Brussels, 23/10/2007 (Agence Europe) - The European Commission, on Tuesday 23 October, published a report by British consultants Oxera on the impact that amendment of European legislation on ownership of audit firms could have on concentration, and the responsibility of these same firms. The study believes that a relaxation of current ownership and/or management rules would provide “incentives such that alternative structures might emerge over time”, on condition that these structures combine “the ability to retain human capital with an opportunity to raise capital at a lower cost from diversified, outside investors”. Audit firms owned by outside investors, and not by auditors, would then be better placed to raise the necessary capital to become established in the major group audit market, currently dominated by the “Big Four” (Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers).
Nevertheless, the report notes that the restrictions imposed on raising capital is one of several obstacles to entry to the market dominated by the big four audit firms. Among these obstacles feature “the reputation” of audit firms, and the “need for international coverage and liability risk,” the report's authors say. For example, the impact of liability risk on the cost of capital deriving from the responsibility of an audit firm vis-à-vis its clients and the authorities might be “significant” and “may lead to capital rationing”, to the extent that outside capital is unwilling to take on liability risk. The report highlights, too, that, in the audit sector, “human capital” may be seen as one of the key value drivers.
Another challenge that would result from a relaxation of the rules on ownership of audit firms contained in directive 2006/43/EC on statutory audits of annual and consolidated accounts is the impact on the independence of auditors. For reasons relating particularly to the independence of auditors, European legislation requires a majority of voting rights in audit firms to be held by qualified auditors: some member states (Cyprus, France, Greece, Portugal and Sweden) have set this requirement at a minimum of 75% of the owners of an audit firm to be qualified auditors. According to the report, opinion among stakeholders varies on the factors which best maintain the independence of auditors. Even though relaxation of ownership rules for audit firms may potentially cause additional conflicts of interest, “for example, where the audit firm supplies an audit to a company owned by the same parent company”, such risks could be dealt with through “specific legal or regulatory controls”. Thus it is that public oversight bodies in the member states have an important role to play to safeguard quality and independence. (M.B.)