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BoardMatters Quarterly, June 2011 - European Commission takes aim at audit policies - EY - United States

BoardMatters Quarterly, June 2011European Commission takes aim at audit policies

Audit chairs of some of the largest companies in Europe and the US have expressed a great deal of concern about some of the Commission’s considerations on audit policy.

Forward View by Tapestry Networks

In late 2010, the European Commission issued a "green paper"1 entitled Audit Policy: Lessons from the Crisis2 and subsequently received hundreds of comment letters from financial statement preparers, government authorities, academics, audit committees, auditors and others. The green paper is part of the Commission’s effort to explore policies aimed at addressing the root causes of the financial crisis.

While most of the comment letters received were negative, Commissioner Michel Barnier, the senior Commission leader whose policy-making unit is responsible for the green paper, has indicated the status quo is not an option.

The Commission is evaluating a number of aspects of audit policy, including:

  • The independence of audit firms, such as whether the auditor should be chosen by a third party (such as a regulator) rather than the audit committee and (or) shareholders; whether the rotation of audit firms (and not just audit partners) should be mandatory; and whether non-audit services provided by audit firms should be prohibited or restricted.
  • Audit market concentration and structure, such as whether to increase the involvement of smaller audit firms into the upper end of the market by mandating joint audits with Big Four firms, and exploring whether to break up the Big Four.
  • The role of the auditor, such as the type and amount of information the auditor should provide to stakeholders.

In particular, audit chairs of some of the largest companies in Europe and the US have expressed a great deal of concern about some of the Commission’s considerations on audit policy, which some say are “too radical,” and could have “unintended consequences” on their companies’ ability to oversee the audits of their companies.

European audit chairs have also expressed dismay that the role of the audit committee was not discussed in the green paper.3 Some worry that they may lose certain responsibilities, such as overseeing the selection of the external auditor.

One audit chair said, “I was elected to the board to make these decisions. If I’m not good at it, then I need to be removed.”

How might this affect US audit committees?

The Commission has made it clear that it intends to take up these issues with governments and regulators in other markets, including the US.

The green paper states: “The Commission is keen to assume leadership at the international level on this debate and will seek close cooperation from its global partners within the Financial Stability Board and the G20.”4 If the considerations raised in the green paper are legislated, they would affect companies with subsidiaries in Europe as well as likely trigger a ripple effect that could influence policy makers internationally.

How US policy makers will respond to the EU’s effort to change the audit profession remains unclear.

To date, one issue has gained traction in the US: the form and presentation of the auditor’s reporting model. The PCAOB is reassessing the current approach and is expected to issue a concept release in the second quarter of 2011.

In a statement about that project, PCAOB Chairman James R. Doty said, “We heard from investors that they want more information in the auditor’s report. Investor dissatisfaction with the current auditor’s reporting model should concern other constituents as well, including preparers, auditors and regulators.”5

While the European Commission’s formal comment period for this green paper has closed, US audit committees and their companies can continue to submit their views to the European Commission, as well as comment on any proposals that emerge from the European Parliament.

Similarly, companies may comment on any related proposals by regulators in the US. The PCAOB’s proposal on the auditor’s reporting model, for example, will have a period of public comment.

Public companies and their audit committees are encouraged to examine and comment on these proposals so that their voices are heard in the debate.

1 A green paper is a publication consultation document early in the European Union’s legislative process.

2 European Commission, Audit Policy: Lessons from the Crisis.

3 Audit chairs also expressed frustration that the role of the audit committee was not discussed in the Commission’s more recent green paper, “The EU corporate governance framework,” issued in April 2011.

4 European Commission, Audit Policy: Lessons from the Crisis, page 3.

5 James R. Doty, “PCAOB Discussed Changes to the Auditor’s Reporting Model in Preparation for Concept Release.”

Forward View is prepared by Tapestry Networks. Views expressed by Tapestry Networks are those of Tapestry Networks and not necessarily of any EY member firm. Tapestry Networks convenes seven audit committee networks sponsored by EY that collectively consist of nearly 150 individuals, who chair more than 200 audit committees and sit on over 300 boards at some of the world’s most admired companies. EY refers to the global organization of member firms of EY Global Ltd., each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm in the US.

Used by permission of Tapestry Networks. This article may not be reproduced, distributed, displayed or published without the express written consent of Ernst & Young LLP and Tapestry Networks.

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