Audit reform: Pervenche Berès

The audit market needs a thorough overhaul if the EU is to protect the real economy and ensure financial stability, writes Pervenche Berès.

The economic and financial crisis has clearly highlighted the significant loopholes and structural failures linked to the audit profession. Even before this crisis, the Enron case has been massively mediatised, and in Europe the Parmalat scandal highlighted the major concerns arising from the inherent risks associated with conflicts of interest between large financial institutions and audit firms. To this respect, the initiative taken by the European commission is highly welcome. There is a need for urgent actions in a sector presenting numerous similarities with the credit rating agency sector: an oligopolistic market – the famous ‘big four’ – where the structural link between the client and the evaluator can easily develop into a “too close to speak” relationship which paves the way for distortion of competition and risks significant erroneous information on the real economic fundamentals of the audited company. The proposals put on the table by the European commission and the various options envisaged are a good basis for building a sound and genuine single audit market. I very much appreciate the promotion of a ‘European passport’ delivered to auditors, which would give them the opportunity to provide a full range of services in a harmonised way all over Europe.

I also consider that the time has come to build an effective and transparent EU supervisory architecture, which has to be clearly independent from the audit sector.

Even if the option of generalising joint audit is explored, I partially regret that the commission seems currently to be in favour of introducing such a bilateral check of financial statements on a voluntary basis. Even if joint audit represents a certain cost for major financial and listed companies, I am convinced that submitting their accounts to a joint audit would be a major guarantee for ensuring the veracity of their financial statements and significantly increase market confidence for stakeholders.

The commission’s proposal stresses the necessity to promote a differentiated approach in order to calibrate the regulations to be applied to the specific companies, notably with respect to their size. I share the need to avoid excessive administrative burden for SMEs when this represents a certain cost, but I think that other information should be included in the financial statements achieved by audit companies, namely binding requirements regarding corporate and social responsibilities. Delivering such information could have a significant importance for investors who consider that a firm should create added value for all stakeholders that would notably increase the quality of social dialogue which is a precondition of efficient companies and more generally for the society as a whole.

Just like credit rating agencies, the audit market needs to be deeply reshaped as soft regulation of large parts of the financial system has demonstrated the potential harmful impact it could have on the real economy and financial stability. The European parliament already defended these commission proposals, and we will stand by our position to ensure that the measures are fully integrated in this comprehensive regulation of the audit market.

Pervenche Berès is chair of parliament's employment and social affairs committee