Barnier sets out future for audit in Europe

By Ian Welch, head of policy, ACCA

If anyone was wondering where more than 500 senior figures of the profession had disappeared to on 9 and 10 February, I can reveal they were all in Brussels. A two-day conference on financial reporting and auditing would not normally have got such a huge response but this was no ordinary event.

This was the event arranged by the European Commission last October when it unveiled its landmark Green Paper on the future of audit, post-financial crisis. Last week the Commission issued a summary of the 700 responses it had received, and on the second day of the conference, EC Financial Services Commissioner Michel Barnier gave the assembled auditors, business leaders and regulators the first indication of his thinking. It proved to be far from everyone's cup of tea.   

Barnier, hot-footing it across town, where he had just told another high-powered audience that he was keeping up the pressure on bank bonuses, got straight to it: 'The status quo is not an option' for auditors, he declared. There would be proposals for legislation by November, and his five areas of concern were:  

• Enhancing independence
• Clarifying the role of audit
• Market structure
• SMEs
• International convergence

While stressing that nothing had been decided and that all the responses were being considered, it soon became clear that three issues - all concerned with independence - were at the forefront of probable action. Firstly the provision of non-audit services by auditors to clients. Secondly, mandatory audit rotation and thirdly, joint audits.

Barnier said that he had been looking on the websites of the big firms. Nothing sinister in that, you might think. But the firms' promotion of non-audit services and positioning themselves as internal business advisers clearly concerned him: 'we cannot just assume audit independence – how can you be sure the audit will not be watered-down?'

To be fair, Barnier's reaction is typical of many politicians – witness the UK Treasury Select Committee in 2009 and the Commons report on Northern Rock – both of which seized on the issue of non-audit services even though it had little to do with the problems being addressed.

ACCA's view is that there is no evidence that non-audit services affect the audit adversely – on the contrary, there is a considerable body of business opinion that prefers the knowledge of the company built up by the auditor not to be dissipated by the recruitment of a different firm to do the tax work, for instance (see a previous blog of mine).

But it has always been a difficult case to make to a sceptical audience - and the financial crisis has stripped away any inclination the EC had to give auditors the benefit of the doubt. Sometimes realpolitik is too strong and it may be that the profession has to give ground on this issue; but the outcome must not be the nuclear option of 'audit-only' firms, which would lead only to a serious tailing-off of talent coming into the profession. That simply has to be avoided.   

Mandatory audit rotation also seems likely to be brought in. Once again, it is hard to justify to critics how a firm can be auditor to a company for 30 years without becoming part of one speaker called the 'organagram' of the company. Speakers including FRC chief executive Stephen Haddrill who followed Barnier, made the case eloquently that this could be overkill and rather than increasing competition and independence would simply add costs and lead to one Big Four firm replacing another. But again, the odds must now be on this happening.   

Finally, having repeated his view that Big Four dominance posed a systemic risk ('prevention is better than cure') and that the EC had to find ways to increase competition, the Commissioner turned to joint audits.

This was an area where national differences were stark. Barnier's compatriots at Mazars and the French regulator praised the use of two firms as being a success in France – 'two pairs of eyes are better than one" – but UK and German speakers condemned them as costly and ineffective. But given the lack of any other effective ideas to help the second-tier firms challenge the Big Four, joint audits must also be a good bet for action.

Turning to accounting standards, Barnier warned the US that the EU's patience would run out on convergence if they did not act reasonably soon. Luckily Arthur Lindo, the US Federal Reserve's chief accountant had already responded to this blogger's question in the Q&A session, to say that he was confident the US would accept IFRS 'quite soon'.

It is just as well that peace seems likely on the convergence front, because there will be more than enough lobbying and politicking going on in Europe on audit over the next few months on this evidence. The European Parliament will have its say in May which should give more clues as to the likely outcome. But it is clear that Barnier has already decided on the essential direction of travel. And the profession is going to have to give ground on some areas it would rather not.