Tuesday, December 14, 2010

Responding the European Commission review on the role of audit

The aftermath of the global financial crisis (GFC) has given rise to a flurry of activity among regulators, governments and policy makers around the world.

In Europe, the audit profession, in particular, is under heightened scrutiny. There is an unprecedented wave of consultations and calls for submissions from government officials and regulators.

In November this year, both Andrew Stringer (Head of Audit) and I were invited to give evidence to a select committee of the UK House of Lords on the topic of audit. As the only non-UK body, we presented the Australian perspective of what might have gone wrong in the banking crisis that hit the UK.

More recently, the European Commission came out with a Green Paper Audit Policy: Lessons from the Crisis on 13 October 2010.

This paper questions the role of audit and how audit function might be enhanced to contribute to financial stability. This week, the Institute responded to the Green Paper, supporting policy changes that clearly lead to improvements of overall audit quality.

In the submission, we acknowledge that it is likely that the European audit profession will see future enhancements in policies in light of the banking crisis that plagued Europe. Our encouragement to European authorities is to use our analyses and experience to influence the development of well considered and innovative improvements before launching into substantial and broad legislation.

Fortunately for us, Australia was at the periphery of the banking crisis and the impact was limited to disruptions to the global funding markets. Given the global nature of the audit profession, it is timely and important to present the Australian perspective of having the robust systems in place that brought us through successfully. Audit should have a key role in ensuring the proper financial governance and strength of companies. This, in turn, improves general market sentiment and overall investor confidence.

If there is to be international regulatory reform, it is important that a comprehensive debate is had, that the focus is on improving the quality and value of audits to meet the demands that have arisen following the financial crisis.

Any reform to audit policy should not be driven by the fear that still reverberates around the global financial crisis, or even worse, merely for the sake of change.