31 January 2012

BUSINESSEUROPE: Alternative approaches to enhance the audit of financial statements and accompanying measures

Audit is 1) an integral part of the financial environment. It should 2) provide an accurate opinion of whether a company’s financial statements are true. It is thus 3) central to confidence in the marketplace and 4) key for companies’ access to finance.

BUSINESSEUROPE is therefore strongly in favour of enhancing the quality of audits. It supports efforts to ensure that European companies have access to high quality audits and that auditors operate independently.

Philippe de Buck, director general of BUSINESSEUROPE, addressed four important issues that are central to the debate about the future of audit policy:

1. the role of the auditor
2. the scope of audits
3. governance and independence of audit firms
4. how to increase competition.

1. The role of the auditor

The fact that companies’ financial statements are audited means that the auditors provide “reasonable assurance” that the financial statements as a whole are free from material misstatement, whether due to fraud or error. Through various procedures, such as identification of a company’s risks, assessment of internal controls, discussion with management, auditors seek to exclude the risk that financial information is materially misstated.

This does not mean that the accounts are entirely free from misstatements. “Reasonable assurance” does not mean “absolute” assurance although it should be close to that.

2. Broadening the scope of audits

BUSINESSEUROPE is not in favour of larger audit opinions describing for instance business risks, for example related to the competition situation, technological developments, or socio-political events. If business risks are material, then management should provide this information in the financial statements. If the auditor finds that information should have been included, then the auditor has to consider whether to qualify the opinion.

The Commission should also not make proposals that force auditors to give assurance on forward-looking information. Auditors cannot control management decisions, new strategic initiatives, mergers etc. It is thus nearly impossible to gather sufficient audit evidence to issue any form of assurance on forward looking information.

3. Governance and independence of audit firms

Audit firms should strengthen their corporate governance and organisational requirements to mitigate conflicts of interest further and reinforce their independence.

Primarily, it is the task of supervisors to control whether independence requirements are met. They have the power to determine that an auditor should not perform an audit in case there is a problem.

4. Increasing competition

Given the strong concentration on the audit market, the emergence of new entrants is certainly desirable. Companies should be able to choose from a variety of firms, and BUSINESSEUROPE favours competition and new entry in the market.

Currently there is no single market for the provision of audit services. Audit services are excluded from the Services Directive and there are many barriers to integration of the European audit market. Consequently, cross-border mobility of audit professionals is low. That is why proposals for a pan-European passport for auditors should be supported.

Requiring joint audits is not the right solution and should not be re-introduced in the debate. They would burden companies without resolving limited choice in a very concentrated market.

Full speech

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