Voices

European Audit Firm Proposals Could Influence U.S. Regulators

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.

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