EU audit proposals full of contradictions
Michel Barnier’s green paper on audit reform would increase risks for auditors, but remains silent on the issue of liability, argues Matthew Lawson
The green paper on audit policy published 13 October by Europe’s internal market commissioner, Michel Barnier, is full of contradictions. While recognising that auditors were not responsible for the banking crisis, it nevertheless puts forward proposals for consultation which, if adopted, might lead to the break up of the Big Four, a regulatory fate not so far visited on the naughtiest of Europe’s problem banks.
While the aim of increasing competition in the audit market is a laudable one, the immediate problem is that only the largest firms tend to have the resource required to audit the largest companies. It will not be straightforward in the short term to open up the audit of those companies to more players while at the same time maintaining quality and controlling risk and cost. Artificially forcing the “ramping up” of smaller practices to allow them a share in larger scale audit work will pose additional risk (and cost) to the company and its investors if such work cannot be appropriately resourced.
And while the ideas in the green paper around increasing the usefulness of the audit report will be welcomed by many as a valuable contribution to the debate, that debate is already ongoing and has been for many months in the UK and elsewhere. A consensus is emerging that auditors should give more subjective opinions for the benefit of shareholders and regulators. But any step to widen the scope of audit will undoubtedly increase the liability risk to auditors and on this thorny topic the green paper is unhelpfully silent. Having identified one of the imperatives for action as the risk to the stability of the financial system of a Big Four firm failing, it seems counter-intuitive for Mr Barnier to consult on proposals that increase the risk of that happening without, at the same time, re-opening the debate on allowing audit firms to limit their liability for audit work in some meaningful way. The existing law on this in the UK is, for all practical purposes, redundant and it is going to take a political dialogue between the UK or EU and the US to change that.
Mr Barnier is at pains to point out that this is a deliberately wide-ranging consultation in which no subject is taboo and so it is clear he is looking to provoke a vigorous and open debate. This is to be welcomed, but in reading the green paper it is sometimes difficult to avoid the impression that the many and wide-ranging proposals put forward are potential solutions in search of a problem that no-one has quite yet been able to put their finger on. It would be ironic if the legacy of this green paper was to increase the liability on and force the break-up of successful businesses, which by its own admission were bit-players in the financial crisis, while the institutions and investors who took the risks that led to that crisis, and the regulators who watched as it sailed by, escape largely unmolested.
Matthew Lawson is a partner in the litigation department at Mayer Brown in London where he specialises in work for accountancy firms