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November 29, 2011

LIVE BLOG: EC audit reform announcement

International Accounting Bulletin EC Audit reform blog banner

 

IAB – Whether you agree with Barnier’s proposals or not, Goodyear does make a good point that both sides (mid-tier and Big Four) of this debate are, ultimately, commercially driven. Perhaps that slightly clouds the fact that both sides make good points as to why some of the proposals are not in the best interest of audit quality.

I’m also not so sure about how necessary some of these market reforms are. That assumes that audit quality is not up to a sufficient standard and that auditors may have contributed to the global financial crisis, which is an assumption/perception this publication does not share. There’s always the need to raise your game but Lehman Bros wasn’t run by auditors.

Has Goodyear’s support made Barnier’s day? There’s certainly not been too many auditors to date that have been so generous with praise. 

14:46  An alternative view by Russell Bedford International

“It is now time for both the mid-tier and the Big Four to put aside what has, for far too long, been a quite damaging display of self-interest in favour of a detailed examination of certain measures which could, too easily, derail Barnier’s very necessary market reforms,” is Russell Bedford International chairman Geoff Goodyear main points.

Goodyear also said:

“Having kept the industry in a state of controversy for most of this year, the long-awaited Barnier proposals appear, finally, to have enraged both sides in this commercially charged debate.  Abandoning proposals for obligatory joint audit has deprived the mid-tier of what had promised to be a new market bonanza; retaining proposals for mandatory audit rotation defies the arguments of virtually all stakeholders, including the Big Four.”

 “It has long been clear to us that much of the debate over the Barnier reforms has been motivated almost exclusively by the self-interest of the profession.  But while both the Big Four and the mid-tier have lobbied intensely against its introduction, we have always maintained that mandatory rotation is the only way to break the obvious over-concentration in this market – and provide public interest entities with a proper choice.”

Arguments for rotation: 

“Mandatory rotation was almost universally condemned – by industry and academia as well as the profession – when the Barnier proposals were leaked in September.  Our peers’ concerns regarding audit quality and costs are well known, but we have always been of the view that mandatory rotation is essential to achieving the market change the Barnier proposals are intended to effect; and that potential downsides could, in any case, be mitigated through more effective management of the transition process and, where necessary, regulation,” Goodyear said.

Goodyear also adds: 

“Given their approximate 85 per cent market share of the audits of FTSE 350 equivalent companies in Europe, the need to control the Big Four’s dominance of the audit market can no longer be ignored, and in retaining proposals for mandatory audit rotation, Barnier has secured the one single mechanism likely to achieve this.  The abandonment of obligatory joint audit is also a welcome assertion of clients’ needs over those of the profession.  But it is now time for both the mid-tier and the Big Four to put aside what has, for far too long, been a quite damaging display of self-interest in favour of a detailed examination of certain measures which could, too easily, derail Barnier’s very necessary market reforms,” he added

13:25 Here’s a comment from BDO Russia senior partner Alexander Verenkov.

“Small remark on the comment of Mr Ben Coleridge Cole (below), promising assurance graduate from Big Four,” Verenkov said. 

“He is frightened at the very thought on the client dealing with “juniors, straight out of college”. This is a Freudian slip as the most popular client complaint is that they see Big 4 “seniors” merely in the presentation booklet or at the introductory meeting in a boardroom.

“That is why it wouldn’t be out of place for a client to meet a senior from mid-tier team from time to time. Otherwise it would be real “nightmare”.”

Thanks for your thoughts Alexander and I hope you aren’t having nightmares over these reforms just yet, there’s still some way to go. Does anyone have any thoughts about “seniors” being in presentation booklets and not at the coalface, so to speak?

Ben is a bright young assurance graduate and you can follow his thoughts regularly at Ben’s blog. (Ben, you owe me a beer).

Let’s face it, there was always going to be a Big Four vs mid-tier style boxing bout over Barnier’s proposals. What is interesting is that neither camp, at this early stage, feels the reforms are magnificent but for rather different business reasons. If we’re not careful, the entire audit profession could be the real loser.

13:00 Right folks, here’s PwC head of public policy and regulatory affairs Pauline Wallace.

