London: The Big Four professional service firms united yesterday in constructive opposition to the EU Commission's proposed audit reforms. Below, we carry their immediate responses:
David Sproul, chief executive and senior partner at Deloitte:
"The audit profession has taken to heart important lessons from the financial crisis. We are supportive of measures to enhance audit quality, strengthen the independence of the auditor, and foster competition. But as we have stressed previously, given the extraordinarily challenged global economy, it is critical that proposals regarding the audit regime and regulation should focus on building greater confidence in the capital markets and facilitating economic growth.
"The European Commission for Internal Markets' focus when it announced the Green Paper was the role of auditors and banks in the financial crisis and the measures required to help prevent a future financial crisis. As a profession we have developed a number of measures in consultation with regulators to address this concern and objective. These include closer communication of risks between auditors and financial supervisors; clearer risk disclosures and reporting by financial institutions; and an improved reporting model for auditors, which reflects their role in reinforcing the public's trust in the capital markets.
"However a number of the Commission's specific proposals do not advance its stated objectives and we believe will have significant negative unintended consequences. We do not support proposals such as audit only firms, mandatory rotation and further restrictions on non-audit services. The detrimental effect of such measures on audit quality would affect all sectors but would be most severe for financial institutions. They present the most complex audit challenges, requiring highly skilled and experienced experts with a deep knowledge of the audited entity. Thus, the proposals would be most counterproductive for the very sector that has been the central focus of regulatory reform efforts.
"Further restrictions on non-audit services, creating audit-only firms, and mandating rotation will result in unnecessary disruption and cost, and will not address the objectives of improving audit quality. Further, these wide-ranging proposals would create an audit regime in Europe inconsistent with those in other markets, further increasing complexity and costs for global companies and impacting European competitiveness. We believe the impact of the proposals has not been properly considered and the input of those with the clearest view, including corporate and investor communities, have been largely ignored.
"The legislative process for the development of final regulations is necessarily lengthy and thorough. The views of critical stakeholders such as investors, regulators, governments, the business community, and auditors need to be carefully considered prior to finalising regulation. We look forward to engaging with the Commission, along with other stakeholders, to inform the discussion throughout in order to reach our shared objective of improving audit quality."
Ernst & Young:
Ernst & Young believe that several of the key proposals announced today by the European Commission on audit reform, should they come into effect, would damage audit quality and provide little or no added value while increasing the cost of audit at a time of economic uncertainty. Furthermore, these proposed measures would have minimal impact in addressing one of the Commission's key concerns — the role of the audit profession in helping to prevent past or future financial crises.
We share the concerns of others that more choice is needed in our profession and have said on many occasions that having only four global networks is not ideal. Therefore, we support those Commission proposals that would increase choice and enhance audit quality, including the proposal for an EU passport and the adoption of International Auditing Standards, which we believe will create a stronger European audit market. We also support the proposed elimination of ownership restrictions and artificial barriers to choice which would be good for investors and overall audit quality.
The European Parliament and Member States now have an opportunity to turn the debate into a constructive discussion that considers the quality and relevance of audits and the important role of independent audit committees. It is our view that a multi-disciplinary service model, particularly when combined with an engaged and effective audit committee, improves audit quality, helps the profession attract the best talent and fosters the provision of high quality services to companies around the world.
Rolf Nonnenmacher, Head of KPMG's EMA region:
"While the audit profession was not the cause of the financial crisis referenced in the EU's Green Paper, KPMG supports new policies and ideas to improve audit relevance and quality in the context of wider regulatory reform.
"KPMG believes that the proposals miss the opportunity to put in place a meaningful framework for change, and would have no bearing on audit outcomes.
"They are also in marked contrast to the views of the majority of stakeholders, including financial institutions, investors, MEPs, business and academics.
"Audit quality is best provided by multi-disciplinary firms. The capability of firms to provide quality audits will be diminished if auditors are separated from wide ranging advisory expertise including, crucially, risk management in the financial sector.
"Furthermore, KPMG is opposed to the mandatory rotation proposals — which would cause serious disruption to major corporates, and have no positive effect on audit quality. Audit committees are best placed to decide on the appointment of auditors.
"Today's proposals focus on a desire to change the structure of the audit market. These issues would be best considered by the appropriate competition authorities, as is happening in the UK at present.
"KPMG is among a number of contributors who have put forward new ideas for improving audit quality, encouraging more choice and improving confidence in financial markets.
"These include a more structured approach to communications with supervisors and prudential regulators; strengthening the role of the audit committee; and more risk and narrative reporting.
"KPMG will work to persuade the European Parliament and the Council of Ministers to take full account of the responses received to the EU consultation document, and looks forward to a positive dialogue to fundamentally alter these proposals."
The European Commission's proposals to reform the audit market are a missed opportunity to learn the lessons from the financial crisis, meet the needs of investors and help enhance audit quality across the European Union. Many of the measures proposed by the Commission threaten to reduce audit quality and raise costs for businesses — which risk putting Europe at a competitive disadvantage.
PwC fully supports evidence-based legislative reforms that would enhance audit quality and remove barriers to competition. In particular we support measures that will promote high quality audits and a dynamic and vibrant profession, and most importantly confidence in the financial information being reported to the markets. We welcome plans to ease the mobility of auditors within the EU through the creation an 'EU auditor passport', a review of audit firm ownership restrictions and better two way dialogue between auditors and financial services regulators. We also support increased dialogue between the regulators and auditors, which would simultaneously enhance the value of audit whilst addressing other concerns around independence and market structure.
However, the Commission's proposals fail to recognise the significant reforms implemented across the European Union over the past ten years, including the strengthening of the role of audit committees, the creation of independent audit regulators and the increased level of shareholder interest in the appointment and activity of auditors.
The Commission's own consultation process has indicated a lack of support across Europe for proposals such as audit only firms and mandatory audit firm rotation. Furthermore the Commission has not provided any concrete evidence for any positive impact of these proposals on audit quality or properly assessed the additional cost burdens for business.