Reforms in Europe Raise Concerns in Canada
New European audit reforms will have global implications and, perhaps, unintended consequences, say three prominent Canadian organizations. CPA Canada, the Canadian Public Accountability Board (CPAB) and the Institute of Corporate Directors in Canada (ICD) are primarily concerned about the audit committee and boards of directors losing control when it comes to making the final decision on an external auditor. €The changes will affect more than just Europe,€ says Kevin Dancey, president and CEO of CPA Canada. Dancey, together with Brian Hunt, CEO of the CPAB, and Stan Magidson, president and CEO of the ICD in Canada, voice their concerns about the recent changes in Europe.
Certain audit reforms emerging from Europe are cause for concern. They will affect accountants and businesses globally €" and potentially create unintended consequences.
Since the changes affect more than just Europe, all stakeholders with an interest in the smooth running of global capital markets and high-quality audits need to take note.
CPA Canada, the CPAB and the ICD are concerned about two reforms in particular: mandatory firm rotation and further restrictions and caps on the provision of no audit services by the auditor.
The European process started in the fall of 2010 with the release of the Green Paper on Audit Policy: Lessons from the Crisis, which included a number of proposals to reshape the audit profession in Europe.
The stated intent was threefold: address the threat of auditors becoming too close to clients because of long audit tenure; reinforce the independence of auditors who receive substantial fees from no audit services; and provide companies a wider choice in deciding which audit firm to engage.
Let's consider some potential effects of the European reforms:
€ Global regulatory convergence and consistency will be affected if major countries outside Europe do not adopt these measures. Indeed, even within Europe, countries will have the ability to diverge from the new requirements.
As the International Federation of Accountants warned in a release on January 7, the "failure [to refocus on regulatory convergence] is stifling business confidence, economic stability, and ambitions for a sustainable recovery."
€ Audit costs will likely increase as firms devote more resources to tendering for new work and take additional time to learn about new clients.
Who is going to pay for these increased costs? Will this time and effort distract from a focus on quality audits? Will it be especially detrimental if market forces are simultaneously putting downward pressure on audit fees?
€ Choice of audit firm will be affected. Some argue that these reforms will increase the number of audit firms that will compete for each engagement. However, audit firm concentration is just as likely to increase.
The reforms will also reduce the choices an audit committee has when changing auditors or identifying firms to provide no audit services.
€ Change may be mandated for a board of directors at an inopportune time, which may preclude a board from retaining the firm it believes provides the best quality audit. The board, with the approval of shareholders, should retain the right to decide on the auditor and when a change should be made. Furthermore, the measures could undermine an audit committee's accountability and responsibility for assessing auditor performance.
Will these reforms reduce risk, improve the audit profession, increase audit quality and effectiveness, better serve the entities that are audited, better meet investor needs and the public interest, and increase the likelihood of fewer audit failures in the future?
We believe that audit quality may in fact suffer. Firms and audit regulators in Europe will likely challenge this assessment and strive to ensure audit quality is not affected. We hope they are correct. Time will tell.
Certain audit reforms emerging from Europe are cause for concern. They will affect accountants and businesses globally €" and potentially create unintended consequences.
Since the changes affect more than just Europe, all stakeholders with an interest in the smooth running of global capital markets and high-quality audits need to take note.
CPA Canada, the CPAB and the ICD are concerned about two reforms in particular: mandatory firm rotation and further restrictions and caps on the provision of no audit services by the auditor.
The European process started in the fall of 2010 with the release of the Green Paper on Audit Policy: Lessons from the Crisis, which included a number of proposals to reshape the audit profession in Europe.
The stated intent was threefold: address the threat of auditors becoming too close to clients because of long audit tenure; reinforce the independence of auditors who receive substantial fees from no audit services; and provide companies a wider choice in deciding which audit firm to engage.
Let's consider some potential effects of the European reforms:
€ Global regulatory convergence and consistency will be affected if major countries outside Europe do not adopt these measures. Indeed, even within Europe, countries will have the ability to diverge from the new requirements.
As the International Federation of Accountants warned in a release on January 7, the "failure [to refocus on regulatory convergence] is stifling business confidence, economic stability, and ambitions for a sustainable recovery."
€ Audit costs will likely increase as firms devote more resources to tendering for new work and take additional time to learn about new clients.
Who is going to pay for these increased costs? Will this time and effort distract from a focus on quality audits? Will it be especially detrimental if market forces are simultaneously putting downward pressure on audit fees?
€ Choice of audit firm will be affected. Some argue that these reforms will increase the number of audit firms that will compete for each engagement. However, audit firm concentration is just as likely to increase.
The reforms will also reduce the choices an audit committee has when changing auditors or identifying firms to provide no audit services.
€ Change may be mandated for a board of directors at an inopportune time, which may preclude a board from retaining the firm it believes provides the best quality audit. The board, with the approval of shareholders, should retain the right to decide on the auditor and when a change should be made. Furthermore, the measures could undermine an audit committee's accountability and responsibility for assessing auditor performance.
Will these reforms reduce risk, improve the audit profession, increase audit quality and effectiveness, better serve the entities that are audited, better meet investor needs and the public interest, and increase the likelihood of fewer audit failures in the future?
We believe that audit quality may in fact suffer. Firms and audit regulators in Europe will likely challenge this assessment and strive to ensure audit quality is not affected. We hope they are correct. Time will tell.
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