The European Commission has been concerned by what it sees as the potential weaknesses of the audit system highlighted by the financial crisis. The Commission points to clean audits of some large financial institutions just before or during the crisis which proved to conceal significant weaknesses. The Commission is also concerned that the failure of one of the big four accountancy firms could have systemic implications for the health of the financial sector and economy as a whole. On this issue, the Commission issued a recommendation in 2008 to member states to limit civil liability of auditors. Despite some improvements the Commission concludes that the concerns raised in its 2008 recommendation have not been fully addressed and that a further assessment is now imperative.
On 13 October 2010, the Commission issued a Green Paper on lessons from the financial crisis for auditing, as a first step in its consultation. The Commission noted that the role of auditors in the crisis has not been subject to the same level of scrutiny as other players and that the fact that many banks revealed large losses despite having received clean audit reports merits investigation.
In particular, the Commission seeks comments on:
- The independence of auditors. How detached are auditors when examining the financial statements of a company to which they provide non-audit services, is there a conflict of interests, is the current restriction/prohibition of non-auditory services, which varies across the EU, satisfactory given the statutory role of auditors?
- The level of reliance on an audit by stakeholders. What expectation gaps, if any, exist amongst stakeholders with regard to the scope and the methodology of the audit, is there a need for the audit methodology to be better explained to users?
- High level of concentration in the audit sector. Does this raise systemic risks, i.e., what would be the impact on the financial system if one of the big audit firms failed, not only in terms of availability of audited information but also damage to investor confidence?
- Supervision. Is national supervision effective or should there be a move to EU level oversight, i.e., through an enhanced role for the European Group of Auditors’ Oversight Bodies (ECAOB) or the establishment of a new European Supervisory Authority along the lines of the new supervisory bodies for banking, securities and insurance?
- A single market for audit. Should a European passport for sqauditors, based on EU registration and common professional qualification requirements, be explored to encourage the growth of smaller networks to compete with the big firms?
- The specific needs of small businesses. The appropriate application of audit rules to SMEs to ensure the credibility of their financial information whilst minimising the administrative burden.
The notion of mandatory rotation of audit firms is also raised, arguing that the retention of the same auditor for many years might undermine the independence of the auditor vis-à-vis its client.
Responses to the consultation are requested by 8 December 2010.