By Roger Acton, Regional Director Europe and Americas, ACCA
The EU Commission have finally unveiled their Green Paper on audit; the Telegraph have called it "Europe’s most radical overhaul of the audit industry". Strong words. At the very least, the Green Paper is a timely and exhaustive look at the role of audit in society.
It’s encouraging to see that a lot of what appears in the Green Paper addresses the kind of issues that were raised by the audit roundtables that we’ve been hosting over the past 12 months.
One of the most encouraging things contained within the Green Paper is the recognition of the valuable role that audit can and should play in society. The report states: "robust audit is key to re-establishing trust and market confidence; it contributes to investor protection and reduces the cost of capital for companies".
While acknowledging the importance of audit, the Green Paper also presents the profession with an opportunity to evolve.
Such an evolution could see an extension of the role of the auditor to better meet the needs of shareholders and address the audit ‘expectation gap’ – the contents of the report indicates that this is something the Commission are looking at.
It’s also pleasing to see the Commission identifying the way that auditors communicate with shareholders as an issue. Currently, key issues are restricted to the eyes of the audit committee only, while information that other stakeholders do receive can often be too defensive or technical.
It’s disappointing though that a corresponding discussion of liability reform – to go along with an enhanced role for auditors – is missing from the paper. What are also disappointing are the Commission’s suggestions for the future of the Big Four. We do need to look at ways to overcome the barriers to smaller firms taking on large audits – action against restrictive covenants and addressing liability issues might help – but breaking up the Big Four just isn’t the answer. More competition would be a good thing, but ‘downsizing’ or restructuring the Big Four isn’t appropriate or feasible as a means to achieve this.
The Green Paper also raises some important issues on the SME side of things too, notably by looking to investigate the kind of assurance that is most helpful to, and needed by, SMEs. While it’s easy to agree with some of the problems raised – that the process of assurance can be a burden to SMEs – it is not so easy to agree with the solutions. The notion that some businesses could end up having no assurance at all is concerning, as this would leave shareholders exposed. Then again, the current situation, where a great variety of non-audit reports exist in different EU states, does not help cross-border trade and we would agree there should be a pan-EU, if not globally, agreed standard procedure.
This doesn’t mean though that I would support having a pan-EU body to carry out the actual monitoring of the regulation; this should be left to national regulators. After all, we need better, not more, regulation.