faull: “We are very appreciative of audit
committees work but we took the view that their role and work is
not sufficient to address audit market concentration.
4:08 HoL: Mandatory rotation after six years
could lead to a company having to take on a less good auditor?
Faull: “I don’t think that will happen. We
think such rotation is necessary to do due to the
oligopoly nature of the market and the negative effect of high
concentration on audit quality.
4:03 pm HoL: “The
calculations for classifying pure audit firms? Is this going to
apply at country level and this might lead to increased cost?
Faull: “The main rational
here is to ensure that the PLC is audited without any other
commercial interest and that there is more choice as these large
firms are rotated.
“There is a national criteria and an EU-wide
criteria. On reaching the threshold the network would have to
dissolve its non-audit services within the EU. The regulation would
only apply in the EU and the pure audit firm could no longer be
part of a global network offering non-audit services.
HoL: “The Big Four are
opposed, saying there are cost implications?
Faull: “We have analysed what the negatives
would be of suggesting these proposals and we think the benefits
outweigh any cost.
“Over familiarity may be a problem between
long relationships between auditors and clients. I don’t think a
good relationship leads to knowing where the ‘bodies are burried’.
I don’t think we have seen firm demonstration of that in the past.”
IAB – It has not been made clear exactly what
the ‘benefits’ of pure audit firms are and how these
benefits were worked out. We certainly hope there aren’t too
many bodies being buried at European PLCs, unless there’s an
undertaker business that has listed somewhere.
3:59pm On Living wills
Faull: “It’s an interesting idea that has been
looked at, but it might be implemented on country level first. I
think it does have some validity for the audit firms.
3:58pm A Lord: Do you expect the mid market
will improve market share as a result of the proposals?
Faull: “I hope once this is
in legislation that will happen. The proposals such as mandatory
tendering, rotation etc. All point in that direction and would
enable that.
“What we have tried to do is for smaller firms
to acquire experience of auditing larger companies and that the
incentives created will be sufficient. However, it is not our role
to change market structure.
IAB – we are having a few problems hearing which Lords are
speaking at present, please be patient and we will try to indentify
them where possible.
3:56pm Lord Lawson: “But won’t the proposals
get further watered down at this stage now?
Faull: “It happens sometimes and the
Commission is not always right and things might get
strengthened.”
IAB – I could have sworn ‘watered down’ implies
weakened? Perhaps it means something else in Brussels…
3:50pm Lord Lawson: “Our
committee found last year that the paucity of dialogue between bank
auditors and regulators was a dereliction of duty and the EC does
not seem to agree with that? There is nothing about the auditor
expressing their concern over an audit to the regulators.
Faull: “Our proposals are at
this stage just proposals and this is something that could be
further debated at legislative stage.
“We found that the dialogue between auditor
and regulator should be left to their discretion. Auditors have a
statutory commitment to report any serious issues that may arise in
an audit by law currently.
Lord Lawson: “But if you
leave it to discretion it just doesn’t happen as the British
experience shows that doesn’t work.
Faull: “You make these points
very clear and I can assure you that the EC work will make sure
these points are going to be considered.”
IAB – Should it be left up to
regulators and auditors to work out the parameters of their
dialogue? I’m not so sure that is the answer… Thoughts anyone?
Email: ana.gyorkos@vrlfinancialnews.com
3:43pm Faul says: “I think
the two streams of work (HoL and EC) are complementary
“Our (EC and EU) timetable is unpredictable and I can’t put a
firm date on it as it is at the Parliaments stage at the
moment.”
An obvious reference how long he predicts these proposals will
take to become regulation, or something of that nature.
3.22pm Hello and welcome to another IAB
Live Blog. The UK House of Lords Economic Affairs
Committee is to grill EC director general of internal market and
services Jonathan Faull over the commissions audit reform
proposals.
I’m Ana Gyorkos and I will be taking you through today’s
proceedings. The question on everyone’s lips – will the EC’s audit
reform plans take a Faull? And, yes, I’ve been spending the
past 20 minutes trying to come up with an
appropriate ‘Faull’ pun. If you have any better ones, you can
email them through to me at: ana.gyorkos@vrlfinancialnews.com
The best Faull pun will win a special prize…
Anyway, today’s session is a one-off following
the HoL’s inquiry into the UK audit market last year, which
referred the issue of market competition to the Office of
Fair Trading (OFT). The OFT then referred the matter to the
Competition Commission.
The HoL findings were often mentioned in the
EC’s own consultation on the EU audit market and now the Lords want
to hear why the EC has decided on some of the final proposals
published at the end of 2011.
Faull is set to answer questions on whether
the commission’s proposals will allow new entrants to gain market
share from the Big Four audit firms, why the commission’s proposals
fail to address whether IFRS should be used in bank audits and why
financial regulators, not the bank auditors, are to be duty bound
to ensure regular dialogue.
Follow the latest updates from 3.30pm here on
the IAB Live Blog for the latest thoughts of the Lords and
the EC on this once in generation audit reform proposals.
