Europe: Response To Green Paper “Audit Policy: Lessons From The Crisis”

The Financial Reporting Council has published its response to the European Commission's audit policy consultation.

With respect to the key proposals within the Green Paper, the FRC supports:

• Efforts to minimise the systemic risk associated with the level of audit market concentration provided that those efforts are not at the expense of audit quality.

• Improved transparency of the audit process. The primary vehicle for greater transparency should be the audit committee report with a requirement for the auditors to report positively on its completeness and fairness.

• The adoption of ISAs in Europe. They suggested that the proposed European Audit

Authority should be responsible for the endorsement process.

• The tightening of auditor independence rules. The UK has recently consulted on this issue and found support from market participants for clearer and more transparent rules, although not for a complete ban on the provision of non‐audit services by auditors to their clients. The revised UK Ethical Standards may be a good starting point for discussion on this topic.

• The establishment of a European Audit Authority to ensure that audit receives appropriate focus within the European regulatory architecture.

• In principle, measures to increase the flexibility for firms to operate within different member states. However any move to “maximum harmonisation” should not be at the expense of existing standards.

FRC do not support:

• A wholesale ban on the provision of non‐audit services to audit clients. The UK’s recent consultation on this issue indicated that investors and other market participants are not in favour of such a ban. We would also be concerned that a ban which included audit‐related services could stifle the development of more innovative audit products.

• The forcible creation of audit‐only firms. Such firms would be unable to offer their staff a wide range of work experiences and compensation packages are likely to be lower than firms can offer currently, making it more difficult to recruit and retain high quality personnel and hence impacting negatively on audit quality.

• The mandatory use of joint audits. There is a risk that some matters fail to be addressed effectively as they are seen to fall between the two firms. Client management may also engage in arbitrage between the two firms, particularly when it comes to difficult or contentious judgements.

Complete Report.