The future of accounting and auditing in the EU: Change is coming - but details still unclear
Conference organized by the European Commission, 9-10 February 2011, Brussels
The debate at a conference on the future of accounting and auditing organized by the European Commission on 9-10 February 2011 demonstrated a shared concern that financial reporting and, especially, the audit process needed to evolve to respond to the problems revealed by the international financial crisis. However, it also showed the wide divergence in views over what measures should be taken to deal with these issues. Michel Barnier, the European Commissioner responsible for policy on accounting and auditing, announced that he would be following up the Commission's recent Green Paper on auditing with proposals for changes to the EU law governing auditing later this year.
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The highlight of the first day of the conference, which was devoted to accounting issues, was the address by Hans Hoogervorst, the incoming head of the International Accounting Standards Board (IASB). In his speech In his speech (read transcript here), which provided the first public insight into how he will approach his new role, Mr Hoogervorst stressed the importance of transparency, both in the IASB's own operations and in the financial markets. In this respect, he saw the reporting standards drawn up by the IASB as playing a key role in enhancing transparency in financial markets, which he argued was a precondition for financial stability. However, Mr Hoogervorst stressed that "stability should be a consequence of greater transparency rather than a primary goal of accounting standard-setters". Mr Hoogervorst's comments have already provoked a response from financial regulators. For example, the new European Banking Authority (EBA) has recently argued that decisions on accounting standards need to take greater account of their effect on financial stability (see the EBA's letter to the trustees of the IFRS Foundation).
The conference's second day was devoted to the future of auditing in the EU. The speech by Michel Barnier, the European commissioner responsible for the EU's internal market, set the tone for the debate. Mr Barnier drew attention to the fact that the Commission's recent Green Paper on auditing in the EU (download Green Paper here) had attracted a record 700 responses, showing the level of public interest in the topic. Although Mr Barnier announced that he would be drawing up a draft directive for the reform of auditing in the EU in November 2011, his speech focused more on his main areas of concern, rather than the policy measures that he would be proposing. Topping the list of worries was the concentration of the audit market, with the "Big Four" audit firms auditing 99 out of the 100 firms in the UK's FTSE100 index and just two firms auditing 27 out of 30 firms in the German DAX30. Mr Barnier drew attention to the problems that the failure one of the large firms would cause and discussed some of the suggested solutions, including joint audits to give smaller firms more exposure to large audits, limits on market shares and a "European audit passport" to increase the level of competition in the audit market. Mr Barnier also raised the issue of the role of the auditor, in particular, whether the auditor should take a broader role than checking whether financial reporting rules had been respected, and concerns about conflicts of interest when audit firms had large non-audit businesses.
Reflecting the varied backgrounds of conference participants, Mr Barnier's speech provoked a lively debate on how important these problems were and what, if anything, the European Commission and the national audit regulators should do to deal with them. Vicenzo La Via, the World Bank's CFO, contributed to this discussion on behalf of the World Bank, emphasizing the need to foster innovation so that audits are seen as a way of adding value and not just as a costly burden imposed by regulators (read transcript here for more details). On the issue of concentration in the audit market, the large and small audit firms present at the conference took opposing positions, illustrating how difficult it will be to construct a consensus behind any reform proposals.