New EU rules on financial statement audits limit a client's freedom to choose
05.05.2014
The changes to the EU legislation on the financial statement audits have been made in an attempt to improve audit quality, but there's always a flip side to new legislation.
When setting new legislation one must always weigh up the pros and cons. A good example, here, is the requirement to rotate the auditor every ten years; this limits the client company's freedom of choice,’ contends Professor Lasse Niemi from Aalto University's School of Business.
‘As such, the client is not able to choose its preferred auditor and ends up having to settle for second-best. Having to find a new auditor also incurs costs for the client company. Moreover, it's not entirely clear whether the quality of the service provided improves when a new auditor has to start from scratch,’ says Niemi.
The aim to improve quality does not bear fruit
On 3 April 2014, the European Parliament approved an audit reform proposal, the amendment to the Directive on Statutory Audit, several years after the process began. The aim of the amendment is to improve the quality of audits and financial reporting. Quality, here, refers to both the actual quality and the market-assessed perception of quality, that is, the trust of the markets in the reporting.
‘Another major change is the limiting of the advisory services that an auditor can provide its client. Clients often have a genuine need for advice from their auditor in relation to, for example, complying with complex legislation on financial reporting. Consequently, this advice would improve the quality of the financial reporting. The legislation is based on the downside of the provision of advice that, in carrying out an audit, the auditor ends up examining and evaluating its own choices and, therefore, prevents the auditor from being objective,’ Niemi explains.
Up until now, the EU has largely relied on the auditor’s and client company's own assessment of the threats to objectivity.
According to Professor Niemi, a further problem, here, is the auditor's financial dependency on the client. Naturally, when a client pays the auditor for services other than the audit itself, this dependency increases. This situation will also be restricted by the new legislation.
Environmental Reporting
Experts on auditing have expressed concern about how the providers of financial statement audits will survive in the midst of these changes. On the other hand, there has been a growth in the demand for new non-financial assurance services, for example, verification of environmental reporting.
Companies often combine their environmental and social responsibility reporting with their financial reporting.
In Niemi's eyes, the regulation of the auditing of environmental reporting is still in its early stages. For now, however, the industry standards for these kinds of services are being self-regulated.
Seminar on Audit Quality and Sustainability of the Profession 19 May 2014
The Department of Accounting at the Aalto University School of Business is organising a seminar on 19 May 2014 in which the changes in and future of the auditing sector will be discussed. The seminar speakers include Professor W. Robert Knechel (University of Florida, US) and Professor Wendy Green (The University of New South Wales, Australia). The language of the presentations is English.
Initial schedule and further information:
http://biz.aalto.fi/en/current/events/seminar_on_audit_quality_and_sustainability_of_the_profession/