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European Commission Wants Changes to Audits

The European Commission wants to change auditing rules in the EU.

The European Commission is hoping to adjust audit regulations in an effort to cut down on financial risks similar to those that led to the 2008 crisis. However, if the proposed changes go through, the relationships between auditors and public companies would be radically transformed, the Journal of Accountancy reports.

The suggested adjustments include setting a six-year cap on how long a company can bring in an outside auditing firm with a required four-year "cooling-off period" before they can work together again, the Journal reports.

Additionally, audit firms wouldn't be able to offer their clients nonaudit consultancy services and a single market for statutory audits would be established, with qualified firms being allowed to work anywhere within the EU.

"Investor confidence in audit has been shaken by the crisis," stated Michel Barnier, the European financial services commissioner, as quoted by the news outlet. He added that he believes "changes in this sector are necessary. We need to restore confidence in the financial statements of companies."

BusinessWeek reports that the Commission is also calling for the four major auditing firms to operate separately from their consulting divisions, a move that aims to do away with conflicting interests.  

Comments

Patrick Slattery
Title: Managing Director
Company: Canopach
(Managing Director, Canopach) |

Dabney --

I appreciate your concern, but would suggest you consider that Enron, Worldcom and a bevy of other fiascoes were the result of work done by Big-X firms. It seems to me that ethical integrity and the firm culture have far more to do with the outcome than the size of the firm.

A culture can rot quickly when strategic decision makers are layers removed from day-to-day issues. That, and the cozy relationship between the auditor and business being audited are the root-cause of most major problems.

Dabney Wellford
Title: CFO
Company: Wellford Consulting
(CFO, Wellford Consulting) |

I agree with most of the comments. The need for change/rotation does have some merit, but there is a significant learning curve, as has been previously mentioned. Suppose that the periods of time were doubled? (That may be more realistic. Is there not a system like that already in place in Australia?)

If the root cause of the problem is that the second tier firms are pushing this, there has to be some realization that they are not capable of handling all of the issues. Otherwise, someone needs to revisit Enron and WorldCom.

The Europeans really screwed things up in adopting the Euro. If their mindset is to now screw up audit practices, we will all suffer. There is no such thing as a perfect system, but the CPA world has been pretty good in job in policing itself.

Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

The idea calls for anslysis of the trade-offs. Audit relationsips will be less cozy, but risks rise for audit failures due to lack of familiarity. Development of industry expertise by audit firms will be reduced by client snd staff "churn". Audit costs are likely tobe somewhat higher, with audit quality decline risks. My nine years with a large firm informs my view of the trade-offs. We have to decide on the primary objective.

Neil Jacques
Title: CFO
Company: Windward Design Group, Inc.
(CFO, Windward Design Group, Inc.) |

I don't think audit rotation is the answer. It will drive up costs and not provide credibility. The audit fee and the client/auditor relationship has to be separated in order to provide real independence. That would necessitate an administrative entity that would pay the auditor independently form the auditee. I can see all sorts of problems with that also.

Ron Dickinson
Title: Shareholder
Company: Dickinson & Clark CPAs
(Shareholder, Dickinson & Clark CPAs) |

Unfortunately auditors receive thier paycheck from the company they are suppose to be checking on. I have audited in the past and the first time you take a position counter to corporate managment and they threaten to change accountants, you understand how bias the system is. Sure we are suppose to be above all that (wink wink). Maybe companies should pay a fee like an insurance premium based on their size into a pool, that then hires out a truely independent accountant.

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

Michel Barnier, the European financial services commissioner, believes "changes in this sector are necessary." He may well be right. However, not all change is for the better. In this case, the proposed changes to auditor rotation will almost certainly make things worse, as Company's experience higher audit costs and auditors struggle with steep learning curves to try to understand all of the complexities of large multinational organizations.
These changes are being pushed by the second tier audit firms that have lost competitiveness with the Big 4 and are trying to regain market share through regulatory actions. The harsh reality, though, is that only the Big 4 have the resources and expertise to serve the largest multinationals.