EU Audit Market - there is a credible alternative to the status quo
We all have a responsibility to learn from the recent financial crisis and to accept that 'no change' is not an option for any of us, however uncomfortable that might be.
We recognise that there is a need to seek agreement on the nature and scope of the changes that should be made and, whilst our firms have formed their own views on the way ahead, we have taken the historic step to jointly contribute on the issues where we believe there can be meaningful change that will address concerns and will also enhance the quality of the audit profession.
We welcome the initiative taken by the European Commission with its wide ranging review covering all aspects of the audit profession, as well as the international leadership it has offered. We strongly support the view that there is an urgent need for an integrated “programme of reforms” and a necessity for regulatory action.
We recognise the privilege bestowed upon us by law as statutory auditors and our responsibilities to serve the public interest. With this in mind, we see three major areas on which policy makers and professionals should concentrate:
Creating a truly integrated Single Market for audit
We are just at the beginning of the process of creating a truly integrated EU Single Market in auditing services, a move which will bring benefits to investors, audited entities, audit firms and the market as a whole. A range of measures is needed to facilitate auditors working more easily across borders as well as initiatives giving firms the opportunity to be registered and supervised on a pan-European basis. Further harmonisation of the requirements governing the relationship between auditors and the entities they audit and the adoption of International Standards on Auditing, would contribute to ensuring more uniform audit quality in the Single Market and a level playing field across the Union.
Enhancing competition and choice to avoid the inefficiencies of concentration
The extremely high degree of concentration in the listed companies audit market must be addressed as a matter of priority not just due to the substantial market disruption that would be likely to occur if one of the dominant firms were to leave the market unexpectedly but also because of the benefits that would come from a more open and vibrant market. Voluntary market based initiatives that have been tried in some countries have not yielded the hoped for results and so a new approach is needed. This should include, in particular: (i) the prohibition of contractual clauses and other institutional bias in favour of the four dominant firms; (ii) regular reassessment of audit appointments thereby ensuring that audit committees and shareholders determine whether the current audit offering meets their needs and to look at the approaches of alternative firms; and (iii) the cooperative and global assessment of significant mergers or acquisitions by globally dominant players whose consequence is to prevent others from developing international capabilities that will provide a real and credible choice.
Enhancing the relevance of auditing
We support a review of how audit findings are reported and are conscious of the growing demand by investors and supervisors for more information in particular concerning the identification and the assessment of risks. There is also an opportunity to offer a greater level of assurance on the increasingly important narrative reporting especially regarding the management and governance bodies’ views on the uncertainties facing the business. There is also significant merit in considering the progressive implementation of joint audits or consortia audits (which may come in various forms) in order to strengthen confidence in the audit and improve the diversification of the audit market.
With these objectives in mind, our firms look forward to actively participating in the next steps of this key project for the EU for which, indeed, “no action” is not an option. The EU has an important role to play and the capacity to contribute to enhancing global financial stability and fostering economic growth.