EU audit reform needs debate say MPs

MPS HAVE CALLED for a debate on European Commission claims that the financial crisis raised questions about the adequacy of the legislative framework for audit.

The Commons European scrutiny committee said the UK government is “wary of large and risky changes” suggested in a green paper from the Commission which aims at reforming the audit market and its regulation.

In a letter from department for business minister Edward Davey that the UK government told the committee some of the proposals, from EU commissioner Michel Barnier (pictured), “could impose large costs and have uncertain effects” and called for “more targeted proposals which would be likely over time to make the audit market less concentrated, improve the content of information about risks in company accounts, or reduce unnecessary burdens on business”.

The government suggested the EU proposals might instead include mandatory tendering for appointment as auditor every five years, greater emphasis on the role and content of the reports of audit committees rather than the reports of auditors and a re-examination of audit thresholds to make audits of some medium size companies voluntary.

A more detailed government response to the commission said the UK would not support a ban on the provision of non-audit services.

It claimed UK rules already ensure the independence of audit firms but added that “it would support an examination of the case for alternative structures allowing firms to recapitalise or grow their practices so as to enter the audit market for the largest companies”.

The UK doubted whether a failure by a Big Four firm would cause systemic risk and questioned whether EU proposals for mandatory rotation of audit firms would increase competition but would increase costs.

The government welcomed proposals for a single European passport for auditors and audit firms provided it was not obligatory for smaller firms operating in only one member state.

The committee report said wide ranging proposals in the EU green paper included the role of auditors, the governance and independence of audit firms, the supervision of auditors, the configuration of the audit market (including the Big Four bias), the creation of a single European market for audit services, the simplification of rules for small and medium-sized companies and practitioners and international cooperation for the supervision of global audit networks.

MPs said the green paper “contains a number of potentially significant recommendations” which should be debated.