The EC proposals for audit reform: A costly mistake

John Cridland
THE European Commission has pulled off some feat with its proposals for audit market reform this week. It has united businesses, investors, the Big Four (Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers) and even on some points emerging and mid-sized auditors in their criticism of the proposals.

How? Because the measures the Commission proposes won’t deliver its stated objectives of improving audit quality and independence, nor will they boost competition and choice. What they will do is add to businesses’ costs at a time when the focus should be on promoting growth and job creation. The Commission’s own impact analysis estimates that this could add up to €150,000 (£129,000) a year in extra compliance costs for each large company. And the damage doesn’t stop there.

Take the proposed ban on auditors providing non-audit services to their clients. Firms typically turn to their auditor for advice when they need a quick answer or someone who understands their business in detail. Forcing companies to go elsewhere could make the difference between success or failure in addressing the issue.

The proposal to force companies to rotate their auditor every six years is wrongheaded. Companies should regularly review their choice of auditor, but this is better done on a more flexible basis, with companies that fail to do so having to explain why. Imagine having to rotate auditors in the middle of a period of major business upheaval.

However the Commission is right to raise questions about concentration in the audit market and what would happen if one of the Big Four fails.

Better contingency planning to ensure the supply of quality audits to the market in the event of a failure would help mitigate this risk.

Regulators, investors and audit firms must also work together to increase competition in the market. We also need to tackle barriers to entry and growth. A good example of this is removing measures that restrict choice, such as banking covenants that specify a Big Four audit.

It’s now down to MEPs to focus on the critical questions as the baton passes to the European Parliament.

Will the reforms prioritise audit quality? Are they market-driven to boost choice? And can they meet these objectives without adding to businesses’ costs and damaging growth?

It’s right to look at ways to increase quality, choice and resilience in the audit market. But these proposals from the European Commission fail to meet the objectives and will be damaging to businesses, just when the focus should be 100 per cent on creating jobs and growth.

John Cridland is the Confederation of British Industry’s (CBI) director-general.