“Pure audit, a ban on non audit services, mandatory rotation, all of those I think are inappropriate and will impair the quality.

On joint audits: “It’s clear that they have seen sense over joint audit which is absolutely what no country appears to want other than France. Any company already has the option to have a joint audit and it is quite telling to see how many outside France who already have the ability to use it. So I think it is sensible that they’ve listened to the concerns that were being expressed by the industry on this proposal- but there is a lot in the reforms that does not respond to any of the issues that have been highlighted.   “Mandatory rotation is one of the things that is going to affect audit quality. Six years is an incredibly short time and mandatory rotation is a flawed concept that will add cost, and not only cost, but also the less quantifiable cost in terms of the impact on audit quality. You are actually constraining the market: a very bizarre notion that if you are looking at market concentration you make it more concentrated by taking one of the players out of the market.   On banning on non-audit services: “I’m still struggling with this disconnect because there isn’t any evidence at all that somehow providing non-audit services to audit clients is going to impair the quality of your audit.

“I must admit, it is a puzzle to me as why people get so obsessed on this subject, it’s purely perception. If you start imposing a cap on essential audit-related activities then you’ve lost the logic inherent in the process of providing an effective overall service. What is the benefit in putting a cap on the amount of fees derived from essential services?

On the flip side, Pauline does have a few words of praise: “I think there is some good content, for example enhancing audit committees and the communication piece is a good one although I don’t think it’s appropriate for the internal market people to lay down what an audit report should say. That is a matter for the experts, like the IAASB.  That might need to be reconsidered, but the notion that you need to improve audit reports and opening the market on ownership is also good, but the spotlight should focus on what enhances audit quality.”

Thank you Pauline.

Thursday, 1 December 2011, 11:35 Welcome back ladies and gentlemen to the International Accounting Bulletin’s rolling blog on the EC’s audit reforms.

In case you live under a rather unfortunately placed rock in some remote outpost of Alaska, you will have pondered one of the biggest days to strike the audit profession since the pre-Jurassic era.

EC internal markets boss Michel Barnier unveiled some of the most radical proposals to rock the profession. If you missed the document, you can download it by clicking on the below image of the well dressed frenchmen, which has a photoshoped version of the document itself. Please do not click on the image above, it will end in disappointment.

A quick summary of the major proposals:

  • mandatory rotation rotation after every six years
  • no mandatory joint audits, but if companies choose joint auditors they can hold onto them for 9 years instead of 6 years
  • a 10% fee cap on providing financial audit services to audit clients
  • further restrictions on non-audit services
  • mandatory retendering with a requirement to invite a mid-tier firm where practical
  • prohibition of Big Four only clauses

Yesterday we received a tonne of reaction to the proposals from the Big Four, mid-tier and professional accountancy bodies. Most of it, to put it bluntly, was negative. Please take the time to catch up on all of yesterday’s action, if you haven’t already done so, while waiting for West London bus, which will probably never arrive.

Today’s menu will feature fresh reactions from a few heavyweights of accounting. Amongst them is PwC public policy leader Pauline Wallace.

There’s also going to be a few saucy public comments that have trickled through the grapevine, so please watch this space.

Right, I’m now going to grab an inexpensive and rather dull prawn sandwich from Waitrose so that I have plenty of energy and preservatives to take you through the day. Did you know you if I spend an extra 40 pence I can upgrade from processed seafood and mayonaisse to an assortment of processed meat and salad on once fresh brown bread. Mouth watering – living the dream. Be back shortly.

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IAB – Well, what a day. There’s plenty of food for thought on Barnier’s audit reform package, which is likely to be hotly debated in the coming months, and hopefully not years.

Of course, the International Accounting Bulletin will have its say on the proposals in the coming day or so after we have a chance to disect the reforms ourselves and some much needed rest. We will also add more comments from other leaders as we did not get a chance to publish everything today so keep following.

A huge thank you to leaders at accounting firms and professional bodies for taking the time to talk to IAB today, even while sitting on an airplane in some cases. 

I’d also like to thank the IAB team – Ana Gyorkos, Sara Perria and Nicola Maher – for their hard work interviewing, updating, transcribing and putting up with a cranky editor. 

