Director of Finance at the European Parliament: Should auditors stick to audit ?

Judging from recent articles in newspapers and journals, overall opinion seems content with the philosophy of permitting a wide range of services to be carried out by auditing firms.

But the world, or Europe to be more precise, will probably require a different kind of service from the international accounting profession in the coming years.

Three main problems have to be resolved:

Chinese Walls

First there is the perceived, if not real, conflict of interest between auditing and ‘advising’. We all know how the profession has always tried to reassure everybody about its infamous Chinese Walls, but few people believe they are really operational or effective.

The truth is the ordinary investor across Europe has little faith in audits conducted by firms when, at the same time, large fees are being paid to the same organisation for ‘advice’ or ‘consultancy’.

Recent analysis has shown that auditors of FTSE-100 companies collected twice as much in 1998 from their clients for ‘advice’ than for audit fees.

So what is the solution? Auditors must be and, more importantly, perceived to be independent. For this to be a reality companies will have to be prepared to pay more. Auditing firms must be prohibited from carrying out any other work with a client if they are already its statutory auditors.

It is tough, but credibility and the maintenance of high standards has its price and the EU citizen investing will have a reliable independent base on which to judge performance.

Monetary harmonisation

With the introduction of the single currency for 11 member states, the price of stocks across members’ stock exchanges are now quoted exclusively in euros.

This means investors are dealing in a single currency and are demanding financial reporting and auditing be presented on a uniform basis. So what the European investor is looking for is a common Europe-wide reporting standard together with a credible audit – again to uniform European standards – upon which to base investment decisions.

As the number of investors continues to grow within Europe, particularly as an increasing number of individuals look to the stock exchanges for their future pension needs, their demands will become similar to those of the general consumer. Just as there are consumer rights, there will be more pressure for investor rights.

None of this is new, but it is becoming more important as the euro has become a reality.

Critics will naturally point to the failure, after enormous effort and time, of the European Commission’s attempt to create a European Public Company Statute and to the diverse company law and tax regulations which can distort comparisons between companies.

Uniform European standards of audit would be much closer to international standards as currently determined by the US, than the level of audit carried out by commissaire aux comptes, the legal framework for auditing in France. They would no doubt reflect different approaches of some technical aspects of auditing large companies and should address the growing problem of fraud.

The commission, which has carried out a lot of work in this field, in association with the national accounting bodies and the Europe-wide Federation des Experts Compatables Europeens (FEE), should finalise its recommendations which could be applied to the top 100 companies in euroland.

Environmental audit

A third aspect is the growing need to provide investors with an environmental audit as well as the classical financial audit.

Again, this need is being propelled by the European investor who is becoming increasingly aware of green issues and wants to ensure investments comply with international environmental standards.

The real questions here are precisely what should this report actually encompass and what initiatives should the EC take to influence developments in the annual reports by European companies.

Auditing of top European companies is set for significant change over the next decade or so and the auditing profession should already be analysing the consequences. At the same time, EU companies must be ready to accept a significantly higher charge for truly independent auditing services.

They could even impose an open tendering procedure every five years to ensure adequate competitive pricing.

Michael Chamier is director of finance at the European Parliament. The views expressed above do not necessarily reflect those of the European Parliament or any other institution of the European Union.

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