The International Federation of Accountants (IFAC), the global organization for the accountancy profession with members and associates in 127 countries, today commented on the European Commission (EC)’s proposed legislation, issued this week.
IFAC supports initiatives to continually improve audit quality, enhance the role of audit, and safeguard auditor independence, and believes that innovation and evolution are essential for this vital service to maintain its relevance and meet the needs of investors and other stakeholders. As such, IFAC supports the following measures proposed by the EC, which we believe are consistent with views widely expressed in response to the Green Paper:
Compliance with International Standards on Audit (ISAs). This is a significant step forward in convergence to high-quality international standards, which facilitate transparency, consistency, economic growth, and financial stability. IFAC notes that ISAs are designed for audits of entities of all sizes, and are capable of being applied in a manner proportionate with the size and complexity of an entity.
Strengthening of audit committees. Mechanisms and processes required to provide greater roles and responsibilities for audit committees in the spirit of ensuring their independence and technical competence.
Enhanced dialogue between auditors and regulators. Stronger two-way communication between statutory auditors and oversight bodies supervising public interest entities and regulatory institutions, particularly in the financial services sector, will help in identifying and managing key risks, including systemic risks, and address audit issues that may arise beyond the formal components of the reporting process.
Greater transparency in auditor selection. Greater transparency in the appointment of statutory auditors and firms will enable greater insight for stakeholders into the selection processes, requirements, and expectations.
Greater cross-border mobility for auditors. Legal mechanisms to enable auditors to practice in multiple jurisdictions, including the creation of the European passport, in line with the move toward global regulatory convergence.
Enhanced auditor report. While the ideal future content and format is not clear, IFAC supports the need to review the auditor report. The International Auditing and Assurance Standards Board has recently issued a consultation paper seeking broad stakeholder views on enhancing the quality, relevance and communicative value of auditor reporting on an international basis.
However, there are several proposals that IFAC does not support, because there is not sufficient evidence that they will have a positive impact on auditor independence and audit quality, and that the benefits will outweigh the risks and costs. IFAC believes that further research should be conducted to support their feasibility and impact. These include:
Mandatory firm rotation. Firm rotation puts sustainable, established relationships at risk rather than encouraging trust, longevity, and knowledge capital between client and firm. However, for public interest entities, IFAC does support mandatory partner rotation after a fixed period of time.
Prohibition of non-audit services. Independence is critical, and IFAC supports the independence framework described in the Code of Ethics for Professional Accountants. IFAC’s view is that, in performing both audit and non-audit services, audit firms obtain complementary knowledge and competence that ensures each of these services—such as tax services—can be provided efficiently and to the expected quality.
Further, IFAC believes that the proposed legislation, if passed by Parliament in its current form, could have a negative impact on the audit profession and professional accountancy organizations (PAOs). In particular:
PAOs’ role in audit oversight arrangements. Currently, in many countries, PAOs have been delegated an important role in regulation, continuing education, discipline, and other areas, and there is an appropriate balance between independent oversight and PAO support. Expertise and infrastructure have been established to support these areas; changes are unnecessary and will require rebuilding infrastructure.
Extraterritorial impacts. IFAC is concerned that the proposals will provide significant problems for global public interest entities (PIEs) that require global audit services. IFAC does not believe that requiring firms of a certain size to provide only audit services will enhance global quality and service capability of the profession. It therefore urges that the Parliament consider the implications legislative changes will have for non-European Union states and the global market for audits of multinational companies.
Finally, IFAC’s view is that a number of the proposals in the proposed legislation were not widely supported by the responses to the EC Green Paper earlier this year.
IFAC responded to the European Commission (EC) Green Paper on Audit Policy: Lessons from the Crisis in December 2010.
About IFAC
IFAC is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of 167 members and associates in 127 countries and jurisdictions, representing approximately 2.5 million accountants in public practice, education, government service, industry, and commerce.
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