AUDIT REFORM : MEDIUM-SIZED AUDIT FIRMS PLEASED WITH JURI VOTE
The compromises adopted by the MEPs, on 25 April, on audit reform are keeping all the players concerned happy. However, the largest audit firms (the so-called “Big Four”: Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers) are somewhat disgruntled, even though they have escaped the worst. The vote by the members of the European Parliament's Committee on Legal Affairs (JURI) yielded the following: the obligatory auditor rotation has gone from six to 14 or even 25 years; the “pure audit firms” provision banning big audit firms (those that generate more than one third of annual audit revenues from large public-interest entities) from providing non-audit services has been dropped; there is a blacklist of non-audit services that is based on international ethics standards; but the introduction of joint audit for the biggest public interest entities (listed enterprises, banks and insurance companies) that the Socialists were pushing for was not adopted (see Europolitics 4634).
In the words of its managing partner for Europe, Hendrik Descheemaeker, Deloitte admits that there has been “progress” compared to the Commission's proposal, but notes that the principle of obligatory rotation is upheld despite the lack of studies or experience proving that it would be beneficial.
Conversely, medium-sized firms – represented by the collective Option Initiatives Audit (200 firms) – welcome the vote. They had been in favour of introducing mandatory joint auditing as the only provision that would allow second-rank players to emerge through the integration of a “non-big” in the college of auditors. This principle was binned but firms are strongly encouraged to apply it regardless. Option Initiatives Audit is pleased that the total duration of an auditor's mission (limited to 14 years) can be extended to 25 years in cases of joint audit.
Eric Seyvos, Option Initiatives Audit's founder, takes the view that if the duration is too short, sticking to the rule too strictly would involve a loss of knowledge and extra costs since auditors spend the first year of audits getting to know the company they are auditing.
The Association of Chartered Certified Accountants (ACCA) also welcomes the vote, calling it a “balanced” approach that addressed investors', shareholders' and enterprise managers' expectations. BusinessEurope, the European employers' federation – which in this case represents auditors' clients – considers that MEPs have opted for a “reasonable approach” by lengthening the rotation period. However, it seems Erik Berggren would have wanted audit firms to have more room for manoeuvre in selecting auditors.
The most uncompromising critics are S&D, Greens and GUE MEPs, who voted against the report. Socialists believe that Parliament's position considerably weakens the Commission's ambitious proposal and will not make it possible to fight scandals like the Enron scandal.
RÉFORME DE L'AUDIT : LES CABINETS INTERMÉDIAIRES SATISFAITS DU VOTE EN COMMISSION JURI
Les compromis adoptés par les députés le 25 avril sur la réforme de l'audit satisfont la plupart des acteurs concernés à l'exception des plus grands cabinets d'audit (dits « Big Four » – Deloitte, Ernst & Young, KPMG et Price Waterhouse Coopers) qui ont pourtant échappé au pire.
Au terme du vote en commission parlementaire des affaires juridiques : la rotation obligatoire d'auditeurs tous les 6 ans passe à 14 voire 25 ans, la disposition sur les « firmes d'audit pur » interdisant aux gros cabinets (réalisant plus d'un tiers de leurs revenus auprès de grandes entités d'intérêt public) de fournir des services non-audit est supprimée, la liste noire des services non-audit est calquée sur les standards internationaux d'éthique et l'introduction d'audit conjoints pour les plus grandes entités d'intérêt public (EIP – entreprises cotées, banques et assurances) voulue par les socialistes n'a pas été adoptée (voir aussi Europolitique 4634).
Le cabinet Deloitte, même s'il reconnaît une « progression », comme l'indique Hendrik Descheemaeker, par rapport à la proposition de la Commission, constate que le principe de rotation obligatoire est tout de même maintenu alors « qu'aucune étude ou expérience n'a prouvé ses bienfaits ».