Just a hot tip, we will soon be publishing an exclusive interview with the man at the centre of these proposals, Michel Barnier, so please keep your eyes peeled for that one. Also, The Accountant will be releasing their list of Top 30 influencers and has interviewed a Hollywood A List of accounting celebrities.

Thank you for your attention and patience and I hope you have the loveliest evening in the history of lovely evenings.

– Arvind

17:25 And some final comments for today from Crowe Horwath International CEO Frank Arford

“This all began with the EC wanting to make changes that would have an impact on the audit market concentration and an impact on upgrading the quality of audit, both of which we think are good objectives, but they are very controversial subjects so I have to say that I appreciate the time and effort that Mr Barnier’s put into drafting and developing these proposals, it can’t be an easy job and we agree with these objectives

 “From what I’ve seen in the summaries there isn’t much left in the proposals that have just been released that will have an impact on the audit market concentration”

On joint audit, he said:

“We’ve supported joint audit requirement and it’s unfortunate that this has been removed: I understand that there is an incentive but this is quite different from having a requirement and I’m not so sure that an incentive like that will have much of an impact on audit market concentration”

“Reducing concentration is a good thing and we felt better [at the idea of] becoming more of a participant in the PIE audits via a joint audit requirement.”

On mandatory rotation, he added:

“We were not in favour of mandatory rotation except that over a long period of time, such as 20 years, we can understand that the public perception of independence can be improved through rotation, but the six years period is a point too far.

“It is possible that this incentive to extend this audit mandatory rotation from 6 to 9 years would encourage some listed companies to follow joint audit, but probably not. We would rather see joint audit as a requirement. I suspect there’ll be a lot of debate and by the time the regulation becomes effective and so we do not expect that the incentive will have much of an impact.”

17:08 Crowe Horwath International audit and accounting director David Chitty said in an interview with IAB:

“The European Commission is not the only standard setter or regulator to be thinking about a new form of audit report. A long form audit report will improve the transparency of the audit process.

“The Commission have specified that their aim was to enhance audit quality as a result of having more participants in the public company audit market:  the way the measures for market are now presented means that there will be less of a shift in concentration and therefore will not achieve the desired aim”

16:31 @ArvindHickman: Sector changes are likely to take up to 3 to 4 years according to this morning’s briefing by the EC

16:30 Grant Thornton International CEO Edward Nusbaum joins other mid-tier voices in saying:

“Grant Thornton is encouraged by the banning of restrictive covenants that artificially limit the choice of auditor, and that proposals for shared audits have been retained in the proposed legislation. We welcome the encouragement for companies to use more than one auditor, but we would like to see the incentives made stronger.”

16:09 Enzo, an Italian IAB reader for 15 years with a penchant for shiny red cars, asks how long will it take for any potential changes to become effective?

Arvind Hickman – That’s a very good question Enzo, my guess is years – 3,4,5,6,7? My limited understanding of EC politics is that proposals are often battered into a shape by various forces until they look completely different to their original form. If I had to take a stab in the dark, I’d say there’s a decent chance mandatory rotation of 6 years will be savagely amended or dropped. If anyone would like to take bets, IAB is offering pretty decent odds. Email me in private.

Does anyone have more informed insights into how long we are looking at for final legislation here?

Send your thoughts to: arvind.hickman@vrlfinancialnews.com

IAB – Just in case you missed it, you can download this wonderful EC audit reform document by clicking on the image below. It will excite, dazzle, shock and help you understand exactly what these accountants are huffing and puffing over. I’m hoping to get my copy of the audit reform document autographed when I next lunch with the man pictured below.

Barnier's audit proposals

15:55 More from Jeremy Newman now.

Newman on Big Four only clauses:

“A lot of mid-tier players have lost potential clients as result of Big Four only clauses. I am aware of tenders in the past where firms like BDO were not able to participate because of those clauses.

“So having those abolished does make a difference and sends a message to the market place saying this is a bad thing to have. I think over time it will make a significant difference on the tendering process.”

On Big Four lobbying:

“There has been a lot of lobbying across Europe and the problem I have with it, in this instance, is a misunderstanding about what this lobbying is about. The lobbying to me seems about protecting the business model and interest of the relevant accounting firm doing the lobbying rather then arguing for what is in the best interest of the market.”

