Brussels, 13/10/2010 (Agence Europe) - The audit sector has been warned. Its failure to predict the financial crisis has persuaded the European Commission to launch a broad reflection on the functioning of the statutory audit market. “It is a fact that few people saw the financial crisis coming, auditors or anybody else (…). The status quo is not an option. We are ready to legislate in 2011”, said the Commissioner for the Internal Market on Wednesday 13 October. Michel Barnier spoke of a number of issues raised by the Green Paper adopted on the same day by the Commission: - Is it normal and healthy for the same companies to provide both audit and advisory services at the same time? - Is it right for audit companies to keep the same clients for decades? - Is it right that it is these clients themselves which select and pay the audit companies? He feels that the existence of such practices could have an impact on the independence of auditors. A European conference will be held in the autumn.
The Green Paper also raises the issue of how the audit market can be integrated at European level. “The audit market is still very much closed off. How do we give it some air, make it more European?”, Barnier asked. He raised the possibility of introducing “a European passport” for audit companies. Under the Green Paper, the issuing of a passport of this kind would be carried out by creating a “European registration system, based on professional qualification requirements, joint governance and rules on ownership and independence applicable throughout the EU”.
European supervision. European market implies European supervision. “The referee has to play on the same ground and at the same level as the players. If we have a European market, then we need European supervision”, said the commissioner, who feels that the work underway on the ratings agencies could pave the way. The auditors would register with one of the European authorities created by the “financial supervision” package and would be subject to its supervision. Another way of reinforcing cooperation between the national supervisors could consist of reinforcing the competences of the European Group of Auditors' Oversight Bodies (EGAOB).
Another field for investigation: the oligopoly of the audit market. “70% of the market is in the hands of the 'Big Four' in Europe” and this figure reaches “99% for companies quoted on the stock exchange” in the United Kingdom, said Barnier. Recalling the collapse of the Arthur Andersen group after that of Enron, he said that “this kind of concentration may lead to a systemic risk”. Several ideas have been put forward to increase competition, such as the introduction of an obligatory rotation of the audit companies and groups after a given period of time of the obligation, for audits of companies quoted on the stock exchange to use consortia made up of medium-sized audit companies, to allow them to gain in reputation. Michel Barnier added that he was “in favour” of the “joint audit” system, which is compulsory only in France.
As independence is central to the remit of auditors, the Commission is reflecting on ways to fight conflicts of interest. For example, it is looking into a scenario in which the appointment of an audit company, its pay and the period of its engagement would be decided upon by a third party, perhaps a regulatory authority instead of the client company. It feels that this option would be “particularly relevant” to the audit of companies of systemic importance. Other options to reinforce the independence of auditors could be to prevent them from providing any services other than audit, limiting the hours paid for by a single client or creating tougher rules on governance. On this point, the regulation applicable to the ratings agencies could again provide a source of inspiration.
The Association of Chartered Certified Accountants, ACCA, which welcomed the Green Paper, has taken position in favour of an extension of the role of the auditor, which it feels is capable of providing opinions not only on financial issues but on the internal checks or governance rules of a company. However, the organisation regrets the fact that the Commission has said little about the issue of auditor responsibility. (M.B./trans.fl)