Concerns raised over evidence for proposed EC audit reforms

CONTROVERSIAL PLANS to reform the audit market suffered another setback this week as the European Parliament raised concerns about the evidence base for the proposals.

A review of the European Commission’s impact assessment of its audit reform proposals – championed by internal markets commissioner Michel Barnier (pictured) – was presented to the European Parliament’s legal affairs committee earlier this week, in which its Impact Assessment Unit (IAU) questioned the rigour with which the EC analysed the market for audit services.

According to the report, the underlying reasons for reform of the audit market were “less clearly evidenced” than the problem areas identified by the Commission.

“The causal link between an alleged general problem of deficiencies in audit quality in the EU and the worldwide financial crisis is not clearly demonstrated,” the report said.

The IAU went on to question the Commission’s analysis that underpins its claim that competition for audit services, especially audit of public-interest entities, has been distorted as a result of a high level of market concentration, chiefly the dominance of the Big Four.

“The existence of high market shares not being problematic per se, one might reasonably have expected the Commission, as the EU competition authority, to have provided a more thorough analysis of the market for audit services and to have made a more closely substantiated case for a possible distortion of the competition,” the report said.

The report also took issue with the fact that, for certain preferred policy options, there appeared to be a problem of proportionality.

In the case of the EC’s proposed mandatory rotation for auditors and separating the provision of audit and non-audit services to public interest entities, the Commission’s own impact assessment was found to present these as preferred options, despite their positive impacts being contested by major stakeholders.

“Since neither the costs of these proposals, nor their expected benefits are fully quantified, the Commission does not seem to provide sufficient evidence that the preferred options are necessarily the most beneficial for the concerned market,” the report found.

“Less radical alternative options have not been explored in the same detail. Moreover, the Commission does not seem to pay enough attention to unintended effects of its options.”

In response to the report, Michael Izza, ICAEW chief executive, said the European Parliament has raised a number of questions about how the proposals should be taken forwards.

“It is important that both the Parliament and the Council reflect on this report and only take forward specific proposals where the evidence justifies the need for reform,” Izza said.

The IAU report provides an analysis of the strengths and weaknesses of the EC’s impact assessment accompanying its proposals and does not attempt to deal with the substance of the proposals.