“What in my view would be best is for the big firms to say: ‘yes, we accept there has to be some change and we will engage in the process to make sure the changes that you are coming forward with are worth while and then we might get more sensible periods for retendering or rotation etc.’

“But if the big firms refuse to engage and also listen then we will get sharp proposals out by the EC as there is nothing else they can really do.

“The concern we are hearing in this debate is about someone’s business model and profits, but this should not be about the business model of accounting firms it should be about what is right for the audit market.”

IAB – Dems fighting words. Thanks Jeremy! Also coming up is PwC public policy guru Pauline Wallace, Grant Thornton global CEO Ed Nusbaum and more from RSM International CEO Jean Stephens. Phew. Need a breather and a biscuit or something.

15:33 PwC UK assurance graduate Ben Coleridge Cole commented on the reforms in his most recent blog post for The Accountant:

Coleridge Cole called mandatory audit firm rotation “pointless” because “if a firm has decided that it wants a Big Four auditor then it will simply move from one to another and again this will only slow down the audit process and up the costs as the clients systems and methods have to be learnt by the new auditors.”

On joint audits he said it would be a “nightmare” exclaiming “joint audits have been shown not to work in Belgium and my theory for this is that the people who do the actual audit work, the hard grind spreadsheet work combined with the red and green pens, find it difficult enough to understand their place in the big picture as it is without another company being on the scene to complicate matters”.

“It is hard enough already to get the information we require from clients and I know that our clients find it frustrating enough having to deal with one person. But when they are required to answer to different juniors, straight out of college, from different companies who have separate methods, I can imagine them losing the plot,” Coleridge Cole added.

15:27 In line with Newman’s thinking we have just received some comments by RSM International chief executive Jean Stephens:

“We believe a package of measures is essential as no one single measure would adequately address the quality and competition concerns raised by the Commission and stakeholders in the Green Paper and during the stakeholder consultation process,” she said.

“We have concerns that the initial proposals have already been weakened, particularly with regard to mandatory joint audit and whilst we agree with mandatory rotation of audit firms in principle, we are also concerned that rotation every six years is too aggressive”.

Stephens added: “Today’s announcement marks the start of the democratic debate and, once we have analysed the proposals in detail,  RSM International will continue to argue strongly for a package of practical and pragmatic solutions to improve quality and competition in the audit market.”

15:17 Please follow us for some more comments by Newman. We have a bit of backlog of transcribing to do… volunteers welcome 🙂

15:16 IAB has just spoken to former BDO International chief executive Jeremy Newman. Please note these are his personal thoughts and do not represent the views of BDO International.

“I would like to focus on the positives of these proposals and the recognition for change and the recognition of the competition problem. The recommendations do have merit,” Newman said.

“I am very pleased about forbidding Big Four only clauses as this is an issue I raised as long as 8 years ago and is good something is being done about it.”

“I am disappointed in continues lobbying of the Big Four on this issue. I have it on good authority that one of the Big Four firms has 60 people working full time on lobbying over the EC Green Paper across Europe.”

Newman agrees that one of the victims of lobbying was probably the joint audits recommendation, which has backing among mid-tier firms.

“After the reform goes to parliament my worry is that they won’t be looking at the proposals as a package, but as individual recommendations, and that can lead to losing the point that the original package has,” Newman said. 

15:09 Institute of Chartered Accountants of Scotland chief executive Anton Colella said:

“We would like to see increased choice in the FTSE 350 audit sector and in equivalent capital markets across the EU. Mandatory audit firm rotation, however, does not provide a guarantee of increased choice and runs the risk of reducing audit quality.

“ICAS is also concerned that the measures potentially impose an extra burden on businesses who would need to change their auditors every 6 years. We would prefer for companies to be required to state their policy on audit tendering and to have to comply or explain on that policy. We believe that in practice this would amount to major audits being subject to mandatory retendering every 10 years or so.

“ICAS also opposed the ban on audit firms providing non-audit services to their audit clients.

“The level of non-audit services provided by audit firms to their audit clients in the UK has decreased considerably in recent years. The audit committee is best placed to determine what services the company should choose to source from its external auditors.”

