EC weighs in on debate over future role for audit

European Commission

If there was any doubt the role of audit was set to evolve, then the latest
suggestions in a European Commission green paper on corporate governance
indicate it is more a matter of when, not if.

In response to the global financial crisis, the EC’s paper takes on a broad
agenda looking at how the financial services industry and its stakeholders can
introduce better governance to avoid future disasters.

It is “desirable” for external auditors, it states, to extend what they
report on to boards and supervisory authorities if they discover substantial
risks within the business.

Co-operation between auditors and supervising authorities should be
strengthened, so the authorities can benefit from auditors’ knowledge.

Lastly, auditors could end up validating a greater range of information to
improve investor confidence.

The green paper’s audit-related suggestions, while focused on financial
services, could be read as cross-industry reforms.

“If we are to prevent future crises, financial institutions themselves need
to change. We need to ensure more effective internal controls. Promote better
risk management,” said the EU’s internal market commissioner Michel Barnier.

Similar points have been aired in the UK, particularly around audit’s role in
risk management. The Financial Reporting Council’s chief Stephen Haddrill gave a
speech at the ICAS’ Aileen Beattie Memorial Event in which he flagged up the
reliance investors place on auditors’ view on their client’s risk-taking.

“The investor only sees the tip of the iceberg of work. But, nevertheless,
investors are relying on that work being done,” said Haddrill.

Throw in the potential re-introduction of the Operating & Financial
Review, the FRC’s ongoing review into audit, and continued questions about the
value of audit in general following Lehmans, and change seems inevitable.

“It’s [all] rowing in a similar direction,” said Grant Thornton head of
external professional affairs Steve Maslin.

With the green paper focused on financial services, Maslin expects that
industry to require a greater focus than others on a flow of information between
auditors and the authorities on getting to grips with understanding the risks
underlying complicated transactions. He also wants that process to flow both
ways, so authorities can help auditors. “If supervisors have information about a
company, then they should be able to provide it to the auditor,” said Maslin.

Beyond financial services, he sees the paper as another step in the process
of expanding the role of audit in general, to make the process more useful to
investors and other stakeholders.

The price for greater assurance is greater risk for auditors, particularly if
making calls on forward-looking statements. This will have to be addressed,
according to BDO head of public policy Graham Clayworth. “For me, it’s about
looking more generally at limited liability status for a bigger reporting role,”
said Clayworth.

Maslin expects to see “incremental changes” in the audit role over the next
eighteen months. Little movement over that period would be “disappointing”, he

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