1. 1
STATUTORY AUDIT REFORM UPDATE
EUROPEAN COMMISSION PROPOSALS ON
“SPECIFIC REQUIREMENTS REGARDING STATUTORY AUDITS OF PUBLIC-INTEREST ENTITIES”
SEC(2001) 1384 final
DRIVING AUDIT QUALITY THROUGH
COMPETITION AND INCREASED
INDEPENDENCE
Martin Craul
Registered Auditor/Accountant
Chartered Tax Advisor
AITI AIPA FAIA Dip Rur Dev. (UCD)
For Friday 26 October 2012

2. 2
INTRODUCTION
 €4,588.9 Billion Bill
 European Aid – 39% of GDP
 Blanket Guarantee Schemes
 Recapitalisation Measures

3. 3
AUDIT REGULATIONS & DIRECTIVES
 A Regulation shall have general application. It shall
be binding in its entirety and directly applicable to
Member States
 A Directive shall be binding as to the result to be
achieved upon each Member State to which it is
addressed but shall leave to the national authorities
the choice of form and content
Article 189 of the Treaty of Rome

4. 4
REFORM OF THE AUDIT MARKET
Michel Barnier, the Internal Market and
Services Commissioner has this to say: -
“Investor confidence in audit has been
shaken by the crisis and I believe changes in
this sector are necessary; we need to restore
confidence in the financial statements of
companies. Today’s proposals address the
current weaknesses in the EU audit market by
eliminating conflicts of interest, ensuring
independence and robust supervision and
by facilitating more diversity in what is an
overly concentrated market at the top-end.

5. 5
OBJECTIVES IN REGULATIONS
 Auditor Independence and Audit’s Quality
 Inject Competition to the Audit Market
 Improve Internal Audit Market and Reinforce
Supervision

6. 6
KEY MEASURES PROPOSED
 MANDATORY ROTATION OF AUDIT FIRMS
Article 33
 MANDATORY TENDERING
Article 32
 PROHIBITION ON NON-AUDIT SERVICES
Article 32
 PURE AUDITS FOR LARGE AUDIT FIRM
Article 10(5)
 PROHIBITION ON “BIG-4” AUDIT CLAUSES
Article 32.7

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OTHER MEASURES PROPOSED
 CLEARER AUDIT REPORTS
Article 22/23
 BETTER SUPERVISION WITHIN UNION
Article 47
 EUROPEAN QUALITY CERTIFICATE
Article 50
 INTERNATIONAL STANDARDS ON AUDITING
Article 20
 EUROPEAN PASSPORT
Directive 3b, 15 & 17

8. 8
MANDETORY ROTATION
FAMILIARITY THREAT
Maximum audit firm engagement period of six years,
extended to nine years if joint audits are performed;
cooling-off period of four years between
engagements
Derogation for exceptional increase by 2 years and 3
years

9. 9
AUDIT ROTATION FACTORS
 How much more will it cost?
 Bringing Freshness to the Audit
 Challenging the Existing Approach
 Commercial Implications for “Big 4”
 Disruption new auditor brings
 Whether Audit Quality
 Creating opportunity for mid-tier firms

10. 10
MANDATORY AUDIT TENDERING
 Audit Committee Recommendations
 Justifying the Decision
 Have two choices for the Audit Post
 Express a duly justified preference
 Due Tendering Process
CREDIT INSTITUTIONS/INSURANCE
UNDERTAKINGS
 Prudential Supervisory Authority right to veto
Article. 32

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BIG FOUR POWER!!!
 99% of the FTSE100
 95% of the FTSE 350
 85% of the listed companies in Europe
 90% of the mandates in the DAX30
 58% of the FTSE350 equivalent in France
 14% penetration in China

12. 12
MANDATORY AUDIT TENDERING
 This proposal is overdue
 Opportunity for alternate audit firm
 Bring a fresher approach
 The French joint-audit experience
 More rigorous auditor selection policy
 Better quality; independence & competence
 Re-election should not be a GIVEN