14.35 Another mid-tier comment from Kreston’s executive directure Jon Lisby said: 

 “The requirement for mandatory rotation and prohibition of the provision of non audit services is likely to add additional costs for listed companies but, whilst there is little evidence that application of the current ethical rules has given rise to any significant concerns over auditor independence, the changes will have the benefit of bringing additional confidence to the market on the robustness of audit. For the mid-tier accounting networks such a Kreston, the changes are expected to create a more level playing field and present increased opportunities to compete for the provision of non audit services”.

14:04 A comment from one of our readers: “I am disappointed the EC has decided to go this way. There must have been a lot of lobbying against joint audits despite them being the best solution to help break market concentration.”

“There will probably be even more winding down as the EC Parliament makes its decision.”

Please send your thoughts to arvind.hickman@vrlfinancialnews.com We will upload some of the finest.

13.42 Hope you all had a good lunch and please keep following for comments from PwC, RSM etc.

13:41 ICAEW chief executive Michael Izza commented on the reform saying EC’s proposals have merit.

“As a result of the financial crisis auditors have taken steps to improve how they operate.  These have ranged from a more structured approach to dialogue with supervisors to the adoption of a new audit firm governance code.  While the profession was not the cause of the financial crisis auditors recognise the need to learn lessons from what happened.”  

13:15 More BDO comments, this time from their UK manging partner Simon Michaels.

“The EC proposals have been watered down. If you really wanted to change market structure you would introduce joint audits and not doing so is a step back. However, there are some recommendations in there like rotation that will have an impact,” he told reporter Ana Gyorkos.

“You only get an opportunity for change once in a generation and my view and that opportunity is now. We welcomed the HoL inquiry and the Green Paper and we always supported that change.

“However, for the moment nothing has changed. There is a lot of lobbying from the side of the Big Four. The overall message is that there has to be change as status quo is not acceptable.”

13:00 Now Deloitte is chiming into this debate. Here’s a few choice cuts from David Sproul, chief executive and senior partner at Deloitte UK:

“The European Commission for Internal Markets’ focus when it announced the Green Paper was the role of auditors and banks in the financial crisis and the measures required to help prevent a future financial crisis.  As a profession we have developed a  number of measures in consultation with regulators to address this concern and objective. These include closer communication of risks between auditors and financial supervisors; clearer risk disclosures and reporting by financial institutions; and an improved reporting model for auditors, which reflects their role in reinforcing the public’s trust in the capital markets.

“However, a number of the Commission’s specific proposals do not advance its stated objectives and we believe will have significant negative unintended consequences. We do not support proposals such as audit only firms, mandatory rotation and further restrictions on non-audit services. The detrimental effect of such measures on audit quality would affect all sectors but would be most severe for financial institutions.  They present the most complex audit challenges, requiring highly skilled and experienced experts with a deep knowledge of the audited entity.  Thus, the proposals would be most counterproductive for the very sector that has been the central focus of regulatory reform efforts.

“Further restrictions on  non-audit services, creating audit-only firms, and mandating rotation will result in unnecessary disruption and cost, and will  not address the objectives of improving audit quality.  Further, these wide-ranging proposals would create an audit regime in Europe inconsistent with those in other markets, further increasing complexity and costs for global companies and impacting European competitiveness.  We believe the impact of the proposals has not been properly considered and the input of those with the clearest view, including corporate and investor communities, have been largely ignored.”

IAB – Apologies about the delay folks. We’ve just had a raft of interviews so nobody has been free to upload comments. I’ll now offer £20 to that person who invents automated transcribing. Expect a delightful trickle of insights to come as the afternoon progresses.

I guess the headline for today would be: ‘Barnier proposals please nobody’, or something along those lines.

The Big Four is not happy about some of the proposals that threaten market structures, warning it will affect audit quality. 

The mid-tier are not happy about an apparent watering down on things like joint audits, which will no longer be mandatory.

Nobody seems too keen on the idea of mandatory rotation after 6 years. To be honest, that one seems to make little practical sense and solves nothing.

Audit-only firms is another interesting one. Sure, it will change market structures, but will this be in a positive way?

Readers: please send your thoughts to arvind.hickman@vrlfinancialnews.com We will upload some of the finest.

