Exactly 688 stakeholders participated in the Green Paper consultation on "audit policy and lessons from the crisis" launched by the European Commission on 13 October 2010. To discuss the Green Paper and the main findings of the consultation, the Commission hosted a high-level conference on 9-10 February 2011, which was attended by over 600 auditors, CFOs and lawyers, although more than 1,500 wished to register. Although only a few law firms participated, this topic is obviously relevant to lawyers as it raises a number of legal issues, particularly in the field of auditor liability.

The conference was web streamed and can now be viewed on line. Over the course of this two-day event, stakeholders held an open dialogue with the Commission and explained their positions. Commissioner Michel Barnier is deeply committed to moving forward on this subject and intends to submit a draft text to the European Parliament in May 2011, in order to have a final version by November of this year.

Purpose of the Green Paper

The financial crisis demonstrated the need to stabilise the financial and economic system. Today, the question arises as to how the auditor's role can be redefined in order to increase financial stability. In unstable times, trust is key. Companies need to be able to enter into agreements with full knowledge of the facts, and investors want to be able to trust the financial statements of the companies in which they are considering investing. In this context, auditors play a key role as they are entrusted with rendering an opinion on the fairness and accuracy of corporate financial statements. In this regard, the Green Paper indentifies two major issues: firstly, a gap in expectations (between stakeholders and auditors) and, secondly, the fact that the consolidation of large audit firms has created a systemic risk, namely that the collapse of one such a firm could result in system-wide distortions. In view of these findings, the European Commission wishes to narrow the expectations gap while ensuring effective oversight and creating a genuine single market for audit services by introducing a European passport for auditors. As different players may have different needs, the European Commission addresses how the rules should apply to small and medium-sized companies and how medium-sized auditors can perform the auditor's role.

Key topics addressed by the Green Paper

This complex subject is divided into a number of sub-topics, namely:

  • the auditor's role and how auditors can provide reasonable assurance while efficiently communicating with stakeholders using the International Standards on Auditing (ISA);
  • the governance and independence of audit firms: how to deal with conflicts of interest when no binding rules on auditor remuneration or rotation exist;
  • the supervision of the transparency of audit firms with respect to fees, additional non-audit services and the cross-border management of audit network operations;
  • the systemic risk caused by the concentration of audit work in the hands of a few players, resulting, amongst other factors, from "Big Four only clauses" and difficult market entry for smaller audit firms;
  • the creation of a truly European single market for audit services enabling cross-border cooperation without approval, registration and aptitude testing in each Member State;
  • the need to adapt the current rules to meet the needs of small and medium-sized companies and practitioners;
  • international cooperation on a European and third-country level.

Increased compliance and liability

In the stakeholders' position papers, liability is a recurring theme: an auditor cannot provide absolute assurance and risk can never be eliminated altogether. While auditors are not afraid of heightened liability, it is clear that their role should be better defined, appropriate compensation received in a transparent way, and measures taken on an international level, in consultation with other financial players. Soft regulation is preferred over "regulatory inflation". Analogies may clearly be drawn to other fields of law such as taxation (e.g. directors may be held liable for taxes, social security contributions and VAT, shareholders of shell companies may be held liable for corporate tax, etc.).

Future issues

If the ideas mentioned in the Green Paper are eventually transposed into new rules, various legal issues will undoubtedly arise, both between auditors and their clients and within audit firms. These issues include:

  • What is the extent of auditor's liability?
  • Can an auditor be held liable for fraudulent behaviour on the part of a client if the auditor's investigation of the client met reasonable expectations?
  • To what extent can auditors wave their liability?
  • How should auditors draft their mission statement?
  • Can auditors be held liable in the event of a client's bankruptcy or similar insolvency proceedings?
  • How should audit firms adopt a partnership model?
  • How can audit firms raise money on the capital markets?
  • How can auditors ensure that external stakeholders do not interfere with their work?

These and other questions will probably be addressed once the European Commission adopts a final position.