Tuesday, February 22, 2011

A wrap-up of the EC conference

It’s been a week since returning to Australia, and I’ve had time to consider further and reflect on the discussions I’d been a part of in Brussels. Here are my brief wrap-up thoughts:

Clearly, there will be change occurring with the policy settings concerning external audit in Europe – Commissioner Barnier made that clear – but what is unknown will be the extent of these changes. For each topic discussed in Brussels there were strong arguments both for and against.

The timing of these changes was set at ‘the end of the European summer’ or no later than the end of October 2011 for a proposed directive.

It seems fairly clear to me that all European countries will be heading to using and following the International Auditing Standards – a sensible outcome.

My sense on auditor independence is that there will certainly be some tightening of limitations on the type of non-audit services that auditors can provide to their clients. I don’t believe that Europe will head for a total ban on all non-audit services – but it was certainly discussed and did have some supporters.

To stimulate the audit concentration focus, suggestions on mandatory rotation of audit firms and joint audits were discussed in great detail. If these were seen to be a ‘bit heavy handed’ then regular competitive tendering may be seen as a suitable option.

The absence of an appropriate legal liability regime (liability capping) in Europe was highlighted as currently being a significant limitation in Europe.

There was much focus and discussion on the evolving role of the audit committee and recognition that it is such a critical component of corporate governance.

My suggestion to assist with appraising all of these current options is to continue to focus on the question – does this proposed change lead to an improvement in audit quality?
At the end of the day, no-one would dispute that we all are committed to the goal of improved audit quality.

Finally in Australia, we should not simply assume that changes in Europe will automatically flow to Australia – we need to consider our individual jurisdiction policy settings and regulatory framework and reach the right judgements about any proposed changes – change simply for the sake of change is not good enough.

Friday, February 11, 2011

EC conference on Financial Reporting and Auditing – Day 2: Audit

Day 2 of the European Commission roundtable in Brussels commenced with a keynote presentation from Michel Barnier (Commissioner for Internal Market and Services).

His opening remarks sent a clear and strong message. He reiterated a view that the 'status quo regarding auditing was not an option'. The EC received 700 responses totalling 10,000 pages and he was currently 'seriously thinking' about the proposed changes. The changes were to support his goal of having a strong single market for Europe.

Commissioner Barnier outlined 5 areas of proposed changes:

1. Clarifying the role of audit – the relationship of audit should not just be with the audited company but with a much broader group, particularly the investors. A view on the state of the health of a company - not just the numbers - is needed.

2. Independence of the Profession – trust of the auditors needs to be re-established. He is looking at the options of mandatory periodic tendering, rotation of audit firms and regulatory approval of auditors for systemic risk companies.

3. Structure of the audit market – the focus on audit share by any firm should have a ceiling and support the French model of joint audits.

4. SME and SMPs – the 'lung for Europe's economy'. He wishes to encourage growth and will consider different levels of requirements for different companies and auditors.

5. Better international co-operation – regulators need to work better together. He commented that Europe's patience was running out with the US desire to converge their accounting standards.

Importantly, the majority of the areas the Commissioner focused on were related to changing and improving the role of the Audit Committee. This is an area highlighted in the Institute’s submissions to EC and the UK House of Lords!

Stay tuned, still more to come!

Thursday, February 10, 2011

EC conference on Financial Reporting and Auditing – Day 1: Financial Reporting

Day 1 of the European Commission roundtable in Brussels started - with a bang - with the opening address from Jonathan Faull - Director General for Internal Market and Services, European Commission.

Speaking to a packed room of nearly 450 international delegates, Mr Faull sent a clear and strong message that the financial crisis and economic downturn in Europe and other countries is 'still on' and, therefore, the discussions of the next couple of days would be focused on solutions.

Mr Faull’s keynote address 'A Time for Change' highlighted two areas of financial reporting, these being financial accounting standards convergence and governance around the IASB.

He stated that the EC decision to adopt IFRS in 2005 for their capital markets was 'the right one' and he recognised that 2011 should be an important year for convergence. He referred to the obvious example of the United States but talked about other countries as well. A salient point here was that whilst convergence was important it should not compromise the quality of accounting standards.

Secondly the issue of governance around the IASB was highlighted for change. It was clear the governance arrangements needed to improve and this will occur through the consultation of a paper issued by the Monitoring Board.

The widely anticipated roundtable event should provide some interesting insights into the EC's audit reform agenda, as well as IFRS, with some high profile speakers including the incoming IASB chair Hans Hoogervorst and EC Internal Markets boss Michel Barnier.

Tomorrow will cover EC audit reform and we expect strong opinions being voiced, starting with Michel Barnier (Commissioner for Internal Market and Services) at 9.45am Brussels time.

Stay tuned - much more to come.