12:30 We have some more thoughts now from BDO’s global CEO Martin van Roekel, who basically is disappointed with the removal of mandatory joint audit and believes mandatory rotation after 6 years will be too challenging. I would also like to mention that Martin spoke to International Accounting Bulletin while sitting on a plane. Thanks for the dedication Martin, please switch your phone onto ‘airplane mode’ and have a safe journey.

Martin van Roekel: “I’m pleased that the proposals finally came to us, so finally we know what they look like. Based on the information that I’ve got, I’m sorry to read that a number of the proposals have been weakened or watered down which, based on everything that we’ve heard in the past weeks, was no big surprise, but it’s still very unfortunate that the proposals have been weakened.

“The (removal of mandatory) joint audit is something we would have liked to be included, as we are of the opinion that it would contribute to quality and innovation and it would’ve been able to realise a significant change in the market structure that, according to our opinion, really needs to be changed.

“Mandatory firm rotation: looking at the present proposal it would be very, very challenging. Six years is a relatively short term and, of course, there is the possibility of nine years with joint audit but it’ll still be a serious challenge for many audit firms.

“The combination with joint audit, as it was proposed originally, mandatory rotation would’ve been a challenge but right now is even more of a challenge. It has to do with building up relations and also if you have to rotate every 6 years it means quite a lot of extra work for auditors dealing with tenders and that will be quite a demanding job for many firms to know that every six years will lose the client.

On non-audit services: “I don’t think it will be a big change, although it will be an influence to their business, although I don’t know to what extent it will have a serious influence as normally the very large firms have a serious split between audit and advisory.

“The audit only firm is still included and this, for sure, can have a positive contribution to change the structure of the audit market.”

11:50 ACCA’s new technical director Sue Almond welcomes an emphasis on audit committees and removing mandatory joint audits but isn’t too supportive of proposals on mandatory auditor rotation, audit only firms, and banning non-audit services.

Sue Almond: “The proposal’s emphasis on the role of the audit committee is especially timely – ACCA has long said that the audit committee could play a safeguarding role and should be tasked with assessing the independence and suitability of the proposed appointee and to report its findings to the shareholders.

“However, the legal requirements for companies to change auditors every six years could amount to a heavy cost burden that will ultimately be borne by businesses. Instead of a blanket ban on the provision of non-audit services to the audited entities, ACCA favours the audit committee critically reviewing whether providing additional services would be likely to affect the auditor’s independence.

“Audit quality should be subject to regular review, but it is overly simplistic to argue that the quality of audit work can be enhanced simply by setting arbitrary limits to the duration of a professional relationship. Since the auditor is appointed to protect the interests of a company’s shareholders, it is also logical for them to review this and decide which auditor they wish to appoint, at what time and on what terms.

“The existing ethical rules, to which all auditors are subject, warn against providing additional services which could have the effect of impeding their independence of mind and action. In our view, legal reforms should be the last resort, and used only when these rules and the regulations which currently enforce them, are proven to be ineffective.”

IAB – Just a reminder that we are planning to speak with leaders and experts from PwC, Grant Thornton and RSM International. Watch this space.

11: 40 A German independent study (whatever that actually means) found the audit profession and its stakeholders have split opinions regarding separating audit and non-audit services.

“When we included every response in our analysis, we found the overall attitude to be relatively equally split with 47% of respondents supporting the proposals and 45% of respondents rejecting them,” Auditing and Corporate Governance department at Goethe University said.

“Excluding responses from auditors, most were opposed to a ban on non-audit-services. Arguments included knowledge spillovers between audit and non-audit activities (33% of non auditor respondents). While 32% of non auditors considered the existing independence safeguards separating audit and advisory services to  be sufficient.

Among all respondents, the most common argument in favour of the proposals was an increase in independence perception.

IAB – So basically, companies think the whole non-audit services debate is based more on perception than reality. Thanks for that folks.

11:35 More Big Four anger, this time from KPMG. Do Barnier’s proposals please anyone at this stage?

Anyway, here’s Rolf Nonnenmacher, Head of KPMG’s EMA region:

“While the audit profession was not the cause of the financial crisis referenced in the EU’s Green Paper, KPMG supports new policies and ideas to improve audit relevance and quality in the context of wider regulatory reform.

