Some Positive Aspects of the Statutory Audit Reform in Europe

Some Positive Aspects of the Statutory Audit Reform in Europe

by Yves Nicolas, President, and Cédric Gélard, Technical Director, CNCC | July 22, 2014 |

The final texts of the statutory audit reform (i.e., the Directive and the Regulation) have now been published in the official journal of the European Union, bringing to a close four years of intense discussions that may significantly change the shape of statutory audit in Europe.

We would like to take advantage of the recent excellent article by Jens Røder, the Secretary General and CEO of the Nordic Federation of Public Accountants, on the Global Knowledge Gateway on July 8 to share our thoughts as well. First, we share the concerns of Jens as to:

  • the ability for the Regulation, due to its many options, to be the proper instrument to achieve a minimum degree of harmonization across Europe;
  • the risk of increasing concentration of the market rather than decreasing it; and
  • the EU decision to defer, pending further review and consultation, the adoption of International Standards on Auditing (ISAs) at European level.

Those concerns are serious and founded.

We would nevertheless also wish to express what we consider to be positive aspects of the Regulation and the Directive:

  • improvement of the communicative value of the auditor’s report;
  • the enhanced role of the audit committee; and
  • recognition that the audit can be adapted to serve the needs of small- and medium-sized entities (SMEs).

Enhancement of the communicative value of the auditor’s report, which is embedded in article 28 of the Directive and article 10 of the Regulation, is part of a worldwide movement launched at the dawn of the 2008 financial crisis to respond to the demand of stakeholders to get more information from the auditor through the auditor’s report. Stakeholders know that the auditor has a deep knowledge of the entity and its environment and want to leverage that knowledge to get more information themselves.

The International Auditing and Assurance Standards Board (IAASB) has been responsive to that demand and is expected to finalize its new auditor’s report by the end of the year. The US Public Company Accounting Oversight Board (PCAOB) is also in the same process and is designing a new auditor’s report that is globally in the same vein. So the lines are moving and we are definitely entering new territories here.

We are very glad to see that move, not only because we think it is positive for the usefulness of the auditor’s report and the perception of the audit, but also because the Key Audit Matters were inspired originally by a requirement in a 2003 French law that requires the auditor to “justify his/her assessments” in the auditor’s report.

The enhanced role of the audit committee is also further recognition that the audit and the auditor is but one link in the financial reporting supply chain. But it also recognizes that properly setting the responsibilities of the audit committee is a very important element of the chain in that it serves the quality of the audit, protects the independence of the auditor, and, ultimately, leads to better financial reporting.

The recognition that EU Member States may adapt the audit of SMEs is also a crucial point of the Directive. The French profession supports the audit of SMEs and considers that the audit is the proper service for SMEs as long as it is adapted to their context. The French profession issued a standard in 2009, which was endorsed by the Ministry of Justice and which recognized the proportionate application of the standards in the context of the audit of SMEs.

Finally, having focused in this Viewpoint on some of the most positive aspects of the EU audit reform, we would nevertheless want to conclude with a certain regret.

One of the main objectives of the Commission in launching this reform was to “learn the lessons from the crisis” and, consequently, to clarify and define more precisely the role of the auditor.

This was the point on which we had the most hope: the expression of a vision for a new role of the auditor in the twenty-first century. And we consider that the audit reform has forgotten this original objective. It has worked on the market, the independence, the supervision, the rules, etc... But it has not shaped a forward-looking vision for the future role of the auditor in light of the usefulness of the audit in a changing environment where the acceleration of the provision of information is dramatic and the need for trust and reliability acute. By not tackling this issue, the EU audit reform will not contribute to the reduction of the expectation gap.

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