The Uncertain Future of the Auditing Profession

by Ian Welch, ACCA, 15 August 2011

The July conference on audit policy organised by FEE, the European accounting federation, gave the profession the first chance to hear from EC Financial Services Commissioner Michel Barnier since his ‘the status quo is not an option’ speech in February.

Surely, we thought, things must have moved on in the intervening five months?

After all, since Barnier’s tough talking in February, European parliamentarians have put forward a series of amendments which we at ACCA largely welcomes. The European Parliament’s legal affairs committee issued a report which included:

Calling for an extension of the scope of audit, namely to risk, which ACCA has argued for over the past three years.

Clear demarcation of audit and non-audit services provided to the same client rather than a ban on the latter.

Strengthening the role of the audit committee, which would be responsible for permitting the provision of those non-audit services, and have a crucial role to play in the tendering process

No compulsory rotation of external auditors

Back to the Hard Line

But observers could have been forgiven for thinking that none of this had happened. Barnier confirmed that the European Commission would be putting out legislation in November, despite rumours that it would be delayed. To remove any doubts, the Commissioner spelled it out: “You might think I'm being too severe – but as I said in February, the status quo is not an option.”

Barnier said “the key word for the profession is independence.” Shareholders and others have lost confidence in corporate reports because they doubt the independence of auditors. “We see auditors who are too closely linked to clients.” So, contrary to the legal affairs committee report, the Commissioner went back to firm rotation and non-audit services.

On rotation of firms, he said there needed to be “a balance between too much, which would damage quality, and too little, which would harm independence.”

On non-audit services: “Too many are given to audit clients. They will often be higher fee than the audit.”

And then the big one: “How can you be wholly independent? We have to limit or even prohibit non-audit services for audit clients.”

The Commissioner went on to float the idea that “strictly auditing firms” would open up the market to smaller competitors, though he later backtracked on that option – viewed by ACCA as extremely damaging to the profession – in the Q&A session.

Opening Up the Big Four

On competition or diversity of audit firms, he insisted that he was “not crusading against Big Four” although he added: “We do not believe we should have only four.”

So what was an answer? Another standby from February: “We are considering joint audits and regular tendering.” At the February event, joint audits clearly divided the delegates along national lines – the French profession was largely in favour while the other states saw them as costly and ineffective. Little had changed except, it seemed, a hardening of the EC's position.

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