“KPMG believes that the proposals miss the opportunity to put in place a meaningful framework for change, and would have no bearing on audit outcomes.

“They are also in marked contrast to the views of the majority of stakeholders, including financial institutions, investors, MEPs, business and academics.

“Audit quality is best provided by multi-disciplinary firms. The capability of firms to provide quality audits will be diminished if auditors are separated from wide ranging advisory expertise including, crucially, risk management in the financial sector.

“Furthermore, KPMG is opposed to the mandatory rotation proposals – which would cause serious disruption to major corporates, and have no positive effect on audit quality. Audit committees are best placed to decide on the appointment of auditors.

“Today’s proposals focus on a desire to change the structure of the audit market. These issues would be best considered by the appropriate competition authorities, as is happening in the UK at present.

“KPMG is among a number of contributors who have put forward new ideas for improving audit quality, encouraging more choice and improving confidence in financial markets.

“These include a more structured approach to communications with supervisors and prudential regulators; strengthening the role of the audit committee; and more risk and narrative reporting.

“KPMG will work to persuade the European Parliament and the Council of Ministers to take full account of the responses received to the EU consultation document, and looks forward to a positive dialogue to fundamentally alter these proposals.”

IAB – As an aside, there’s been plenty of talk about the Big Four lobby, kind of alluded to in Rolf’s last comment. One has to remember that there’s a long way for this ‘regulation’ to go before it becomes some sort of EU law.

TECHNICAL UPDATE: Ladies and gentleman, if you are not receiving updates at the exact times we are posting them, please do not despair. It is not the internet that is the problem, rather the CMS system our company uses called Immediacy, which takes about 30 minutes to update stuff and I believe is being supported by a couple of rare, and rather rich, Congolese chimpanzees.

We will try our darndest to get things up as it happens, but please don’t refresh your browser every 5 seconds – it won’t help.

11: 26 Another mid-tier firm leader, Patrick De Cambourg of Mazars, has provided some thoughts literally minutes before the announcement on Barnier’s proposal. Sorry its taken a while to get this up, if anyone invents an automated voice transcription service I will chip in £10 to get it up and running.

De Cambourg: “The rumours that circulate say that there will be a strong statement on rotation and the introduction of joint audit as an incentive, restriction of non audit services to audit clients, EU passports, EU harmonisation and we will see also – but I’ll need to read the text – pure audit firms: a firm will be banned not only to give non audit services to audit clients but to deliver non audit services in general.

“The quality of the debate [has been very high], it’s amazing to see how much has been done in 14 months addressing issues that were not such before.

“It means that we are trying to tackle a very serious risk on independence and risk of familiarity

“Let’s measure first if rotation has to be used in exceptional circumstances having in mind that having the same auditor for a hundred years or 50 years because if you take it for given you do not create the conditions for professional scepticism.

“The duration of rotation is important: if there is joint audit it makes reasonable sense to mitigate the duration of rotation.

“There are two ways to create scepticism: one is rotation, but that’s very strong and extreme; there is also joint audit that creates a very very good ground for added scepticism and the combination of the two is interesting.

“Joint audit works and it works very well.

“It could take as much as two years to complete the process: it’s a step in a long journey that has proven very positive so far”

11:19 PwC UK is not happy with Barnier’s proposals as well. In a written statement, the firm said:

“The Commission’s proposals fail to recognise the significant reforms implemented across the European Union over the past ten years, including the strengthening of the role of audit committees, the creation of independent audit regulators and the increased level of shareholder interest in the appointment and activity of auditors. The Commission’s own consultation process has indicated a lack of support across Europe for proposals such as audit only firms and mandatory audit firm rotation.  Furthermore the Commission has not provided any concrete evidence for any positive impact of these proposals on audit quality or properly assessed the additional cost burdens for business.

Ian Powell, Chairman of PwC UK and head of the PwC region that covers the European Union, said: “Adding cost and complexity to business will not help European capital markets, investors and business. The Commission’s focus should instead be directed to measures which reinforce trust in audited information by focusing on audit quality.”

11:06 And for all of you who don’t like strong coffee, here’s a quick summary from gun reporter Ana Gyorkos, who has been following developments from wee hours of the morning.

