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.
————————————————————————————————————————————-
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.
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.
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.
