BRUSSELS: Indications of a possible softening of the tough rules proposed by the European Commission for the auditing sector are coming from Brussels if a working document from a key MEP is anything to go by.
The document comes from the rapporteur (committee co-ordinator) for the crucial Legal Affairs Committee Legal Affairs Committee (Juri), which, together with the Economic and Monetary Affairs Committee (Econ), will set the tone for the final legislative outcome of the EC’s proposed reform.
The rapporteur, British MEP Sajjad Karim, summarises his position that “any reform must help resolve the gap that exists between what auditors are asked to do and what some stakeholders and citizens generally understand the audit process to mean”.
Karim is due to formerly put forward a series of options to committee MEPs on 10 July.
In his working document, he implies a relatively neutral stance on the mandatory firm rotation. Here, Karim “invites further debate on the appropriateness of mandatory rotation in view of the representations made so far”.
This is typical of a fairly open-minded approach to the main issues, which include the role of audit committees, auditor independence, joint and shared audits and so on. Karim’s document is subject to revision.
Ian Dilks, the global leader of public policy and regulatory affairs at PwC, has also seen the document and believes that Karim takes a harder stance against the controversial audit-only firm proposal. Dilks says Karim expresses the opinion that he does not believe in this remedy, while Karim himself states that “he considers that further work may be necessary to satisfactorily designate services”.
Dilks points out that the International Auditing and Assurance Standards Board (IAASB) recent consultation document lines up with Karim’s line on improving communication with investors.
Karim advises the EU Parliament to consider “how best to further develop the proposals of the EC to ensure that the audit report retains significance for investors and shareholders”.
Henry Irving, head of the Institute of Chartered Accountants of England and Wales’ (ICAEW) audit and assurance faculty, tells International Accounting Bulletin that Karim’s report sees “both sides of the argument and wants to stimulate further debate”.
As far as the tightening up on non-audit services, Irving comments that Karim thinks aspect needs more thought to get away from “such hard and fast rules” as proposed by the EC. Irving refers to an “expectation gap” between what auditors actually do, and what citizens and investors expect.
Stress is placed on the functioning of audit committees, both by the ICAEW, and the Brussels-based Federation of Accountants (FEE). In a recent discussion paper, European Federation of Accountants (FEE) refers to differences in the function of the committees across Europe. It believes that “a more harmonised approach to audit committees is achievable”.
The audit reform legislative process in the European Parliament is expected to continue throughout this year, possibly even longer.