European Audit Reform Falls Short on Regulatory Convergence

Gary Pflugrath | April 17, 2014 | 1

Two weeks ago, European Parliament voted on statutory audit legislation, marking the latest stage of the European audit reform process and concluding nearly four years of discussion and debate. While some outcomes will advance the uniformity and quality of audit practices across the European Union, others fell short and will fail to progress global regulatory convergence.

A primary objective of audit regulatory reform should be to further enhance audit quality, and ultimately the quality of financial reporting. In a highly interconnected global economy, regulatory convergence across jurisdictions is a critical part of meeting this objective.

Aspects of the European reforms that adopt a globally consistent approach, for instance, the step toward adopting International Standards on Auditing, is a very positive development. These high-quality international auditing standards are globally accepted, and are currently being used or adopted in over 90 jurisdictions around the world, including many countries in Europe.

However, other aspects of the legislation open the door for potential regulatory divergence and fragmentation. Parts of the legislation provide individual member states with options that will create a patchwork of regulation across the union. Not only will Europe be out of step with other major jurisdictions, such as the US and Canada, but member states will potentially be out of step with each other. The stakes are high, and the rest of the world will certainly be focused on what happens in Europe. Failure to decide a consistent approach to audit regulation within Europe does not auger well for the chances of agreement among the global community.

In January, IFAC highlighted the impact of the failure of achieving global regulatory convergence: stifled business confidence, economic stability, and ambitions for a sustainable recovery. In areas including auditor independence—in particular, mandatory audit firm rotation and the provision of non-audit services—the European legislation is unclear and ambiguous, and permits differences between its member states. In addition, it differs from legislation in the many other jurisdictions—and yet will impose regulatory requirements upon these jurisdictions.

The adoption and implementation of high-quality, globally accepted, standards for auditing and ethics (including auditor independence) across the world is essential for a robust and efficient regulatory environment for audit that can respond to the challenges of a globally inter-connected economy. Regulatory reform that potentially creates divergence within a jurisdiction and between major jurisdictions increases costs and complexity for business and stifles economic growth.

So is the desire for sound reforms that promote global convergence and consistency of appropriate regulation to enhance audit quality dead?

 

Gary Pflugrath

Gary Pflugrath

Senior Director, Public Policy and Governance

Dr. Gary Pflugrath joined IFAC in 2011 and commenced his current role as Senior Director, Public Policy and Governance, in March 2018. In this role, Dr. Pflugrath has responsibility for the public policy and regulation function of IFAC, which, as the global organization representing the accountancy profession, researches and represents the views of the profession and its stakeholders. IFAC takes a leadership position on public interest issues where the accountancy profession’s expertise is most relevant. Since 2015 Dr. Pflugrath has been responsible for overseeing IFAC’s performance reporting and risk management activities and managing its Planning and Finance Committee as well as participating in IFAC leadership’s work with respect to international standard-setting boards’ governance arrangements. He also has responsibility for the organizational governance activities of IFAC, including overseeing IFAC Board and IFAC Council arrangements, meetings, and agendas. Dr. Pflugrath’s positions prior to joining IFAC include nearly 20 years at the Reserve Bank of Australia, where in 2002 he was the senior manager responsible for the Bank’s accounting policy and reporting. He then moved to the University of New South Wales (UNSW), as a lecturer in accounting, to pursue his ambition to complete doctoral studies. Subsequently, he held the position of policy adviser (audit and assurance) at CPA Australia. Dr. Pflugrath holds a Bachelor of Business (Accounting) Degree, (Chisholm Institute of Technology, now Monash University), and a Master of Business Administration Degree (University of Melbourne). He received his Doctorate of Philosophy (PhD) from UNSW in 2008. He has published referred articles in several academic journals, including Auditing: A Journal of Practice and Theory, the Journal of Business Ethics, and the International Journal of Auditing. Dr. Pflugrath has been a CPA in Australia for more than twenty years.

 

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Eric Turner April 30, 2014

This is a great topic. CPA Canada recently issued the following media release that I think well explains the Canadian position on audit reform and regulatory convergence. http://www.cica.ca/about-cica/media-centre/media-releases-and-backgrounders/2014/item79049.aspx

 

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