Battle brewing over new rules for auditors

Michel Barnier July 2012.JPG

Proposed restrictions on auditing firms are likely to spark a fight between the European Parliament and Commission as legislators finalise a report on the issue next month.

The target of heavy lobbying, the blueprints include controversial mandatory rotation provisions for audit firms and limitations on the non-audit services they can offer clients.

The original proposals – published by the Commission in December 2011 – pushed for a six-year cap on how long an audit firm could work with a corporate client. They also called for new rules to strengthen audit reports.

The measures followed the failure by auditors to predict the major banking collapse of 2008, leading to criticism that they had become too close to their clients.

Rotation is sensitive issue

Parliament’s committee for economic affairs wants the rotation proposal dropped, and a report by the legal affairs committee’s rapporteur, Sajjad Karim (UK, Conservatives and Reformists), suggested audit firms should rotate after 25 years. The Irish presidency has suggested a compromise of 10 years.

Karim’s report also proposed to allow companies’ audit committees to bypass rotation provisions, if they decide to retain the same auditor following a valid tendering process.

The degree of differences and animosity surrounding the level of lobbying were evident at a conference on the potential impact of reform on investors, organised by the European Federation of Financial Services Users in the Parliament on Tuesday.

There is disagreement over how many of the rules should take the form of a directive, giving member states' more power, or be inserted in an EU-wide regulation.

“I believe therefore that we must address many of these questions by way of a directive, which ensures a degree of flexibility nationally as to how to achieve the aims that the Commission and I share,” Karim told the conference, referring to the independence of audit firms.

“We will not serve European shareholders and investors well by imposing a one-size-fits-all solution that is a bad fit for companies across the member states," he said.

An EU official said that the Commission was prepared to be flexible in relation to the proposals, but not to the point where the substance is gutted from the regulation.

Michel Barnier, the internal market commissioner, told the conference that he was emboldened by a decision by Britain's Competition Commission in February that criticised the four biggest accountancy firms.

The UK regulator accused PwC, Ernst & Young, Deloitte and KPMG of being too dominant and not always meeting the needs of shareholders, accusations the firms rejected.

The four largest audit firms share the work of more than 85% of listed companies in most member states.

The firms stand to lose from proposals that they rotate their work regularly and spin off consultancy work, measures that would favour smaller audit outfits.

Hard lobbying criticised

Spanish MEP Antonio Masip Hidalgo, the Socialist shadow rapporteur in the legal affairs committee, told the conference that he backed strong regulations and decried lobbying efforts by large audit firms.

Hidalgo wrote to the former president of the Parliament, Jerzy Buzek in 2011 that someone representing the interests of the sector approached him claiming “he would do his best to sink me personally and to have me rejected by my party”, if he did not drop his opposition to the Big Four audit firms.

“Considering the major issues in our proposal it is normal there are a lot of discussions and that these are not always easy, even if I do sometimes find them a bit aggressive towards me,” Barnier told the conference.

Positions

"It is time for transparency. We heard today an unequivocal call from shareholders, especially investors, who want more clarity over a company’s relationship with the external auditors,” said Sue Almond, technical director at the Association of Chartered Certified Accountants, who moderated during a conference in Parliament on 26 March.

“ACCA could not agree more and strongly supports the various proposals aimed to improve audit quality and relevance. We also believe that the emphasis on corporate governance measures, such as enhancing the role of the audit committee (or their equivalent), is especially timely. We have long said that the audit committee could play a safeguarding role, namely regarding the oversight, as well as the (re) -appointment and dismissal of the auditor,” Almond said.

Background

The EU adopted a directive in 2006 which aimed to restore confidence in capital markets by strengthening the quality and independence of auditing of company accounts.

The directive came in the aftermath of international accounting scandals involving US firm Enron and which brought to collapse one of the top global auditing firms, Arthur Andersen.

In 2008, Brussels reviewed for the first time the auditing directive. But immediately after the entry into force of the new rules, and on the wake of the US subprime crisis, the Commission started a new review of the sector which ended up in December 2010 with the collection of responses to a wide public consultation aimed at changing again the key piece of EU legislation on auditing.

Timeline

  • April 2013: Parliament aims to agree amended report on the Commission proposals

Further Reading

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