A college classmate of mine who was an unabashed Europhile often lectured anyone within shouting distance about how many of the famous tr
ends throughout history - whether in clothing styles, literature, art, cuisine or automobile design - inevitably began in Europe before gradually making their way across the Atlantic. His ultimate goal was to travel throughout that continent and, with any luck, have a manuscript chronicling his adventures published. Sadly, he fell well below his Hemingway-esque ambitions - save for a protruding stomach and bushy beard - and last I heard he was operating a bookstore/café somewhere outside Lyon.
More recently, however, there's been a groundswell building across the ocean, and rather than haute couture or cuisine, it involves trend-setting of a far more lasting nature - that of sweeping auditor reform. And it has moved beyond the preliminary discussion phase.
Last month, the European Commission proposed a draft law that could potentially split up the largest auditing firms over there, and mandate the use of a separate entity and name for their advisory and non-audit practice units. Introduced by Internal Markets and Services Commissioner Michel Barnier, the proposals seek to clarify the auditors' role and their subsequent response to Europe's financial crisis, as well as to create guidelines to strengthen auditor independence.
But one of the main goals is to create greater diversity (read: choices) of auditing firms, which to no one's surprise is dominated over there, as here, by the Big Four. Auditing firms would face prohibitions on providing non-audit services to audit clients, while the larger auditing practices would be required to divide their audit services from non-audit in an e_ ort to avoid any and all conflicts of interest. And of course, what audit reform measure would be complete without floating the concept of mandatory auditor rotation.
Public companies would be required to rotate their auditing firms after a maximum engagement period of six years, and an audit firm would have to wait four years before engaging the same client again. A joint audit engagement - which is encouraged under the proposal, but not mandatory - would carry a nine-year maximum term.
But wait, there's more. _ e commission also proposed the concept of creating a single market for audit services, described as a "European passport," thereby allowing auditors to practice across Europe once they become licensed in a member state - much like the CPA mobility concept in the U.S.
The draft is obviously designed to enhance and improve the quality of audits throughout the European Union and help restore public confidence in financial statements, particularly with regard to large public institutions, banks and insurance companies.
To be sure, there's been more than a little discussion on domestic shores with regard to auditor reform. Not so long ago, PCAOB Chairman James Doty outlined a laundry list of auditing reform measures, including the oft-mentioned auditor rotation, disclosing the engagement partner's name in the audit report, new standards for broker-dealer engagements, and making disciplinary hearings against audit firms public, to name a few.
To date, there's been no shortage of feedback within the profession about auditor reform in the U.S. Some opine that it's long overdue, while others outline the drawbacks associated with firm rotation and service prohibitions.
But should large-scale auditor reform ever make it here, it will surely be around longer than many transient European imports like extra-wide bell bottoms and sous vide cooking.