Les cabinets de taille intermédiaire réunis dans le collectif Option Initiatives Audit (200 cabinets) par contre se félicitent. Ils défendaient l'introduction de l'audit conjoint obligatoire, « seul dispositif qui puisse permettre l'émergence d'acteurs de second rang par l'intégration d'un non-Big dans le collège des auditeurs ». Ce principe n'a pas été retenu mais son recours est encouragé. Le collectif apprécie que la durée totale de la mission de l'auditeur, limitée à 14 ans, puisse être étendue à 25 ans en cas d'audit conjoint. Eric Seyvos, le fondateur d'Option Initiative Audit estime que « si la durée est trop courte, une application brutale impliquera une perte du savoir et un surcoût », puisque, dit-il, la première année les auditeurs consacrent la moitié de leur temps à prendre connaissance de l'entreprise.
La profession des experts comptables et auditeurs certifiés, représentée par ACCA, accueille elle aussi le vote positivement, estimant qu'il s'agit d'une approche « équilibrée » qui répond aux attentes des investisseurs, des actionnaires et des gestionnaires d'entreprises.
Business Europe, la fédération patronale européenne, qui représente dans ce cas les clients des auditeurs estime que les députés ont choisi une « approche raisonnable » en allongeant la période de rotation. Erik Berggren aurait néanmoins souhaité que les comités d'audit bénéficient de plus de marge de manoeuvre dans la sélection des auditeurs.
Les critiques les plus ferventes viennent des députés S&D, Verts et GUE qui ont voté contre le rapport. Les socialistes trouvent que la position du Parlement affaiblit considérablement la proposition ambitieuse de la Commission et ne permettra pas de lutter contre de nouveaux scandales comme celui d'Enron.
EP wants compulsory rotation of auditors after fourteen years
The European Parliament's legal affairs committee recommends more relaxed changes to auditing rules than those suggested by the European Commission, particularly the requirement on the compulsory rotation of auditors (see EUROPE 10498). The aim is to conclude the talks with the Council of Ministers later this year. The Council is expected to publish its negotiating position next month.
Rapporteur Sajjad Karim (ECR, UK) says the main aim of the draft legislation is to encourage greater confidence in an industry blamed for failing to prevent the onset of the 2008 financial crisis. He says the agreement voted though by the legal affairs committee is a compromise in which nobody got everything they wanted. The S&D, Greens/EFA and GUE/NGL rejected the agreement, which was voted through with a qualified majority of 15 to 10, but Sajjad Karim says that, if a battle ensues with the Council of Ministers, the majority is very slim indeed.
“Reforms tackle the question of appointment of firms in particular by introducing requirements around mandatory tendering and mandatory rotation of firms. Such a combination of approach will tackle problems of over familiarity between auditor and audited company, yet avoid disruption and high cost from EC proposal of rotation every 6 years. Only 20% FTSE 350 companies have had the same auditor for more than 20 years”, explained Karim. After tough talks, the maximum period before rotation becomes compulsory has been set at 14 years. The Commission recommended six years and the S&D seven.
The member states may want to extend the maximum period to 25 years for the auditing of bodies of public interest (banks, insurance companies and blue chip companies) when they issue a new compulsory call for tender, a full assessment of international standards or are subject to a joint audit by two or more auditing companies, said Liberal MEPs Cecilia Wikström (Sweden) and Alexandra Thein (Germany) in a press release.
Black list. The MEPs say that the European Commission's desire to ban auditing companies from supplying additional services (on top of auditing) is going too far because it would prevent small auditing companies from gaining market share in an industry dominated by the “Big Four” (KPMG, Ernst&Young, PriceWaterhouseCoopers and Deloitte Touche Tohmatsu). The committee says that any service other than auditing subject to a compulsory call for tender should not be added to a black list of companies breaking international ethical standards (something the European Parliament has been calling for). The committee says that examples of services that should not be allowed are those which have an impact on balance sheets, which impact on the composition of the management board of the company audited, relate to salaries, or are provided as part of commercial negotiations or which provide legal assistance in a court case.
