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?