EC proposes mandatory rotation of auditors

The European Commission is considering a radical restructure of the audit
industry including a new regulator to appoint firms, mandatory rotation and caps
on advisory fees.

The commission has also proposed European-wide registration, and is
considering forcing firms to hive off their audit arms, amid a raft of new
proposals to shake up the industry.

“With audit firms, as with other sectors, the status quo is not an option,
the status quo will not be an option for the European Commission,” commissioner
Michel Barnier said when launching the paper.

He said the demise of big five firm Anderson, following the 2002 Enron
scandal, demonstrated that the risk of a large auditor collapsing was not
“academic”.

“In this area I don’t think our memories can be short term. If you just
consider this to be the past and want to start with business as usual, please
don’t rely on me to take that tact,” he said.

The paper also proposes the introduction of joint audits, widely used in
France and the introduction of a new “limited audit” for SMEs.

The commission is also trying to combat the “big is best” perception which
results in companies switching to a Big Four client.

“Being an auditor of large listed companies seems to create a reputational
endorsement; such a positive association would then help the large firms in
securing further high profile audit engagements and thus contribute to lack of
dynamism in the market,” the green paper states.

The announcement was welcomed by accounting bodies and audit firms today.
Michael Izza, ICAEW chief executive, said the paper provides “an opportunity to
explore how audit needs to evolve in the post-financial crisis environment.”

Jeremy Jennings, head of Ernst & Young’s regulatory affairs team, said
this was a chance to opportunity for “a thoughtful and important discussion
about enhancing both the role and relevance of audits and the audit process”.

Further reading

Restrictive
bank covenants keep the Big Four on top