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FEE has welcomed the debate launched by Commissioner Barnier: auditors need to reflect on their societal role and their added value and as the needs of society, markets’ and stakeholders’ evolve, auditors have to change too. FEE thinks that a number of the proposals bring welcomed improvements. However, there are also proposals that need to be dropped or need significant scrutiny and improvement from the co-legislators.
In this respect, FEE discussed the matters of the extension of the definition of Public Interest Entities, the appointment of the auditor, the independence/avoidance of conflict of auditors' interest/competition/market, the performance of the audit/audit reporting including to prudential regulators, a new EU cooperation framework and transparency reporting by auditors.
For supervisory purposes and for protecting the interests of investors, the extension of the definition of PIEs might appear sensible. However, some of the entities added may in reality be small or medium-sized, low risk or low complexity entities. As all PIEs, regardless of their size, risk and complexity, will fall within the scope of the Proposed Regulation regarding statutory audit of PIEs, FEE is not convinced that the proposed definition is the right way forward, especially for smaller EU Member States. Additionally, every statutory auditor of any PIEs, even the smallest, low risk and simple one, will need to comply with all requirements of the Proposed Regulation. FEE is very concerned that this will drive Small and Medium-sized Practitioners (SMPs) and smaller, mid-sized audit firms with a few PIE audit clients out of this audit market. Such a measure would not aid creating a more open and vibrant market, one of the objectives of the European Commission’s proposals, rather to the contrary.
Finally, the definition of large PIEs includes as a minimum the largest 10 issuers of shares in each EU Member State measured by the market capitalisation on the basis of the end-year quotes. It will be clear that entities which fall under such definition in a small EU Member State could be relatively small PIEs, with for instance a market capitalisation of below €10 million. Conversely, in the largest EU Member States, such small PIEs would by no means be considered as large PIEs. As the application of this criterion of the largest 10 issuers of shares in each EU Member States will have such a vastly different impact depending on the size of the capital market in an EU Member State, FEE does not support this part of the definition of large PIEs, and would recommend to leave this as a Member State option or alternatively, to add exemption thresholds underneath which the 10 largest issuers would not be considered as PIEs.
FEE supports modernising the current audit framework and advancing audit policy, in particular with the proposed measure to develop the role of audit committees, especially in relation to the appointment of statutory auditors.
Different measures may be needed for the appointment of the auditor of companies of differing natures and sizes. In general, the process for selection and appointment of the auditor should be independent of management and the decision-making for auditor appointment should be with the governing bodies of the entity. Therefore, FEE does not support the European Commission proposals on independence, avoidance of conflict of auditors’ interest, competition and market as discussed hereafter.
FEE supports the proposed European Commission measures enhancing the performance of the audit. The proposals on auditors’ communications or reporting should be supported and improved to make them more practicable and useful.
An internal audit report by the auditor to the audit committee on the detailed findings during the audit should increase the involvement and knowledge of the audit committee.
Common business sense indicates, however, that this report’s value would be greater if its use was limited to the board and not potentially available to all at the General Assembly.
As far as audit reporting to regulators or prudential regulators is concerned, the communication between financial institutions, their auditors and financial regulators should be more frequent compared to the frequency of communication between large listed companies, their auditors and other regulators. The exchange of information should be done as a three-way communication between the entity, the relevant regulator and the auditor, and the information exchanged should relate to the area of supervisory responsibility of the regulator in question.
FEE also supports other aspects of modernising the current audit framework and advancing audit policy, in particular the improvement of the coordination of audit oversight on European level. This will necessitate the creation of a dedicated and representative Stakeholder Group in the ESMA.
Finally, FEE also supports modernising the current audit framework and advancing audit policy by the proposed measure for improvement of the governance of audit firms.