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Europe Mulls Far-Reaching Changes in Audit Firms

September 28, 2011

A draft version of the European Commission’s latest proposals for changes in auditing firms has leaked out and it calls for some dramatic changes.

The proposals include forcing accounting firms to specialize in either auditing services or non-auditing services, according to Accountancy Age. Auditing firms would be barred from providing consulting and advisory services, including tax advice, risk management and valuation services.

The draft green paper, spearheaded by EC internal markets commissioner Michel Barnier, would also require mandatory rotations of auditing firms, an idea that has also been proposed in the U.S. by Public Company Accounting Oversight Board chairman James Doty. Other proposals include joint audits of publicly traded companies by multiple firms, and an end to quarterly financial reporting by some publicly listed companies.

The Institute of Chartered Accountants in England and Wales released a cautious statement about the draft proposals, which are expected to be released next month.

“These are draft proposals which may be amended during the consultation process and before the final recommendations are due to be published in November,” said ICAEW chief executive Michael Izza. “All of the measures proposed will need to be judged against the yardstick of addressing independence concerns, improving audit quality and ensuring market confidence. “Some of the proposals clearly deliver this and should be supported. These include strengthened tendering processes, greater transparency around the process for appointing auditors, the prohibition of 'Big Four' clauses, the introduction of International Standards on Auditing, and enhanced dialogue between auditors and prudential supervisors which was a suggestion proposed by ICAEW as part of our Audit of banks: Lessons from the crisis initiative. Over the coming weeks and months, individual member states will need to give detailed consideration to these proposals and how they will impact on their own domestic markets. The profession, member states, EU institutions, and other stakeholders need to work together towards a proportionate response which is mindful of potential unintended consequences.”

Those proposals could also have a major impact on accounting firms in the U.S. that do business in Europe.

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