27 September 2012

ACCA: Reform of audit - No status quo but more transparency, quality and independence

It must help resolve the gap that exists between what auditors are asked to do and what stakeholders and citizens generally understand under “audit process”. There are however diverging perspectives on the appropriate tools on how to make auditing more effective and relevant in the 21st century, especially in the area of auditor independence and market structure, revealed a roundtable recently organised at the European Parliament in Brussels.

The European Commission believes that promoting independence and healthy competition, and ensuring the enforcement of legislation supervising the audit sector, is key to restoring trust in this service, which plays a pivotal role in business by promoting the causes of transparency, accountability and sound financial management. The EU executive believes that confidence of stakeholders in the audits of financial statements is an essential ingredient for growth and competitiveness. With this in mind and in order to clarify and reinforce the role of audit, the EU executive published on 30 November 2011 its legislative package, which comprises a new Regulation containing specific requirements for the audit of Public Interest Entities (PIEs) and a Directive to amend the current statutory audit Directive. The co-legislators - the European Parliament and the Council - are currently preparing their respective positions on the package.

In this context, Sajjad Karim, MEP rapporteur of the audit package for the Legal Affairs Committee, hosted an informed roundtable on 'The Future of Audit: towards more transparency, quality and independence' organised by ACCA (the Association of Chartered Certified Accountants) in partnership with ecoDa (the European Confederation of Directors' Associations) to discuss the various proposals linked to audit quality and transparency as well as those targeting  independence and market structure. The panel of  experts included representatives from the investors, shareholders, businesses and Directors communities, from the European Parliament, the European Commission, the International Auditing and Assurance Standards Board (IAASB) and the European Securities and Markets Authority, and from a cross-section of the audit profession.

Sajjad Karim, MEP said: “My report follows a clear philosophy: audit quality, transparency and independence should be the foremost considerations when designing an audit regulatory regime. After the 2008 financial crisis, the finance sector needs to win back the confidence of investors, who are looking for higher quality auditing, improved value of statutory audits, and more competition in the market. By combining greater information and availability of insight into the audit market with a reinforced opportunity to engage, I also expect to see a much stronger attitude of involvement from shareholders and investors when it comes to a company's auditor engagement, as they find themselves much better placed to critically assess and comment on what they want to see from their auditors.”

Nathalie Berger, Head of the Audit unit at the European Commission said: “The European Commission very much appreciates MEP Karim’s efforts to bring the audit reform forward. He rightly highlighted that the status quo is not an option. From today's debate, we all seem to agree on the objectives of clarifying the role of auditors and strengthening auditors' independence. Auditors play a societal role. Improved audit quality will enhance the single market, it will be key to strengthen auditors' confidence in order to ultimately enhance financial stability."

Investors and shareholders were deploring a lack of transparency and felt excluded from the audit process and findings. Most of the panellists agreed with the rapporteur proposals to improve auditor communication and auditor reporting – welcoming the IAASB Auditor Reporting Project to ensure robust supervision, and to strengthen the role of the audit committee. On the latter, Per Levkall, representing ecoDa, however highlighted that “expanding the role of the audit committee should be consistent with the diverse functioning of corporate governance in the various Member States - notably in Nordic countries - and should not create an unjustifiable disruption of existing corporate governance practices".

The audience was also reminded that it is essential that professional bodies continue to be involved in the activities of the profession under the supervision and oversight of Member States’ competent authorities, which are best placed and sufficiently competent to judge the level of delegation to professional bodies.

The debate was particularly animated on market structure and independence issues. MEP Karim proposes to keep the principle of mandatory rotation, seen as a cornerstone of the audit proposals by the EU Executive, to avoid familiarity between the auditor and the audited company, but prefers an engagement limit of 25 years instead of the six years proposed by the Commission, in order to avoid disruption and high costs. For the rappporteur, mandatory rotation is a backstop, and shareholders should become much more involved in the process through the work of each company’s audit committee, namely through an annual review and the appointment by shareholders of the statutory auditor.

Many participants supported MEP Karim’s view that robust international standards and international convergence make sense as many of the companies classified as PIEs operate beyond the borders of the EU. On the controversial non-audit services area, a majority agreed that, looking beyond the 'blacklist' of services , the involvement of the audit committee in the approval of all other non-audit services is essential. MEP Karim also shares shadow rapporteur MEP Bodu’s willingness to open up competition in the area of non-audit services to allow smaller firms to gain a foothold in the upper tiers of the market.

The issue of joint audit, deleted in MEP Karim’s draft report, was also addressed, with representatives of mid-tier firms  arguing in favour of the Commission proposal to incentivise the system, calling for strong regulatory measures. Businesses indicated that they were not opposed to voluntary joint audit, but by no means a mandatory one, and warned against increasing costs to areas that are not significant to the audit user, as it draws resources away from the key focus points.

It was stressed that we must remain conscious of the huge variety of domestic companies throughout the EU and the national markets in which they operate; a “one-size fits all” solution throughout could thus end up representing a “bad fit for all”. Some participants indicated that they would prefer an approach based on corporate governance codes and the “comply or explain” principle rather than a legally-binding mandatory instrument.

The Legal Affairs Committee will now consider the input from other committees and amendments from other MEPs. The deadline for these has been deferred until 7 November.

Sue Almond, Technical Director at ACCA, concluded: “We were delighted with the quality of speakers, delegates and debate at such a critical stage of the audit reform process. Although there remain, understandably, areas of difference, it was interesting to see a number of areas of consensus - for example in the critical role of the audit committee in auditor appointment and independence, and in the need for more informative and transparent auditor reporting. We look forward to working with MEP Karim and the broad range of stakeholders as the debate enters the key negotiating stage, with a view to achieving change that will genuinely contribute to audit quality and enhance public confidence in audit.”

Press release

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