Summary of Deloitte response to the European Commission Green Paper |
Below is a summary of the response by the Deloitte member firms in the European Economic Area (Deloitte) to the European Commission Green Paper, ‘Audit Policy: Lessons from the Crisis’ (the “Green Paper”). While the context of the Green Paper is lessons from the economic crisis, a number of the ideas raised have been debated at different forums for a number of years, with varying outcomes. Deloitte recognizes that there are lessons for all market participants from the crisis, and welcomes ideas that will help strengthen the role of audit, encourage financial stability, and further enhance audit quality.
Deloitte firms support the following measures, among others:
Financial Stability
- Formal protocols defining increased communications between the auditors, management and prudential regulators
Reporting
- Refined management disclosures on business model and risks, management judgments and estimates, and going concern status
- Audit committee and auditor reporting on the above
- Auditor disclosure of key items regarding the audit plan
- Auditor reporting on the completeness of the audit committee’s report (to include items such as audit committee procedures undertaken to evaluate estimates, uncertainties, etc.)
Objectivity
- Auditor appointment by shareholders (or audit committees as proxy for shareholders where appropriate)
- Governance codes to strengthen audit committees
- Audit committees approval of audit fees
- Audit Committee approval and disclosure of non-audit services and fees
- One set of rules on non-audit services to be provided to audit clients, complimented by the EU-wide implementation of the International Ethics Standards Board for Accountants (IESBA) Code of Ethics
- Exploration of value of independent non-executive appointments
- Strengthened communication between the auditor and audit committee
Choice
- Auditor choice to be enhanced by market incentives, not regulation
- Audit committee to conduct periodic assessment of audit relationship defined by governance code
- Elimination of “Big 4 only” clauses in contracts
- If there is a decision to tender, mandatory inclusion of at least one non-big 4 firm should be required
- Mechanisms to enable professional capabilities of non-Big 4 to be understood by audit committees
- Develop contingency plans for firm failure in individual markets
Deloitte does not support the following ideas as these run the risk of negatively impacting audit quality, imposing disproportionate costs on business, and weakening shareholder rights.
- Disenfranchising shareholders by having the auditor appointed by a third party such as a regulator
- Mandatory audit firm rotation, mandatory tendering, joint audit or the formation of a consortium to perform an audit
- Any further prohibition of non-audit services beyond the rigorous standards already included in Member State laws implemented to meet the Statutory Audit Directive and the independence standards in the IESBA Code of Ethics
- Certain special provisioning for SMEs such as less stringent internal control standards or further adaption of ISA for SMEs and SMPs (as ISA is scalable)
In recent years, significant regulation has been introduced for the audit profession, including the creation of oversight bodies and more enhanced independence standards, along with more demanding ethic standards. The 8th Directive is yet to be fully implemented and evaluated, and as such, time is needed to determine if further action is warranted.
As an employer of approximately 50,000 people with the intention of hiring almost another 50,000 new graduates over the next 5 years, Deloitte is committed to supporting Europe’s goal to achieve smart, sustainable and inclusive growth for our economies, and believes that the debate on audit needs to take place without losing sight of this key goal.
Download the full Deloitte response or access to the responses as published by the European Commission.
Response to European Commission Green Paper on 'Audit Policy: Lessons for the Crisis'
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