Audit reform: Sebastian Valentin Bodu

Sebastian Valentin Bodu expects some lively debate over the commission’s audit reforms.

The commission’s initiative on audit reflects a very leftist position, very much like the S&D position on the green paper prepared earlier this year. The final report – non-legislative for now - approved by the parliament was much more balanced. However, the commission’s legislative proposal totally ignored this position and a new battle of ideas will start in the legal affairs committee, which is mainly responsible for drafting future legislation on audit.

The next legislative report should start from the assumption that there was no link, direct or indirect, between the quality of audit – even for the financial institutions – and the financial crises. That is because the auditors simply do not review or give opinions about the output of a company, including how risky or not a bank’s financial products are. If we consider otherwise we will mistake the auditors with the regulators and supervisors.

The auditors are just giving a professional opinion about how the CFO of the audited company drafted the financial statements, in order to convince the current or future investors that such statements are not biased. Moreover, there is no information stating that the auditors fraudulently reviewed statements in such a way as to hide the reality about a company’s assets and liabilities. There is also no information that the auditors have any involvement in the failure of some financial institutions. If so, the fact that a company has the same auditor for many years is not a thing that should lead to a mandatory rotation of the audit firm because the auditor is not a watchdog (this function is reserved to the supervisors and here we can discuss the lack of proper supervision of some financial institutions). Like the law firms or the notaries public, the auditors perform a professional service in return for a fee. That means that an internal rotation of the partners and the team is sufficient to insure the objectivity of such service. Of course, ethics inside the audit firms is a must and for that we need the profession to be properly (auto) regulated.

Another important issue is the proposed separation between the audit and non-audit services. The commission did not mention this explicitly, but request permission to elaborate a list of such services, so of course they will refer to tax consulting. Tax consulting and audit are two activities that are not incompatible but they complement each other. Considering that the audit services needs, on many occasions, a professional interpretation of certain tax legislation, it is nonsense that such an activity should be outsourced. This will lead to an increase in the costs of both audit and tax consulting, which happened with the legal services when such separation was implemented, and the only thing that changed was the name of the law firm.

Joint audit is a proposal that intends to give a chance to small and medium audit firms to extend their services to big corporate clients. I think that everyone should agree that the competition needs to be encouraged and such firms must receive a chance. Sharing audits could be a solution if the team partners agree among themselves the division of work. Any mandatory interference with these division will lead to a poor audit, and to an increase of work and costs for the client. And such result is the last thing that we want to see during these turbulent times.

Sebastian Valentin Bodu is a vice-chair of parliament's legal affairs committee