Auditors prepare for major rule changes

It’s June 2012. KPMG UK’s managing partner John Griffith-Jones has just written his second vociferous opinion piece in The Financial Times, protesting against new “absurd” mandatory rotation rules which forced the firm to hand over its £32m audit of HSBC to rival PwC.

Meanwhile, Grant Thornton was announced a 12 % increase in assurance revenues, owing in no small way to the abolition of Big-Four-only covenants and the introduction of dual-audit across the EU.

An EU study has also shown that audit fees for small businesses have dropped as much as 25% following the introduction of the new “limited audit”, however there is a worrying increase in the number of frauds.

This scenario is one possibility under reform measures announced by European Commission internal markets commissioner Michel Barnier this week.

Barnier brought the same strident, interventionist style he has displayed in other financial sectors to the audit industry calling for wide ranging reforms with the potential to fundamentally reshape the market.

“The status quo is not an option, and will not be the option chosen by the European Commission,” he said.

“If some people think that this is a thing of the past, that we can start again with the
attitude of business as usual, don’t rely on me to carry on in this way.”

The accompanying EC green paper represented a mixed bag of reforms, the most extreme being the mandatory rotation of firms and the introduction of an EU regulator.

Meanwhile, the House of Lords economic affairs committee is holding its own investigation into audit competition, which this week offered a taste of the arguments yet to come to the European Commission.

In Deloitte’s submission it said the debate is “largely of perception and disclosure, not substance”.

Ernst & Young said it wants “greater connectivity and co-ordination between national audit oversight bodies”.

But it seems clear that whatever structure Barnier finally decides on, the Big Four will have to either concede market share, increase their exposure to litigation or contend with more regulation.

At the highest levels of the profession there’s already an admission the audit structure will have to change and consequently it’s likely we are seeing the dying days of the static audit report, which has been described as “out of date” even within the industry.

However, there was limited mention of liability reforms. Auditors have long called for safe harbours, to limit their damages should they be sued.

The tacit understanding in London was that any discussion of audit reform should be paired with liability reforms. The idea being that the government could supply a safety net, if auditors agreed to walk a much higher tightrope.

However, the proposed EC reforms suggest this is not a given and liability reform is not an assumed part of the initiatives


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