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BackThis week, the European Commission presented in Brussels its ideas for new stricter rules for auditors. Similar to the rating agencies, in particular the large accountancy firms have become the centre of attention because they have given the banks a clean bill of health, in spite of considerable losses. This is about to change.
This week, the French Internal Market Commissioner Michel Barnier launched a Green Paper of the Commission in Brussels, which outlines the further procedure in respect of auditors. A Green Paper is the first stage in the EU's legislative procedure and opens the discussion with a number of questions aimed at the public.
In the Green Paper, the Commission addresses the role of accountancy firms at the outbreak and during the financial crisis. Between 2007 and 2009, numerous banks had made massive on-balance sheet and off-balance sheet losses, but nevertheless got the "all clear" from the auditors. This would call into question whether auditors fulfil their legal and social function, commented the Commission.
The questions, which the Commission raises in its Green Paper, are not to be taken lightly. It notes for example, that auditors currently carry out in particular formal audits without analysing the actual economic situation of the enterprise. However, the banking crisis had shown, that it is not enough to fulfil formal criteria. That is why the Commission posed the question "whether it would be sensible to return back to basics and to put the focus on a substantial audit of the balance sheet." Furthermore, auditors should not only look into the past but also take a glance at the future of the company.
The Commission devotes an important chapter to conflicts of interest of accountancy firms, which are paid by those, who instruct them to carry out their audit. The idea of the Commission: order, fee and duration of the audit should be carried out by a regulatory authority or another third party rather than from the company itself, in particular in case of major corporations and systemically relevant financial institutions. The regular rotation of auditors shall also help to loosen "family ties: currently more than half of all companies have employed their auditor for more than 7 years, a third even more than 15 years.
A particular cause for concern for the industry is the contemplation of the Commission to stop accountancy firms from pursuing their secondary business, hence consulting. The large auditors are already up in arms about it as a significant part of their turnover is generated by the consulting business.
A particularly serious problem is the extremely high market concentration. The audits of large listed companies are dominated by the so-called "Big Four" (Deloitte & Touche; Ernst & Young; PricewaterhouseCoopers; KPMG). They have a market share of over 90 % in most Member States; in Great Britain in respect of the 100 companies listed at the London Stock Exchange the figure even rises to 99 %. The Commission recognises systemically-relevant risks in this market concentration, in particular if one of the four corporations would collapse. As solutions, it proposes joint audits of several accountancy firms, as they are already required in France. The Green Paper also mentions a break-up of the four giants as an option.
Interested parties have the opportunity to give their opinion on the ideas in the Green Paper until 8th December. The Commission will decide next year whether it will present concrete legislative proposals.
Further information:
In the Green Paper, the Commission addresses the role of accountancy firms at the outbreak and during the financial crisis. Between 2007 and 2009, numerous banks had made massive on-balance sheet and off-balance sheet losses, but nevertheless got the "all clear" from the auditors. This would call into question whether auditors fulfil their legal and social function, commented the Commission.
The questions, which the Commission raises in its Green Paper, are not to be taken lightly. It notes for example, that auditors currently carry out in particular formal audits without analysing the actual economic situation of the enterprise. However, the banking crisis had shown, that it is not enough to fulfil formal criteria. That is why the Commission posed the question "whether it would be sensible to return back to basics and to put the focus on a substantial audit of the balance sheet." Furthermore, auditors should not only look into the past but also take a glance at the future of the company.
The Commission devotes an important chapter to conflicts of interest of accountancy firms, which are paid by those, who instruct them to carry out their audit. The idea of the Commission: order, fee and duration of the audit should be carried out by a regulatory authority or another third party rather than from the company itself, in particular in case of major corporations and systemically relevant financial institutions. The regular rotation of auditors shall also help to loosen "family ties: currently more than half of all companies have employed their auditor for more than 7 years, a third even more than 15 years.
A particular cause for concern for the industry is the contemplation of the Commission to stop accountancy firms from pursuing their secondary business, hence consulting. The large auditors are already up in arms about it as a significant part of their turnover is generated by the consulting business.
A particularly serious problem is the extremely high market concentration. The audits of large listed companies are dominated by the so-called "Big Four" (Deloitte & Touche; Ernst & Young; PricewaterhouseCoopers; KPMG). They have a market share of over 90 % in most Member States; in Great Britain in respect of the 100 companies listed at the London Stock Exchange the figure even rises to 99 %. The Commission recognises systemically-relevant risks in this market concentration, in particular if one of the four corporations would collapse. As solutions, it proposes joint audits of several accountancy firms, as they are already required in France. The Green Paper also mentions a break-up of the four giants as an option.
Interested parties have the opportunity to give their opinion on the ideas in the Green Paper until 8th December. The Commission will decide next year whether it will present concrete legislative proposals.
Further information:
Green Paper of the Commission on Audit Policy