Audit firms forced into drastic measures by Eighth Directive

european flags

Audit firms are taking drastic steps to avoid their ability to provide
services being hamstrung by the Eighth Directive.

This week MGI Midgley Snelling said it may have to change its name and the
way it ensures quality control in moves to distance itself from the MGI network
and avoid a ‘bureaucratic nightmare.’

If Midgley Snelling could not prove that it was part of an association rather
than part of a network, its audit offering could be seriously impaired by the
audit directive.

‘It will make audit very difficult to do,’ said Jonathan Farrow, MGI UK and
Ireland’s international co-ordinator. ‘Every time we did an audit we would have
to contact each individual firm in the MGI network to make sure that there was
no independence issues.

‘That would be a bureaucratic nightmare. We can’t force [the individual
firms] to reply and we wouldn’t be able to go ahead until all members had
confirmed that there was no conflict of interest. It would be totally

‘We’ll probably have to drop the “MGI” part, which is a shame,’ said Farrow.
‘We have a common quality control throughout the network, but we will now have
to rely on local quality control through our institute.

The MGI network has more than 200 member offices, including seven in the UK
and Ireland, in 70 countries across the EU and worldwide, which shows the
opportunity for conflicts under the directive, which came into force on 29 June

One of the key aims is to ensure that auditors remain independent of audit
clients, which includes making sure that accountancy network firms are also
independent of the audit clients of other members of that network.

This effectively means that a firm within a network could not accept an audit
assignment if a conflict existed within the wider network.

A network would also be required to have processes in place to identify and
prevent conflicts that could jeopardise independence.

Farrow said the firm’s German peers had also kicked off talks with lawyers on
their position. The firms’ arguments rest upon the fact that they rely on
cross-referral of work.

‘MGI falls outside the definition of a network and the additional
requirements with which a
network must comply and both we and our colleagues in Germany will be awaiting
the opinion of our legal advisers with great interest,’ added Farrow.

Related reading