COM Consult Nov 08 Controle Struct Audit firms - EuropeanIssuers position 20090305

Paulo

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EUROPEANISSUERS COMMENTS TO THED IRECTORATE GENERAL FORI NTERNAL MARKET ANDS ERVICES WORKING PAPER: CONTROL STRUCTURES INA UDIT FIRMS ANDT HEIR CONSEQUENCES ON THEA UDIT MARKET NOVEMBER 2008 POSITION 6 March 2009 The European Commission published in November 2008a consultation on the ownership rules that apply to audit firms. The study on whi chthis consultation is based analyses whether changes to those rules might help improve ocmpetition in the audit market, in particular for large international audits. The study recognizes that restrictions on access t ocapital are only one of several potential barriers to entry. In our view barriers are causebdy the necessity for audit firms to have: (a) international coverage; (b) expertise suited to the size, complexity vaenrsdi tyd iof business situations; (c) a decent number of audit staff and (d) good reputation as perceived by investors,se ras s ouf financial statements. Those needs, which are essential for internationaal udits, imply the following: - I mportant investments are necessa rfyor a smaller audit firm to enter the internationl aaudit market (to attract, train and retain staff;u ibld a network, adapt the internal structure; compete with the largest audit firms oann oligopolistic market,…); - Ther eturn on equity investments misost uncertain if the expansion of a smaller audit firm is based on an internal growth model, rather than na external growth model (e.g. ...

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• Publié par: Suib
• Nombre de lectures: 31
• Langue: English

Extrait

E UROPEAN I SSUERS COMMENTS TO THE D IRECTORATE G ENERAL FOR I NTERNAL M ARKET AND S ERVICES W ORKING P APER : C ONTROL S TRUCTURES IN A UDIT F IRMS AND T HEIR C ONSEQUENCES ON THE A UDIT M ARKET N OVEMBER 2008 POSITION 6 March 2009 The European Commission published in November 2008 a consultation on the ownership rules that apply to audit firms. The study on which this consultation is based analyses whether changes to those rules might help improve competition in the audit market, in particular for large international audits. The study recognizes that restrictions on access to capital are only one of several potential barriers to entry. In our view barriers are caused by the necessity for audit firms to have: (a) international coverage; (b) expertise suited to the size, complexity and diversity of business situations; (c) a decent number of audit staff and (d) good reputation as perceived by investors, as users of financial statements. Those needs, which are essential for international audits, imply the following: -Important investments are necessarya smaller audit firm to enter the international for audit market (to attract, train and retain staff; build a network, adapt the internal structure; compete with the largest audit firms on an oligopolistic market,…); - Thereturnon equity investments ismost uncertainif the expansion of a smaller audit firm is based on an internal growth model, rather than an external growth model (e.g. combination of several smaller firms with existing clients); this is all the more so as audit 1 business assets – human capital, which is the most important expansion factor- are intangible and volatile; in addition as the investment comes within a long term horizon and is far from being liquid.The growth of audit firms thus has essentially been based on external growth, under a step by step approach; moreover second tier audit firms generally merge with the largest audit firms, without then improving competition in the international audit market; - Audit firms and investors may useother sources of funding than equity instruments.

1 Ref. to question 7.

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* * * We see a need for not reducing the current number and structures of the audit firms’ 2 networks .At the same time, for the reasons mentioned above, we believe it is doubtful that changing ownership rules might contribute to significantly attract investors and 3 improve competition in the audit market, at least on its most concentrated segments. From an audit client perspective, it is essential that any relaxation in ownership rules, if any, 4 be envisaged only in conjunction withappropriate measures and safeguardsto continue to meet the three following objectives: -auditor independence from investors: auditor independence, which is essential for the efficient functioning of capital markets, should be ensured through the firm structure, other appropriate safeguards and specific regulatory controls by audit oversight bodies. Investors should be prohibited to intervene in the audit process; - confidentiality: there must be no access to and use of audit data and audit client data by investors; -audit quality: expansion, competition and the search for returns on investment should not impair the quality of the audits and the credibility of financial statements. As the objective is to improve competition in the audit market – in particular in the market for large international audits -, we would kindly recommend thatthe Commission monitor with careful attention any purchase of an audit firm that would be envisaged by the 5 largest audit firms. * * * Capital does not seem to be the main reason causing the concentration on the audit 6 market . Actually, the balance sheet of the biggest networks show that they perform more 7 legal and consulting services than auditing services which typically do not need capital. Also, it isquestionable whether the concentration on the Big Four is a problem of supply or of demand in the audit industry. Mid size networks already exist even if very few of them are used by listed companies. 2 Ref. to question 2. 3 Ref. to question 3. 4 Ref. to question 4. 5 Ref. to question 5. 6 The concentration of audit works to the big 4 is relevant (100% FTSE 100, 96% FTSE 250, 80% all listed firms in UK but, interestingly, decreasing from84% in 2years: there was an increasing audit work for the 5 audit firms next to the Big Four). 7 The pure audit revenues of the Big Four in UK represent only 25% of the total revenues; 60% of revenues comes from non audit fees to non audited entities (see Icaew-FRC 2008 study).

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We wish to point out that some regulations may further limit the choices of issuers for audit firms: -the organization of the groups of companies: issuers are basically obliged to go to the Big Four networks (see the Oxera study), as they are typically organised as a group of companies, often spread over many countries. In particular, the rules on the responsibility of a group auditor (in some cases the same auditor of the consolidated accounts) typically induce the auditor to “trust” only members of his network to audit the annual accounts of controlled companies. In theory, it is possible to have different auditors, but recent critical cases (for instance Parmalat) show the inefficiency of the exchange of information between different auditors. -the rules on independence, incompatibility with performing non audit services and rotation of partners(and in some countries of audit firms); -the fact that any audit firm, big or midsize, is due to apply the same auditing standards: Directive 2006/43 requires the same auditing standards to be applied for audit services rendered to both listed and non listed companies. A last issue to be considered is that oftransparency of audit firms. Article 40 of the Directive 2006/43 goes in the right direction but unfortunately is one of the least transposed. Wesuggest considering the merits of an adapted Corporate Governance Code for audit firms that would not put too much emphasis on non executive directors. This code could be subject to a “comply or explain” system with respect, for example to transparency on the allocation of fees and revenues within the network. * * * ________________________ EuropeanIssuersa pan European organisation set up to promote the interests of issuing companies. Its is members are national associations and companies from 15 European countries counting together some 9.200 listed companies with a combined market value of some € 8.500 billion. As such it represents the vast majority of publicly quoted companies in Europe. The members of EuropeanIssuers come from various sectors including automotive, nutrition, energy, health care, construction, financial services and many more. What brings them together in EuropeanIssuers is that they are all owned by the public, making them subject to an impressive set of complex and stringent rules and regulations. Through EuropeanIssuers listed companies can engage in direct discussions with the decision makers at European, trans-Atlantic and global level. Typical areas of interest include shareholder rights, corporate governance, transparency, clearing and settlement as well as financial reporting and auditing. Our ultimate goal is to achieve fully integrated, liquid and well functioning European financial markets. More information can be found onwww.europeanissuers.eu

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