September marks the second anniversary of the European Commission’s landmark Green Paper – Audit Policy: lessons from the crisis. This paper kicked off the debate on the future of auditing which has been gathering pace around the world ever since, and from an ACCA/ecoDa (European Confederation of Directors’ Associations) event in Brussels on September 25, shows no sign of running out of steam.
Perhaps more worrying or encouraging (depending on your viewpoint) the Commission shows little sign of moving on from the radical ideas for overhauling the audit market, which Internal Markets Commissioner Michel Barnier unveiled back in 2010.
After hundreds of responses to that Green Paper, many of them critical of Barnier’s more eye-catching proposals on joint audit, non-audit services and a break-up of the big firms, the European Commission (EC) published its proposed legislative package in November 2011, which retained most of them largely unchanged. Now, almost another year on, and the Commission’s views remain, seemingly, the same, despite all the activity which has been going on in the Commission’s co-legislators – the European Parliament and the Council – during 2012.
For those who have not been following this every step of the way, hundreds of amendments have been put forward and considered throughout this year. British MEP Sajjad Karim, MEP rapporteur of the audit package for the Parliament’s Legal Affairs Committee, which is leading on this issue, has been listening to a variety of stakeholders throughout the consultative process and presented a report to his committee for debate on 18 September. More amendments will now be considered until 7 November.
But at the ACCA event, while Karim was thanked for his hard work by the EC’s head of audit unit Nathalie Berger, it was clear there was no meeting of minds. On the key issue of audit rotation, the Karim report had suggested mandatory rotation after 25 years, largely as a backstop, with the emphasis placed more on getting shareholders to become much more involved in the process via the audit committee.
A figure less than this (say 15 years) and companies might easily end up gravitating towards it as a matter of course – but no figure at all would leave the current position unchanged, where Schroders were recently in the headlines for putting its audit out to tender after the small matter of 50 years.
This issue is of course a matter of keen debate. Many, including ACCA, prefer tendering to compulsory rotation, to avoid undermining the authority of the audit committee in making such decisions.
The UK City regulator, the Financial Reporting Council has just proposed tendering every ten years, which would meet the concerns of many at our event. Delegates pointed out the situation is made more difficult by the small number of large auditors – in some sectors and countries, the effective choice may be between just one or two firms – so compulsory rotation reduces that choice by a crucial one. Why should companies be forced to lose the best auditor for the job?
Berger was clearly unimpressed with such arguments. What was ‘voluntary rotation’ she asked? Mandatory rotation was a cornerstone of independence, she said, and a much shorter timescale than 25 years was needed to avoid ‘familiarity’ overriding that independence. And action was needed on non-audit services like tax and consultancy which posed a real threat to independence.
The Commission, she said, viewed ‘with concern’ the amendments which had been put forward on non-audit. Evidently the watering-down of the original Barnier plans in Karim’s report, had not gone down well. And she repeated the mantra that joint audit would improve quality, with 2 pairs of eyes being better than one. Yet investors in the room had already raised the danger of increased cost and audit issues falling between the cracks if two firms were used.
Karim responded that he had consulted with a wide range of stakeholders (many of whom were among the 200 people who packed out a European Parliament auditorium for this event) and was trying to find a balance between ‘the status quo’, which he believed was unacceptable, and the ‘politics of doing something’, which was equally unhelpful, given that the final stages of negotiation were looming. He had tried, he said, to take emotion out of the debate.
It would be wrong to say the EC has no support. A speaker from the EGIAN grouping of mid-tier firms said fundamental market reform, as originally envisaged by the EC, was still needed. Perception was reality on independence, and the current amendments were going the wrong way. Why not team up joint audit with restrictions on non-audit services and make a joined-up reform package?
The split between the mid-tier firms and the Big Four, visible throughout this long process, seems starker than ever, on this evidence.MEP Sebastian Bodu, shadow rapporteur, put forward the idea that, given the proven impenetrable difficulties of increasing audit competition with the Big Four, why not put a turnover cap on the provision of non-audit services? This would allow non-Big Four firms to enter that market, thus creating a ‘brand name’ for themselves with big plcs, which he hoped would allow them to grow naturally into the audit arena for those companies. It has to be said that not everyone immediately saw the link.
Just about the only topic which seemed to gain general agreement was the need for an enhanced role for audit committees. Although even here, ecoDa pointed out the difference in quality of such committees across the 27 EU member states, which they said showed the need for national corporate governance codes, rather than pan-European legislation to be the vehicle of change.
This process must conclude over the next few months. Yet the debate, it seems, is far from finished.