IFAC commented on EC's proposed legislation

02 December 2011

IFAC commented on the EC's proposed legislation dealing with audit policy, issued on 30 November, 2011. IFAC supports initiatives continually to improve audit quality, enhance the role of audit, and safeguard auditor independence.

IFAC supports the following measures proposed by the EC, which it believes are consistent with views widely expressed in response to the Green Paper:

• Compliance with ISAs: This is a significant step forward in convergence to high-quality international standards, which facilitate transparency, consistency, economic growth, and financial stability. IFAC notes that ISAs are designed for audits of entities of all sizes, and are capable of being applied in a manner proportionate with the size and complexity of an entity.
• Strengthening of audit committees: Mechanisms and processes required to provide greater roles and responsibilities for audit committees in the spirit of ensuring their independence and technical competence. 
• Enhanced dialogue between auditors and regulators: Stronger two-way communication between statutory auditors and oversight bodies supervising public interest entities and regulatory institutions, particularly in the financial services sector, will help in identifying and managing key risks, including systemic risks, and address audit issues that may arise beyond the formal components of the reporting process.
• Greater transparency in auditor selection: Greater transparency in the appointment of statutory auditors and firms will enable greater insight for stakeholders into the selection processes, requirements, and expectations.
• Greater cross-border mobility for auditors: Legal mechanisms enable auditors to practice in multiple jurisdictions, including the creation of the European passport, in line with the move toward global regulatory convergence.
• Enhanced auditor report:  While the ideal future content and format is not clear, IFAC supports the need to review the auditor report. The IAASB has recently issued a consultation paper seeking broad stakeholder views on enhancing the quality, relevance and communicative value of auditor reporting on an international basis. 

However, there are several proposals that IFAC does not support, because there is not sufficient evidence that they will have a positive impact on auditor independence and audit quality, and that the benefits will outweigh the risks and costs. IFAC believes that further research should be conducted to support their feasibility and impact. These include mandatory firm rotation and prohibition of non-audit services.

Further, IFAC believes that the proposed legislation, if passed by Parliament in its current form, could have a negative impact on the audit profession and professional accountancy organisations (PAOs). IFAC is concerned that the proposals will provide significant problems for global public interest entities (PIEs) that require global audit services. IFAC does not believe that requiring firms of a certain size to provide only audit services will enhance global quality and service capability of the profession. It therefore urges that the Parliament consider the implications that legislative changes will have for non-European Union states and the global market for audits of multinational companies. 

Press release

© IFAC - International Federation of Accountants