EUROPE-WIDE REGULATION is essential to sort out problems in the audit market and national initiatives like comply-or-explain won’t cut it, Barnier’s draft paper claims.
Country-level regulation is “not adequate” and the challenges uncovered by the financial crisis “cannot be solved at national level”, according to the unfinished green paper on audit seen by Accountancy Age.
Barnier warns regulatory differences between member states would “seriously undermine” the single market, underlining the interconnected nature of securities markets and financial players.
Some audit insiders said European-level regulation “has lots of value”, but questioned how it would work in practice.
National laws mean each member state would have to retain local regulators with the ability to influence the profession and make decisions.
Corporate governance arrangements also differ widely from country to country, meaning an overarching rule book might struggle to fit in with existing legislation.
Regulatory arbitrage could be minimised by the top-down approach to oversight, but undoubtedly, the double layer necessitated by local laws might dilute the “coordinated approach” Barnier seeks.
The Financial Reporting Council will have to consider what the draft paper means for its role and responsibilities. Will it be reduced to implementer and presence-on-the-ground for Brussels? Will its funding be cut as regulatory responsibility is pulled into the centre?
Audit oversight, one of its primary jobs executed by sub-body the Audit Inspection Unit, might be pushed into greater alignment with other member states.
The draft paper claims current mechanisms to coordinate audit oversight lack “appropriate means to ensure the convergence of supervisory rules, powers and the system of investigation and penalties”.
It argues the cross-border nature of audit firms necessitates international supervision, something that is lacking under current regulations.
Instead, Brussels wants the European Securities and Markets Authority to take on the role, with a mandate to enhance cooperation and supervision.
Among ESMA’s new responsibilities: the creation of an internal committee to deal with audit-related questions; issuing guidance on the content and presentation of the audit report; and overseeing a new pan-European audit quality certificate.
One critic dismissed the certificate as “yet another effort to pull control into the centre”, calling it an attempt to bestow smaller firms with the kind of brand built up by the Big Four through hard work and investment.
Whether or not the certificate is a valid exercise, there is no doubt that the FRC could suddenly find itself answerable to new masters in the regulatory arena. Currently undergoing a strategic review of its own, one has to question whether foresight on the Barnier reforms has shaped thinking on changes that must happen at the UK regulator.
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