Nowadays, when revolutions spread across Middle East and North Africa
So, how auditors are going to live in near future? What are new regulation ideas of industry? Would it harm our profession? I wish I new concrete answers on this question. Let’s just briefly outline what have happened.
European Commission fed up with current audit practice
In October 2010 European Commission met to raise questions about problems of audit and subsequently issued a document “Green Paper - Audit Policy: Lessons from Crisis”(click to see). The major issues discussed by Commission are as follows:
· The role of auditor;
· Ethical issues: governance and independence;
· Competition in audit market;
· Supervision of audit practices;
· Small business problems.
Expectation Gap
I can’t say better than Commission has written: “Given that these stakeholders may be unaware of the limitations of an audit (materiality, sampling techniques, role of the auditor in the detection of fraud and the responsibility of management), this engenders an expectation gap”.
Yes, there is an expectation gap! Most of people unrelated with audit mistakenly think, that clean audit opinion must give guarantee of financial soundness. Partly they are right. Even under current audit standards the audited entity can’t be totally financially unsound and still get clean opinion. In case of bankruptcy issues and if auditor has reasonable grounds to cast doubts about viability of an entity in nearest year there is an always possibility to issues modified audit opinion with emphasis on going concern issues.
The bad thing, that even these kind of issues were not emphasised (see e.g. Lehman brothers case described by Sikka).
EU would consider extension of the auditor’s mandate and going to decide whether to enable them to provide economic and financial outlook of audited company or not.
Competition
Big Four audit firms do audit for 90% of listed companies in vast majority of EU states. Looks like oligopoly, doesn’t it?! EU says that in case of ‘demise of systemic audit firm’ it would raise ‘to big to fail’ situation. There is also potential risk of complete lose of trust by investors and deep crisis of audit profession. European Commission does not have unambiguous answers. Probable ideas to consider: joint audit, mandatory rotation of auditors, reassessment of actual quality of services provided by Big4 and addressing existing bias of perception of Big4 ( European Commission 2010, pp. 15-17).
Green paper clearly states: “The fact that auditors' responsibility is to the shareholders of the audited company and other stakeholders although they are paid by the audited company creates a distortion within the system”. One of suggested solution to this problem would be introduction a third party into ‘auditor-company’ relationships: ‘remuneration and duration of the engagement would be the responsibility of a third party, perhaps a regulator, rather than the company itself’.
Non-audit services also impair auditors’ independence. The tone of document shows that Commission would like to remove any business interest of audit firm in the company being audited. ‘Pure audit firms’, so called, ‘inspection units’ – this is the language used by European Commission.
Call for help
European Commission asked for response on its Green Paper and promised to announce proposals in 2011. By the 8th of December 2010 preliminary public consultations (click here for proposals) had been ended and on 10th of February 2011 high level Conference was held to discuss Green Paper (pls. click link to read about Conference and materials).
I am going to follow European Commission discussions and I will provide some suggestions concerning raised issues in my further posts. Moreover, I would be pleased if you provide me with your ideas in comments.
References:
European Commission. (2010). Green Paper - Audit Policy: Lessons from Crisis
Sikka, P. (2011).The EU man cometh. PQ Magazine. No. 1, p. 27.
Smith, P. (2010). Under Pressure. Accounting and Business. Vol. 13, Issue 10, pp. 13-14
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