More Debits & Credits Posts

European Audit Firm Proposals Could Influence U.S. Regulators

December 1, 2011

A draft law that would force vast changes in the auditing profession in Europe is likely to have ripple effects in the U.S.

The European Commission proposals, issued by Internal Markets and Services Commissioner Michel Barnier on Wednesday, include far-reaching requirements for the Big Four firms to split up and rebrand their audit and advisory practices, as well as rules for mandatory audit firm rotation among public companies in the European Union (see Europe Proposes Splitting Audit Firms).

The proposals were among the topics under discussion by officials from the Securities and Exchange Commission and the Public Company Accounting Oversight Board during an auditing conference Thursday at Baruch College’s Zicklin School of Business in New York. Among the proposals are changes in the audit reporting model, for which the PCAOB has already issued a concept release.

“I think for many reasons it’s worth reading the EC’s proposals that came out yesterday,” said PCAOB chief auditor and director of professional standards Martin Baumann. “They sort of jumped the gun on this issue a little bit, because the [International Auditing and Assurance Standards Board] has a project on this, and they have proposed new regulations which would amend the audit report in many of the ways we’re talking about here today, including laying out the details of the level of materiality the auditor would consider, identifying key areas of the risk of a material misstatement, including areas of measurement uncertainty, and on and on. They have added requirements to the audit report that will be voted upon by the European Parliament sometime in the future. I think it’s a pretty interesting document to read.”

Baruch College professor Douglas Carmichael asked the panelists about the European Commission proposals for mandatory rotation of audit firms every six years, and separation of audit and consulting services at large firms. “That didn’t work out too well for Andersen here,” he quipped. “These certainly would be major changes in the relationship between public companies and their auditors.”

Mandatory audit firm rotation has already been proposed in a concept release by the PCAOB and has received about 75 to 80 comment letters, Baumann noted. Some of the comment letters recommended that the audit committee go through a mandatory “re-tendering” of the audit firm and make it clear that the auditing firm is supposed to work for the audit committee and not for management. “That would be a powerful change in itself,” he said.

Brian Croteau, the deputy chief accountant for the SEC’s Professional Practice Group, said he was still studying the European Commission proposals, which had only come out a day earlier. “My initial reaction in reading them is that there are at least some aspects of them relative to auditor independence that are very familiar to us because they are in SOX or in our rules today, or at least partially, or they overlap,” he said. “In some ways it builds upon what’s in Sarbanes-Oxley, but in other ways it goes beyond it. I think it’s important to consider all of those ideas.”

A proposal for firms doing joint audits together, which was watered down in the document that emerged from the European Commission after encountering stiff resistance from auditing firms, is not a project the PCAOB currently has on its agenda, Croteau noted. “I think I have more questions than answers about how that would work and what the incentives would be,” he said.

He and Baumann emphasized that it was important to find ways to enhance auditor independence and objectivity and professional skepticism. Baumann said he had not seen any comment letters on the PCAOB’s concept release saying that joint audits could provide a solution in those areas. “Most of the markets that have had joint audits, and there were several, have dropped out over the years,” he noted.

Comments (2)
Recently the Govt. of India made a proposal to give freedomn to the banks to appoint their own auditors and it was opposed not only by the Institute of chartered Accountants of India for maintaining the independence of auditors but by the Bank managements themselves that they did not want to take the responsibility for appointing auditors since the present system of audit by joint auditors at the central level and various brach auditors by choosing the auditors from the annual panel of auditors released by the Reserve Bank of India, is working well. Thus there is no monopoly of auditors with regard to banks in India.
Similarly for public sector enterprises, the Auditor General of India prepares a panel of auditors approved for audit of these institutions out of the applications received from the willing practising professional firms and individuals against specifications with regard to number of years of experience and the number of partners and employees and classified into four categories so that the different sizes of firms may be appointed as single or joint auditors, as directed by the office of the Auditor General of India out of the categories suitable to them. The audit fees are fixed by the respective companies' board of directors and any fee for other services than statutory audit should not exceed 50% of the audit fees. This also is working well since more than 30 years now.

If one observes the inspection Report of the Big 4s by PAOB in US as well as by FRC in UK, most of the serious deficiencies are found in audits by these big 4s only.
Posted by kswamy | Sunday, December 04 2011 at 6:31AM ET
Joint auditors and auditor rotation are being successfully carried out in India in both Public sector banks and other public sector company audits. In the case of public sector banks, there are four to five joint auditors depending on the size of the bank. The branches of these banks are independently audited by other local auditors mostly unconnected with the statutory central auditors. The Reserve Bank of India, the central bank, fixes the fees on a scale on the basis of the amount of loans and advances outstanding at tehyear end of the various banking activity of the branches and lump sum fee for auditing the corporate office and other service branches which have non banking activities.
The central bank prepares the list of auditing firms entitled to audit these banks on the criteria established for empaneling on applications received from the practising professional firms, classifies them into four groups based on the number of years of experience and the number of partners and employees the firms have.
The respective banks allot the branches for audit on the criteria established on the basis of the size of loans and advances and the geographical convenience of the branches and the size of the firm, from the panel of auditors published by the Reserve Bank of India, every year. Thus the auditors are independent and have to give a declaration before accepting the audit that they or any of their partners, are not related to the directors of the bank or indebted to the bank in any amount exceeding Rs.10,000(about $200), and that they are not connected with that bank for which they are chosen, and any of its branches as internal auditors or revenue auditors or undertakig any assignement of work, before accepting the audit.
This is working very nicely for the past many years.
The auditors are rotated/replaced every three/four years for the outstation branches and the central auditors are rotated in a way one third is replaced every year in rotation. The central auditors divide the work among themselves with regard to the areas to be looked into by each of them.
Detailed guidlines are given to all the auditors by the respective bank headquarters office for special matters to be looked into while completing the audit and submitting the reports.The auditors are also instructed to report whether accounting policies as per accounting standards are followed or not as well as compliance with the provisions of the banking regulation Act and directives of the Reserve Bank of India.
Even big private sector listed companies also used to have joint auditors.
Thus joint audits develop the profession by opening opportunities to newly starting professionals also by exposure to smaller branches.

None of the Big 4 audit firms have opted to audit these public sector banks in India because of joint audit. One non-public sector bank audited by one of the big 4 audit firms went bust a few years ago and the firm were suspended from auditing any banks in India by the Reserve Bank of India.
Now even private sector banks have to have joint auditors according to the directive of the Reserve Bank of India.
So joint audit and fixatin of fees by a central authority will go a long way in improving the performance of audit. They cannot undertake any other sevice for that bank.
Posted by kswamy | Friday, December 02 2011 at 9:07AM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.