Comments from ACCA to the European Commission, December 2010.
ACCA welcomes the opportunity to respond to the Green Paper Audit Policy: Lessons from the Crisis issued by the European Commission. The Green Paper is wide ranging and detailed (38 questions) and our full comments are available in the PDF.
Executive summary
ACCA's overall view is that audit is not broken but it can bring more value. Innovation in audit services/delivery is intrinsically related to a debate on complexity/reform in financial reporting and to liability reform. Audit quality is continually improving and the introduction of clarified ISAs in the EU will facilitate that. Commission moves to meet the risk of the exit of one of the Big Four audit firms must involve global cooperation with other regulators.
Role of the auditor
Although auditors cannot certify that a company is a going concern they can report on much more 'front end of the report' information, including corporate social responsibility information, to inform users. This would narrow the expectation gap, but even with much education, many users will still have unwarranted expectations.
Auditors should continue to improve their exercise of professional scepticism and ACCA accepts it has a role to play in that. Auditors can do more to report what they do and explain their opinions. A company's audit committee already plays a vital role and its importance should be emphasised.
International Standards on Auditing (ISAs)
As a global accountancy body, ACCA has long championed the adoption of ISAs around the world and recommends legal adoption in the EU as a priority. The Commission is heavily engaged in IAASB processes and so we argue that adoption of its future standards should be a formality. We call for the Commission to add its voice to calls for a 'think small first' basis for IFAC standards, which currently do not fully recognize the specific circumstances of SMEs.
Independence and governance of audit firms
The Commission suggests that independence rules might be changed regarding: who appoints auditors, audit firm rotation, how long an auditor can remain in office, providing non-audit services (a ban), and limiting total fees from any one client. Such proposals also represent mechanisms to decrease audit market concentration. ACCA argues strongly that, instead of such rule changes, consistent application of the principles based IFAC Code of Ethics (and existing EU law) remains appropriate.
The Commission raises questions as to whether there needs to be transparency of the financial statements of audit firms and whether further measures could be envisaged in the governance of audit firms. Such changes can be relevant to the independence of auditors and market diversity; the latter also could be influenced by changes in ownership structures. ACCA warns that the costs of transparency and governance arrangements are not proportionate and any new measures should be only voluntary for smaller firms.
Supervision of auditors by regulators
ACCA agrees with the Commission that supervision of audit firms in the EU could be more integrated, with a firmer base to ensure closer cooperation between the national audit oversight systems. Communication between auditors and regulators of listed companies, and audit committees could be improved by a shared commitment to build trust.
Concentration and structure of the audit market
The 'Big Four' firms dominate the listed company audit market and while ACCA believes that a market with greater competition and choice would be in the public interest, regulators should not intervene other than to create a level playing field. If a Big Four firm fails, it would be highly significant to capital markets. A coordinated global response would be required. ACCA recommends that regulators put in place contingency plans, rather than taking early but costly market-wide measures, which so far have not been successful in diversifying the market. Member State experience of measures such as mandatory rotation of audit firms and joint audit may not suit the EU as a whole.
Creation of a European audit market
As ACCA offers a globally recognised qualification throughout the EU, ACCA qualified accountants are able to achieve enhanced cross-border mobility. We support a range of measures to enhance mobility of individuals and of audit firms. We warn, however, that a 'European passport' could impose unreasonable requirements on Member States and be costly for smaller firms.
Simplification: small and medium sized enterprises and practitioners
The Commission exposed ideas for a 'statutory review' as an alternative to an audit and proportionate rules on quality control and oversight by audit regulators. ACCA points out that such a new service would be a burden if implemented for small companies already exempt from audit and would not meet the needs of companies now subject to audit. We agree that regulation should be proportionate and refer to the efforts of IFAC to ensure that its standards can be used by SMPs. We call on the Commission to develop an EU environment for business in which small companies may chose from a range of services to add credibility to their financial information to meet the needs of their stakeholders.
International cooperation
In ACCA's view, the quality of oversight of global audit players would be enhanced principally through the adoption of global standards and consistent high quality monitoring by regulators. A level playing field established through mutual cooperation between jurisdictions would be beneficial.