01 December 2011

Barnier: It is critical to address serious shortcomings in the audit sector

The Commission addresses these problems along three main lines:

1. Auditor independence should be demonstrable and obvious

The Commission proposes:

• Mandatory rotation of the audit firm to address the risks of 'over-familiarity' between the auditor and the audited company;
• Restrictions on non audit servicesso that consultancy work can no longer be provided to an audit client;
• Pure audit: firms with a very substantial size in audit will no longer be able to provide non audit services.

2. Opening up the top end of the audit market

For a public interest function that is part of a statutory entrustment, the Commission says it cannot be satisfied with a situation where 80 per cent of companies quoted in Europe are audited by just four firms, the "Big Four". In certain countries, it gets worse as there are only the Big Three, Big Two or even a Big One!

To change this market which is too concentrated, the Commission proposes:

• Rotation as well as regular and transparent mandatory tendering and a stronger audit committee seriously involved in the auditor selection process;
• The prohibition of the Big Four clauses where for example a lender may require only a Big Four auditor for the borrower;
• The opening up of ownership rules so that more capital can be attracted.

On joint audit, the Commission believes that the concept has certain appeal. But for the time being, in the face of strong criticism on the practicalities notably from countries that have tried it in the past, it has decided to not make it mandatory. However, given the benefits of the 'four eyes' principle, the Commission is encouraging it, especially by allowing longer rotation periods when joint audit is used.

3. Improving the functioning of the internal market and strengthening supervision

It is a paradox that the audit market that remains so concentrated in the hands of a few players is so fragmented at the national level. The facilitation of the mobility of audit professionals throughout the Union needs to be ensured.

The Commission proposes:

• Mobility for appropriately qualified auditors, via the creation of a European passport for auditors;
• A more detailed audit report through the Union;
• A European Quality Certificate allowing a next tier firm to demonstrate its abilities to audit larger and more complex entities;
• The application of international standards of auditing, whilst ensuring appropriate rules for smaller and medium businesses;
• And greater supervision of the audit sector. The Commission would like to see the European authority, ESMA, to ensure the co-operation of audit supervisors.

Conclusion

The Commission proposes a balanced approach that is both pertinent and reasonable. It is thus taking the lead globally by bringing together a host of complementary measures to ensure better functioning of our economy. The crisis has been a rude reminder of just how much we really need clear and reliable information.

The auditor, in the course of his work, acquires an understanding of the risks within the audited entity. This proposal requires quite simply that the auditor transmits this understanding in a structured manner so that such information may be relied upon.

Press release

© European Commission