Some of the key reccomendations are:

Mandatory rotation of audit firms: Audit firms will be required to rotate after a maximum engagement period of 6 years (with some exceptions). A cooling off period of 4 years is applicable before the audit firm can be engaged again by the same client. The period before which rotation is obligatory can be extended to 9 years if joint audits are performed, i.e. if the entity being audited appoints more than one audit firm to carry out its audit, thus potentially ‘improving’ the quality of the audit performed by applying the “four-eyes principle”. Joint audits are not made obligatory but are thus encouraged.

Mandatory tendering: Public-interest entities will be obliged to have an open and transparent tender procedure when selecting a new auditor. The audit committee (of the audited entity) should be closely involved in the selection procedure.

Non-audit services: Audit firms will be prohibited from providing some non-audit services to their audit clients if non-audit fees exceed 10% of audit fees. “The fees for the provision of related financial audit services to the audited entity should be limited to 10% of the audit fees paid by that entity.” This effectively threatens the current Big Four business model. In addition, large audit firms will be obliged to separate audit activities from non-audit activities in order to avoid all risks of conflict of interest.

European supervision of the audit sector: The Commission proposes that the co-ordination of the auditor supervision activities is ensured within the framework of the European Markets and Securities Authority (ESMA).

Enabling auditors to exercise their profession across Europe: The Commission proposes the creation of a single market for statutory audits by introducing a European passport for the audit profession. To this end, the commission proposals will allow audit firms to provide services across the EU and to require all statutory auditors and audit firms to comply with international auditing standards when carrying out statutory audits.

Cutting red tape for smaller auditors: The proposal also allows for a proportionate application of the standards in the case of small and medium-sized companies.

No more Big Four only clauses: No surprises here as Barnier plans to abolish them, and so he should.

10:55 Here is the official EC Regulation of the European Parliament and of the Council, click on the image for all the detail in the document. You might want to make some rather strong coffee before consuming this.

Barnier's audit proposals

10:45 Unsurprisingly, BDO is unhappy with Barnier’s watered down proposals.

James Roberts, a senior BDO audit partner has just said: “There is some irony that proposals to address concentration, independence and quality in the audit market have been so turned on their head through the lobbying and extensive influence of the largest firms. The remaining proposals appear to be worse for the market than no proposals at all.”

Of course that is a not so hidden dig at the Big Four.

10:20 All the information gathered so far is from the EC’s technical briefing this morning a full set of documents in expected to be revealed and publicly available within the next hour.

Please send in your feed back on the developments so far.

Despite some what toning down some of the recommendation there are still fundaments changes proposed especially as it comes to separating audit and non-audit services within the Big Four that audit publicly listed clients and financial services organisations.

Please email in your comments: ana.gyorkos@vrlfinancialnews.com

10:15 EC hope the reforms to be implemented could take about 3 to 4 years and a in depth debate in the European Parliament is expected.

10:10 Impact on the Big Four? EC says the requirements go a long was as it prohibits audit and non-audit services to be under the same network and legally connected. There will be branding issues that will have to be resolved, they say.

10:00 What are “Pure audit firms”? Services that pose a conflict of interest: Tax and general management of the company, setting up risk management systems, some valuation services, legal services and internal audits.

Wednesday, 30 November 2011, 9:40 A technical briefing on the EC reform currently taking place in Brussels Two main texts: it’s a big package the EC says.

Proposing:

–         mandatory rotation after every six years

–         mandatory tendering with the requirement to invite at least one mid-tier player

–         prohibition of non-audit services to audit clients – services like IT and tax advisory

–         “Pure audit firms” for big firms auditing large clients, which we believe means having to legally separate their audit and non-audit parts of the business

–         Prohibition of Big Four only clauses

–         There will be in incentive for joint audits – they won’t be mandatory

Welcome to the International Accounting Bulletin’s coverage of the EC Audit Reform announcement.  IAB  will be following all of tomorrow’s events providing you with up to date analysis and industry comments from mid-tier and Big Four leaders.

Please feel free to email in your comments or views on the EC’s reform as they are announced tomorrow to ana.gyorkos@vrlfinancialnews.com.

 

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