Karim added: “The compromise agreed, with the key support of the Liberal and Democrat group would fix the maximum contract period for an audit company at 14 years with a backstop at 25 years for member states requesting a derogation when their public interest entities (PIEs) have carried out either mandatory re-tendering of audit contracts or a comprehensive assessment or have been subject to a joint audit by two or more firms”.
European Parliament Committee Votes for Audit Firm Rotation
by Michael Cohn
The Legal Affairs Committee of the European Parliament voted Thursday to require public companies to change audit firms after up to 14 years, which could increase to 25 years if safeguards are put in place.
The European Commission had proposed a six-year period before audit firm rotation would be required, but a majority of the committee decided that this would be a costly and unwelcome intervention in the audit market (see Europe Proposes Splitting Audit Firms and Europe Moves toward Audit Firm Overhaul).
Along with requiring companies to switch auditors regularly, the Legal Affairs Committee also voted to prohibit auditors from supplying certain non-auditing services. The draft law aims to open up the audit services market in the European Union in an effort to improve audit quality and transparency.
The role of auditors has been called into question due to the financial crisis, the lead rapporteur on audit for the Legal Affairs Committee noted. “We need to win back the confidence of investors, who are looking for high-quality and independent auditing to give them the assurance that they need when investing in Europe's companies,” said Sajjad Karim, a member of the European Parliament representing the northwest of England.
The committee decided by 15 votes to 10 to enter into negotiations with the European Council, with a view to agreeing on a common text. The S&D, Greens/EFA and GUE/NGL groups in the European Parliament voted against the draft law. Informal talks will begin as soon as possible.
The law would require auditors in the European Union to publish audit reports according to international auditing standards. For auditors of public interest entities, such as banks, insurance companies and listed companies, the committee agreed that audit firms would have to provide shareholders and investors with a detailed understanding of what the auditor did and an overall assurance of the accuracy of the company's accounts.
As part of a series of measures to open up the market and improve transparency, the committee supported the proposed prohibition of “Big Four only” contractual clauses requiring that the audit be done by one of these firms.
Companies would be obliged to issue a call for tenders when selecting a new auditor. To ensure that relations between the auditor and the audited company do not become too cozy, members of the European Parliament approved a mandatory rotation rule whereby an auditor may inspect a company’s books for a maximum of 14 years, which could be increased to 25 years if safeguards are put in place.
Independence of Non-auditing ServicesTo preclude conflicts of interest and threats to independence, EU audit firms would be required to abide by rules mirroring those in effect internationally. Most committee members saw the proposed general prohibition on offering non-auditing services as counterproductive for audit quality. They agreed to prohibit only those non-auditing services that could potentially jeopardize auditor independence. They also approved a list of services that would be prohibited under the new law.
For example, auditing firms would be able to continue to provide certification of compliance with tax requirements, but they would be prohibited from supplying tax advisory services that directly affect the company’s financial statements and might be subject to question by national tax authorities.
The full European Parliament is expected to take up the draft law later this year.
In reaction to the vote by the Legal Affairs Committee, Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, pointed out that a number of the changes voted through by the members of the European Parliament seem to align the EU audit reform proposals more closely with international standards, which he considers a positive.
“Much of the focus of this debate has been on rotation and the largest audit firms,” Izza said in a statement Thursday. “However, it is important to remember that the audit reform will impact on all businesses having an audit, their shareholders and audit firms of all sizes across the European Union. There is a lot in the proposals beyond those issues that have received the most attention. We need a resolution and certainty over what the audit legal reform will entail. A lot of resources have been invested by a broad range of stakeholders in understanding the proposals’ possible implications. The vote today takes us one step closer to the end; hopefully an agreement between Council and the full European Parliament, which together have the ultimate say in finalizing the law, can be found soon.”
In the U.S., the Public Company Accounting Oversight Board has also been considering a concept release on auditor independence that proposes mandatory audit firm rotation. The PCAOB held a series of meetings around the country last year to discuss the proposals with accountants, shareholders and other interested parties.