Audit reform: Michel Barnier

Promoting healthy competition and ensuring the enforcement of legislation supervising the audit sector is key to restoring trust in this vital service, writes Michel Barnier.

Confidence of stakeholders in the audits of financial statements is an essential ingredient for growth and competitiveness. Auditors perform an essential role in the trustworthiness of financial statements. With its proposals, the commission aims at ensuring that this role is clarified as well as reinforced.

The commission has chosen the difficult path of taking the lead in this global discussion. We are in regular contact with our counterparts in other jurisdictions. As a direct result of this effort, in cooperation with the World Bank, audit was even discussed at a recent roundtable held by the federation of small businesses. An independent study identifies two key issues that need to be addressed to improve the functioning of the audit market: audit market concentration and quality of audits and the independence of audit firms.

When considering the audits of listed companies in EU member states, on average 90 per cent of the turnover is realised by the ‘big four’ audit firms. This ratio further increases to 94 per cent when considering the audits of companies listed on regulated markets and 96 per cent when considering the audits of companies listed on the main stock indices. This poses a potential big risk in case of the demise of a big four audit firm. While such an event is considered unlikely, it has to be noted that the demise of Arthur Andersen in 2002 was never considered possible before it actually happened.

Rotation between audit firms, as well as regular and transparent mandatory tendering – together with strong audit committee involvement, the prohibition of clauses where lenders require the borrower to have a big four audit firm as auditor and opening up ownership rules to attract more capital for audit firms all go in the direction of opening up markets.

Just like beauty, quality and independence are in the eye of the beholder, therefore perception of audit quality and of auditor independence is paramount. Reports on the inspections carried out by the supervisors of audit firms question the professional scepticism of auditors; not only in the EU but also in the US. A growing number of press articles report on companies where serious shortcomings were uncovered. Why did these companies receive a clean audit report? How great is the pressure on an auditor to not lose a company that has been a client for decades? How independent is an audit when there are other commercial interests and the auditor could be auditing work performed by other departments of his firm? Mandatory rotation of audit firms, restrictions on the provision of non-audit services and the prohibition to provide any non-audit services for audit firms of a very substantial size address these questions linked to independence.

Improving the functioning of the internal market and strengthening supervision is crucial. Audit quality also needs to be ensured at an EU level. This can be achieved through mobility across the EU for appropriately qualified auditors and the use of the international standards on auditing in all member states. This also offers new opportunities for auditors so they can exercise their profession wherever they want to in Europe.

Good legislation without proper enforcement is no legislation and greater supervision of the audit sector is therefore required. This could be achieved through stronger national supervisors and closer coordination of audit supervisors in Europe. I consider the commission proposals to be instrumental in re-establishing confidence in audit and am convinced that the discussion on these proposals in the council and the European parliament will produce a solid framework for robust audits.

Michel Barnier is European internal market and services commissioner