Two pairs of eyes on the review, why not?

New proposal from EU will strengthen the quality of audit across Europe


The article from the Danish Business Magazine is in Danish, but you can read a summary here:

The French Commissioner’s proposals for an audit market reform

The auditing industry’s four heavyweights – KPMG, PwC, Ernst & Young and Deloitte – were probably aware that EU Commissioner Michel Barnier, who is responsible for internal markets and services, was not exactly showering them with warm thoughts. But the fact that he had it in for them as much as he did took them by surprise.

The French Commissioner’s proposals for an audit market reform – a regulation is the EU’s toughest measure – will have significant consequences. And since it was presented, the noble body of auditors has been up in arms.

Firstly, Michel Barnier wants to separate pure audit and non-audit services such as consultancy. Secondly, he wants to force companies to change their auditors every six years – a period which can, however, be extended to nine years if a company accepts voluntary joint audits.

While this is just a draft regulation, signs are that the auditors will not get off the hook, despite intense lobbying.

Some auditors are over the moon: From the major auditing firms, it is easy to get the impression that Michel Barnier is on another planet.

But in fact, several smaller players are delighted with the proposals, which have also been one of Barnier’s main aims: To break up the big four and make space for smaller players.

A partner of the smaller auditing firm of Mazars, Pia Lillebæk, is delighted with the draft, even though she agrees that the current proposal will not raise standards.

“I am not in any doubt that my colleagues have internal guidelines to prevent conflicts of interest. However, it is a problem when the general public starts having doubts,” she says, mentioning the public question mark whether the qualification requirements were met in DSB and Amagerbanken.

In her view, it is crucial that the auditors’ credibility is intact.  Mazars, which is based in France with 13,000 employees in 67 countries, operates as a ‘pure auditing firm’. The firm never advises its so-called PIE clients, for whom they conduct audits, instead referring them to external consultants.

Pia Lillebæk believes that forcing companies to change their auditors will not in itself enhance quality. But if companies decide to employ the same auditor for nine years by allowing two different auditors to conduct a joint audit, then it will.

The argument against a ‘joint audit’ is usually that it is more expensive.  However, a new intra-national study from HEC Paris, the University of Ulm in Germany and Jaana Kerrunen in Finland concludes, on the basis of extensive study analysis, that this argument does not hold water. In fact, the study shows that the price will increase by max. 3 - 5 per cent.

Joint audits were actually phased out in Denmark because they did not work as intended. So why reintroduce them?

Pia Lillebæk from Mazars says:

“Joint audits improve quality, and they ensure diversity.  And they prevent conflicts of interest. They also fuel a healthy scepticism – we have several excellent examples of this.”