13. 13
NON AUDIT SERVICES
 Non-Audit Services that entail conflict of interest in
all cases
 Non-Audit Services which may entail conflict of
interest

14. 14
BANNED NON-AUDIT SERVICES
 Expert services unrelated to audit
 Tax Consultancy
 General Management/Advisory Services
 Accounts Preparation
 Internal Control Design
 Valuation Services
 Designing Information Technology Systems
 Participation in Internal Audit
 Broker/Dealer/Investment Advisor
Article 10.3

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MAY ENTAIL CONFLICT OF INTEREST
 Human Resources & Senior Management
Recruitment
 Comfort Letters to Investors
 Design & Implement Financial IT systems
 Due Diligence to vendor/buyer Mergers/Acquisitions
Article 10.3 (b)

16. 16
COZY ANDERSON ENRON
 Permanent office space for auditors
 Jersey Days for auditors
 Relentless transfer of employees
 $27million for non-audit services
 $25 million for audit services
 The lines got a bit fuzzy

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ANDERSON AND ENRON
 “All that closeness goes a long way toward breaking
down barriers.”
John Markese, President American Association of
Individual Investors
 “Another auditor would have done the same thing
anyway, so what’s the point of losing all that
money?”
Anon

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THREAT OF NON-AUDIT SERVICES
 Back to auditing basics
 Independent assurance to shareholders that
directors have properly prepared statements
 Ethical Standard 5
 IFAC Code of Ethics
 Unhealthy mix of audit v consultancy

19. 19
“AUDIT ONLY” FIRMS
 Audit Firm that generates more than 1/3 annual
revenue from large public interest entities and
belong to a network
 Members have combined €1,500,000,000 revenue
with EU
 Prohibition on provision of other audit services

20. 20
LARGE PUBLIC INTEREST ENTITIES
 The largest 10 issuers of shares in the member state
 Average market capitalisation of €1,000,000,000 –
one billion
Article 14

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RECOGNISING THE NETWORK
 Big auditing firms will have network connections and
links
 Usually global network of separate network firms
operating around the world
 Name used for audit may be brand name
 A platform to share knowledge, skills and resources
 May have co-ordinated entities
 Governance entity
Article 5

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PURE AUDIT FIRMS
 Shall not provide non-audit services
 Not in network providing non-audit services
 Non-Audit Entity Investment in audit firm?
 Non-Audit Entity capital interest in audit firm?
 Audit Firm not to hold 5%+ in non-audit entity

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PURE AUDIT FIRM ISSUES
 Inter-disciplinary function that already exist
 Lack of access to expected expertise
 Worries about audit standards in audit only
 Attracting qualified personnel & graduates
 Dominant firm moves to stay within limits

24. 24
BIG 4 AUDIT CLAUSES
 Contractual Clauses forcing audit choice will be null
and void
 Inform competent authority
 OECD Study of May 2010
 Banks sharing auditor with client

25. 25
MICHEL BARNIER AGAIN
“Investor confidence in audit has been shaken by
the crisis and I believe changes in this sector are
necessary ; we need to restore confidence in the
financial statements of companies. Today’s
proposals address the current weaknesses in the EU
audit market by eliminating conflicts of interest,
ensuring independence and robust supervision
and by facilitating more diversity in what is an
overly concentrated market at the top-end.

26. 26
PROPOSALS REVIEW
 Seeking more independence and competition
 Curtailing power of Big 4
 Strengthening influence of mid-tier firms
 Influencing risk of systemic failure
 Mandatory joint audits off the agenda?
 Placating the investors
 Curtailing conflict of interest opportunities
 More information in audit reporting
 Better supervision

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VOLCKER’S FINAL SAY
“It does seem to me that regular audits should not
become a sort of long-term annuity for the
accounting firm, paid for by the company being
audited, rather than being responsive to the true
client, the investment public”
Paul Vockler former Federal Reserve Chairman

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FINALLY………….. THANK YOU!
ANY QUESTIONS??