- Audit committees have an important role
- Mandatory rotation amounts to an unwelcome restraint on companies’ freedom to choose their own auditors
- ISAs need to be made legally binding across Europe
The long-awaited recommendations from the European Commission (EC) about the future of audit have been given a cautious welcome today by ACCA (the Association of Chartered Certified Accountants).
Sue Almond, Technical Director at ACCA says: ‘The proposal’s emphasis on the role of the audit committee is especially timely - ACCA has long said that the audit committee could play a safeguarding role and should be tasked with assessing the independence and suitability of the proposed appointee and to report its findings to the shareholders.
‘However, the legal requirements for companies to change auditors every six years could amount to a heavy cost burden that will ultimately be borne by businesses. Instead of a blanket ban on the provision of non-audit services to the audited entities, ACCA favours the audit committee critically reviewing whether providing additional services would be likely to affect the auditor's independence.'
While welcoming the removal of the mandatory joint audit from the EC’s proposals, ACCA is concerned that the mandatory rotation of audit firms, along with a ban on firms providing non-audit services could present major implementation challenges to the audit profession and could prove counter-productive.
Sue Almond adds: ‘Audit quality should be subject to regular review, but it is overly simplistic to argue that the quality of audit work can be enhanced simply by setting arbitrary limits to the duration of a professional relationship. Since the auditor is appointed to protect the interests of a company’s shareholders, it is also logical for them to review this and decide which auditor they wish to appoint, at what time and on what terms.’
ACCA doubts that many member states will embrace optional joint audit requirements and considers that the mandatory rotation every six years amounts to an unwelcome restraint on companies’ freedom to choose their own auditors. To be effective, ACCA believes that shareholders need to be fully engaged with the process and audit committees need to be prepared to make recommendations on the basis of a truly competitive market for audit services.
ACCA is not convinced that there is evidence to support the argument that mandatory auditor rotation, large audit only firms, and banning the provision of non-audit services will improve audit quality, and does not consider that the suggested benefits outweigh the costs and disruption to business.
Sue Almond explains: ‘The existing ethical rules, to which all auditors are subject, warn against providing additional services which could have the effect of impeding their independence of mind and action. In our view, legal reforms should be the last resort, and used only when these rules and the regulations which currently enforce them, are proven to be ineffective.’
A new market structure?
ACCA believes that a market with greater competition and choice in the listed company audit market would be in the public interest, and that changes should be made to the audit environment to improve diversity. But it warns against regulators taking costly market-wide measures in an attempt to create a level playing field, and should instead put in place contingency plans.
Sue Almond continues: ‘This new set of wide-ranging rules will set the future for the profession. As a global accountancy body, ACCA is pleased that the EU Executive is willing to facilitate the cross-border mutual recognition of audit firms and statutory auditors. We also welcome the proposal to harmonise audit standards across the Union through the introduction of International Standards on Auditing (ISAs).
‘We are disappointed that there has been so much focus on a limited number of the market structure elements of the proposals, yet so little detail on topics such as ISA adoption and consistency of the auditor qualification, which would have a major impact on improving the quality and consistency of audit throughout the EU,’ Ms Almond adds.
Small and Medium-sized Enterprises still need an audit
Given ACCA’s strong interest in SMEs - more than 63,000 of ACCA members work in SMEs or small partnerships worldwide - ACCA also welcomes the Commission’s proposal to allow member states to adapt audit standards to the size of the audited entity through a proportionate and simplified audit for SMEs.
Sue Almond adds: ‘It is important that however this issue is taken forward, common standards are applied consistently across member states.’
ACCA has called on the EU and national policy makers to recognise that companies that are exempt from audit may still wish to have their accounts audited or reported on in some other way by professional accountants in order to enhance the credibility of their financial information.
ACCA however, agrees with the main thrust of the Commission’s report, which asserts that audit is key to both re-establishing trust and market confidence and to contributing to investor protection because it provides easily accessible, cost-effective and trustworthy information about the financial statements of companies.
‘ACCA is now looking forward to engaging in a constructive dialogue with the EU co-legislators prior to these proposals being approved, and is organising a roundtable meeting about the future of audit in Brussels on 6 December 2011’, concludes Sue Almond.