Wednesday, September 21, 2011

EU Commissioner Barnier Says Independence, Audit Concentration and the Efficacy of the Audit Report Will Inform EU Audit Reform Proposals

The proposed EU regulations or legislation on financial audit will focus on independence, audit concentration, and providing a more informative audit report, said EU Commissioner for the Internal Market Michel Barnier. In remarks to the European Parliament, he said that the Commission plans to build a more integrated single market and transparent auditing. The proposals are slated to be set forth in November. The Commissioner prasied a repprt to Parliament on audit reform by Mr. Antonio Masip Hidalgo, which will inform the Commission's proposals.

The Commission's first concern is the quality and credibility of the audit. Regulators must restore the confidence in company financial statements, he said, and this requires that auditors be independent of the entities they audit. Yet too often companies keep the same audit firm for decade, he noted, in some cases for more than a century. The consequence of this is less confidence in company accounts. The Commissiom is considering mandatory rotation of audit firm after an appropriate period of time. In addition, the Commission is considering limitimg or in some cases prohibiting the non-audit services the financial auditor can provide to the audit client.

While he assured that he is not on a crusade against the Big Four, Commissioner Barnier is concerned with audit concentration and wants to see more players in the outside financial audit market. He noted that the Big Four audit firms control about 80% market share of listed companies. In Germany only two firms hold 90% of the mandates of the DAX 30, he said, and in Spain one can even speak of a Big One, as only one firm certifies the accounts of the largest banks and holds 58% market share
of major listed companies. In his view, the audit market of large companies should not be so dominated by four audit networks when there are at least as many firms wishing to enter this market in Europe. For one thing. Comm. Barnier favors a ban on contractual restrictions in favor of the Big Four, which are unacceptable in a European market where competition should be free and authentic.

Finally, the proposals will be designed to achieve an audit report that is more detailed and informative and gives investors and other users of the financial statements a thorough knowledge of the audited company and its organization and risks.