The Cost of European Audit Legislation

Jens Røder, Secretary General & CEO, Nordic Federation of Public Accountants | July 8, 2014 |

The Treaty of Lisbon, which came into effect in 2009, was designed to make the European community more effective, taking into account the perceived benefits accruing from full integration of the internal market. In addition, European businesses, including service providers and institutions, were to become more effective and efficient and able to operate seamlessly within the European Union.

These were great visions, which European legislators were committed to following, the purpose being to make Europe more competitive in the global arena.

Alas, the latest legislation impacting the auditing and accounting profession, as well as the entities using the services of the profession, has largely failed to realize these lofty ideals. The audit policy directive and regulation, which have recently been passed, are intended to improve audit quality and increase market efficiency in the provision of audit and audit related services. Although this legislation will not become applicable until June 2016, it is becoming increasingly clear that these objectives are unlikely to be achieved to the extent originally envisaged by the legislators. While not all are bad, there are nevertheless some major causes for concern.

Options in the regulation allow Member States considerable flexibility regarding the length of time that an audit firm can provide audit services to a listed company, before it must rotate off the engagement. Likewise, the extent to which an audit firm within the Union can provide non-audit services to its listed audit client will depend very much on the options adopted in the EU Member State where that client is registered.

In addition, there are transition provisions regarding a number of areas, such as audit firm rotation and the calculation of the cap on the provision of allowable non-audit services that are obtuse and difficult to interpret and hence observe. These uncertainties place extra burdens on audit committees and costs to comply. These uncertainties run counter to the concept of a seamless market and risk increasing fractionalization of the audit services market in the EU.

The EU decision to defer, pending further review and consultation, the adoption of international standards (International Standards on Auditing [ISAs] as issued by the International Auditing and Assurance Standards Board [IAASB]) on auditing and quality assurance for audits within the European Union is understandable but nevertheless,  disappointing. Several Member States have adopted ISAs but by no means all.  The adoption of ISAs will contribute to improving the consistency of audit oversight in the EU, because they can be applied as European benchmarks. The use of ISAs will strengthen the original objective of heightening audit quality within the EU. 

The continuing concerns, expressed by the European Parliament and the European Commission about the governance arrangements and independence of the IAASB, must inevitably lead to questioning the general acceptance of the current governance and oversight structure in the form of the Public Interest Oversight Board (PIOB) and Monitoring Group. In recent years all the recommendations, designed to strengthen independence from the accounting profession and governance in the public interest, as suggested by the PIOB and the Monitoring Group, have been implemented by the IAASB. Yet neither body is apparently able to convince European legislators, despite the European presence on both these bodies.

A recent market survey (published in May 2014), carried out by the Danish Competition Authority, in connection with a merger between the partners in the Danish firms of KPMG and E&Y concluded that there is a risk of further market concentration in the top tier audit market segment and a reduction in choice of service provider in this segment as a result of the application of the new EU legislation. This can hardly be the intent of the legislators.

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