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The European Group of International Accounting Networks and Associations (EGIAN), which represents nearly all of the major international networks and associations of audit firms apart from the Big 4, welcomes the publication by the EC of the draft regulation on specific requirements regarding statutory audit of public interest entities and of the draft directive amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts.
The publication of the draft regulation and directive enables the proposed measures to be discussed through a transparent and democratic process.
There is an unprecedented opportunity to create a Single Market in the EU in audit which addresses the needs of the principal users’ of audit reports and is focused on promoting audit quality, independence and transparency. EGIAN has concerns, however, that, as the proposed legislation currently stands, it will not achieve these goals. This paper proposes a practical way forward to create an open vibrant audit market for Public Interest Entities (PIEs) involving additional firms and which has serving the public interest at its heart.
EGIAN believes that legislative intervention is essential to bring about the necessary change in the PIE audit market across the EU. Voluntary initiatives have not secured any significant changes, and legislative intervention is therefore now unavoidable. Without it, the current unsatisfactory situation will continue to deteriorate further until it goes beyond the point of being reversible. The situation would be severely aggravated were one of the four dominant players to leave the market, a concern regularly voiced by regulators and regulatory capture would in all likelihood be guaranteed at this point.
Leading investors, the EC and a number of reports in some Member States have identified serious problems with the operation of the current audit market for PIEs and especially large PIEs. A stagnant audit market is preventing audit achieving its full potential. The problems include:
Taken together, these concerns highlight that the current model is not meeting the needs of shareholders, other stakeholders or the wider public interest.
The EU must create a much more open vibrant market for the audit of listed companies and other PIEs with additional players willing to challenge the status quo. Such a reformed market should be based on the following key attributes: quality-driven, independent, transparent, more diverse due to additional players, progressive, proportionate and growth-orientated, a Single Market, sustainable.
Rebalancing of reforms to facilitate additional firms entering market Additional players critically underpin the reform programme
Reforms proposed should be tested against the criteria set out above. The current proposals need to be rebalanced, especially with regards to more clearly facilitating the entry of additional players into the market as this underpins many of the other reforms. In this section, the EGIAN identifies the package of key reforms we believe are necessary and in the Appendix the EGIAN discusses other important measures.
Promoting additional players mandatorily or by encouragement?
If they are to achieve their objective, the reforms adopted need to offer reasonable assurance that additional players will have a more significant role in the PIE audit market in the future. This can be most straightforwardly be achieved by mandatory measures, or alternatively by encouragement to boards, to make appointments from among non-dominant players. If the latter approach is adopted, there will need to be significant encouragement to boards in a number of areas to promote the necessary change in approach.
Focusing on large PIEs
The EGIAN believes a number of the proposed measures are best directed primarily towards large listed companies, where the concerns relating to independence and concentration in the audit market are greatest, rather than their applying to all PIEs.
The reforms form an ‘interconnected’ package
Lastly, the reforms must be considered as a package of “interconnected” measures aimed at producing significant change to the structure of the audit market. Care needs to be taken not to look at individual measures in isolation as this may lead to their impact not being properly assessed.