■ ICAEW | THE FUTURE OF AUDIT
THE BIG DEBATE
THE COMMISSION’S AUDIT DEBATE COULD ACHIEVE A NEW PUBLICINTEREST BALANCE IN THE AUDIT MARKET. PABLO PORTUGAL
W
hen the European Commission published
a green paper consultation on audit policy
in October 2010, it set out to achieve a
comprehensive, forward-looking debate
where ‘no subject should be taboo’.
The debate poses numerous challenges, but also presents
opportunities with regard to the evolution of audit in the EU
to serve the economy in the next generation. The many
ideas put forward by the Commission and stakeholders in
responses to the consultation will be discussed at a major
conference in Brussels on 10 February.
The ICAEW response supports the Commission’s initiative
to debate the future of audit and its regulation as part of a
wider scheme of reforms to capital markets and the
governance of the financial system. Auditors and market
participants have much to gain from proposals that
contribute towards a robust audit environment.
For this reason, we see this as an opportunity to debate an
EU framework which will help to:
■ audit quality and market confidence;
■ auditors’ communication to address user needs;
■ the long-term sustainability of the audit market, with
specific reference to market concentration;
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■ regulatory cooperation at EU and broader international
levels;
■ integration of the EU internal market;
■ a consistently robust audit environment across all
member states; and,
■ market choice and a proportionate approach to audit and
assurance in relation to small and medium-sized businesses.
AUDIT QUALITY AND MARKET
CONFIDENCE
Our submission is absolutely clear on what should be the
primary objective of this exercise: to enhance audit quality
and market confidence. All initiatives must be measured
against this overarching priority.
In addition to measures in the areas discussed below, the
ICAEW response highlights a number of themes to enhance
audit quality, including the EU adoption of clarified
International Standards on Auditing (ISAs) for all statutory
audits under EU law, as well as the importance of education,
training and professional development for individual
auditors. The latter is often overlooked and was not
referenced in the green paper itself.
Improving what auditors do to increase the relevance and
FEBRUARY 2011 | ACCOUNTANCYMAGAZINE.COM
THE FUTURE OF AUDIT | ICAEW ■
reliability of companies’ risk reporting is in our view the
single most important area where regulators and market
participants should look to learn from the crisis.
The challenge for auditors is to understand the causes
and effects of the crisis and to be proactive in developing,
with market participants, new areas such as assurance on risk
reporting. This type of market-driven innovation will be
crucial if we want to find durable solutions to problems
raised by the crisis. The ICAEW response provides a number
of ideas to stimulate debate in this area.
A requirement for rotation of audit firms or a
policy of forced ‘downsizing’ of firms would
bring unintended consequences
CONCENTRATION AND
MARKET STRUCTURE
Our submission acknowledges the keen and legitimate
concerns of regulators regarding audit market
concentration. While we need to differentiate between the
audit and banking sectors when using the term ‘systemic’,
there is a risk of major disruption to capital markets from the
demise of a large firm or network. There would also be
consequences for large purchasers of audit, accountancy
and other services, given existing auditor independence
requirements.
In order to mitigate this risk, our response puts forward
specific new suggestions for policy measures to reduce
concentration levels and to help ensure continuity of high
quality audit services.
As a starting point, regulators could make reduced
concentration an objective in their work plans, with specific
targets. From here, we believe that national strategies could
be developed, with full consultation of all relevant
stakeholders and shared internationally. We should consider
ideas to increase the frequency of tendering and to ensure
there is fair market choice in the appointment of auditors.
But it is important that any proposals considered do not
compromise audit quality or the healthy operation of the
audit market. We have concerns about pursuing, for
instance, a requirement for rotation of audit firms in EU
legislation or a policy of forced ‘downsizing’ of firms or
networks as these measures would bring unintended
consequences.
In relation to other ideas raised in the green paper, such
as requirements for joint audits or mandatory tendering
periods, we call for rigorous empirical research and testing to
assess the potential benefits and drawbacks of
implementing such measures within national strategies or at
European level.
INDEPENDENCE AND
PUBLIC OVERSIGHT
The ICAEW response agrees with the Commission that the
potential for conflicts of interest exists in the audit sector and
this should be addressed.
We support rigorous implementation of existing ethical
standards and independence principles and rules, but also
stress that requirements should remain proportionate and
pragmatic. We raise concerns, for instance, about proposals
for an outright ban on the provision of non-audit services or
for the appointment of auditors to be done by a third party,
which in our view are likely to prove counterproductive.
Also, we stress the central role of audit committees and
have called on regulators to give attention to ensuring that
these committees have appropriate expertise and
independence from management.
A robust system of public oversight and inspections is
New balance: Tailored SME
assurance essential
crucial to promote quality and objectivity. The ICAEW
response supports enhanced coordination among European
national authorities, but notes that national bodies should
retain their overall responsibilities for oversight and
implementation as they are best placed to deliver effective
oversight. A new European body could be tasked with
coordination in specific areas and, where possible, initiatives
at the global level should also be pursued.
TOWARDS A NEW BALANCE
We are especially mindful of the challenges facing SMEs in
the aftermath of the crisis. A good understanding of their
needs and a tailored approach to SME assurance is essential.
We argue for an EU approach that allows countries to take
up non-audit assurance services according to their national
environment and for the benefit of audit exempt companies.
It is appropriate to have a broad EU debate on future
company law thresholds, rather than a policy of actively
discouraging the statutory audit in the SME sector.
As an overall point, it is important to recall that audit is a
service required by statute in order to serve the public
interest. For this reason, we believe that auditors need to
support appropriate regulatory responses to concerns
regarding their role and the market structure. And regulators
must be mindful of the need to balance regulatory demands
and the market dynamics that play a part in any sustainable
economic activity.
We believe that a vibrant and competitive audit
environment can stimulate quality, innovation and
confidence. And a proportionate regulatory framework is
needed to provide necessary safeguards in a competitive
marketplace.
This comprehensive debate is an opportunity to enhance
quality and confidence and achieve a new public interest
balance in various aspects of the audit environment. To this
end, we will continue to work actively to promote new
thinking in the months ahead.
ACCOUNTANCYMAGAZINE.COM | FEBRUARY 2011
Pablo Portugal is ICAEW EU
regulatory affairs manager in the
Europe region office in Brussels. E:
[email protected], T: +32
(0)2 230 3272.
The full ICAEW response to the
Commission’s green paper on Audit
Policy: Lessons from the Crisis is
available as ICAEW Rep 136/10 at
www.icaew.com/representations
Find out about the expertise and
support offered by the ICAEW
Audit and Assurance Faculty at
www.icaew.com/aaf
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