The release of the draft audit legislation by European
Parliaments Committee on Legal Affairs (Juri) rapporteur
 Sajjad Karim has provoked welcoming and concerning comments
from stakeholders.

The long awaited draft excludes some of the most radical reforms
proposed be the European Commission such as pure audit firms, joint
audits and short interval mandatory rotation.

PwC head of public policy and regulatory affairs Pauline Wallace
told the International Accounting Bulletin that the draft shows the
committee recognises the need for high quality audit and supports a
lot of the arguments for what stakeholders have been presenting in
terms of how the market should operate.

“It looks like a reflection of the sort of things that have been
coming out of the debate and certainly reflecting some of the
reviews that were expressed by the European Parliament’s own impact
assessment on the proposal, which were highly critical,” she

Grant Thornton International director Nick Jeffrey said he was
hoping for a bit more from the draft, but the outcomes are mainly
in line with the expectations.

“The whole idea of this process was to improve the situation for
investors and the proposals went quit a long way in doing so coming
out of the commission, but I think Karim’s version takes it back a
bit from what the investors were looking for,” he told the

in order to address lengthily audit tenders Karim proposes a cap of
25 years for an audit engagement forcing the firm to change its
Wallace believes this debate is “wrong” .
“There is absolutely no basis for arguing that auditors cease to be
independent over a certain time period, the mere fact of duration
is not the issue. The issue is whether audit committees are making
judgments based on the right decisions at the right time and
getting the right quality audits at the best price for their
business,” she said.

“And that is not something that you can arbitrarily say there needs
to be a cut off date and after that this person is not right to do
the audit. It’s much more appropriate to say ‘how should they be
testing the market, how should they be looking at making the
process of assessing the quality of their auditors as transparent
as possible?’”

Jeffrey said the 25 year retendering provision has no change on the
market in effect.
“This measure risks unintended consequence of speeding up
concentration in the market. The market is already very Big Four
concentrated and this measure could only speed up the concentration
among the four large firms,” he says.

The audit reform still has a way to go and Jeffrey believes Karim’s
report was a predictable start, however there still could be a deep
debate and review before the final legislation is ready for the
parliament’s vote.

Wallace also anticipates further debate and says the Economic and
Monetary Affairs Committee (ECON),  which is to issue its
draft report later this month, has it’s hand full with many
pressing issues.

“The fact is that as the impact assessment indicates there is no
evidence that what’s being proposed actually responds in any way to
the financial crisis and understandably Econ’s priority is looking
at the fall out from the financial crisis which is still going on,”
she said.

Disagreements within Juri

The debate within the Juri committee before
the release of the draft has at times been heated with some MEP
member accusing Karim of being influenced by Big Four lobbyist and
for being too pro-business.

 Juri member and Spanish MEP Antonio Masip Hidalgo’s office
told the IAB the draft is a major lost opportunity to reform a
market in need of competition.

“Karim’s  Draft Report defies the spirit of reform showed by
the European Commission in its proposal. We expected that the
financial crisis would pave the way for reform but it seems Mr
Karim sees everything is going well,” a spokesperson for Hildago

When asked about  the commonly mentioned pressures from the
lobbyist teh spokesperson said:  “The lobby of the Big Four in
Brussels is very hard and leaves smaller and medium firms voiceless
as they do not have the same resources to influence on the European

As a result MEPs receive one-sided information which might prevent
them to see the whole picture of the market”.

Going forward Hildago’s office believes Karim’s thoughts might be
inline with the political majority within the EU Parliament
“If Karim is side by side with the European People’s Party, he
might have lee way to turn down the EC proposals in the face of the
current right-wing majority in European Parliament.”

Karim is to present the report on 17 or 18 September and the
Economic and Monetary Affairs Committee (ECON) is then expected to
give its opinion in November.

A formal agreement of a final text that will then go to EU
Parliament for debate could emerge by the end of 2012.