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PwC: European Commission misses opportunity on audit reform

01/12/2011 16:12
The European Commission’s proposals to reform the audit market represent a missed opportunity to learn the lessons of the crisis, meet the needs of investors and help enhance audit quality across the European Union.

PwC strongly supports reforms which enhance audit quality and remove artificial barriers to competition within Europe. There are therefore many aspects of the EC proposals which PwC supports including increased transparency arising from more informative audit reports, stronger audit committees, better two-way dialogue between auditors and financial services regulators, improvements to the mobility of auditors within the EU, and a review of audit firm ownership restrictions.

However, many of the measures proposed by the Commission, such as audit-only firms and mandatory audit firm rotation, will not have a positive effect. Such measures are likely to reduce audit quality and raise costs.

In addition, neither the Commission’s own consultation process nor recent independent survey evidence suggests there is widespread support across Europe for proposals such as audit-only firms and mandatory audit firm rotation.

Evgenios Evgeniou, Managing Partner of PwC Cyprus said: “There are lessons to be learnt from the financial crisis and we fully support evidence based legislative reforms that would enhance audit quality and remove barriers to competition. These include: auditor ‘EU passports’, which would increase mobility for suitably qualified professionals in the European Union; removing any artificial barriers to entry for smaller audit firms such as legal covenants which require the use of a large audit firm; and increased dialogue between the regulators and auditors, which would simultaneously enhance the value of audit whilst addressing other concerns around independence and market structure.

"However, we have to ensure that the focus of the debate remains on audit quality and building confidence in reported financial information, avoiding any superficially attractive proposals which could in practice have precisely the opposite effect for the businesses engaging the audit profession. These companies operate in a global environment and some of the proposals will add significant costs, increase regulatory complexity and threaten audit quality, all at a time of major financial upheaval and when growth is an imperative."