Significant tightening of consultancy and advisory services provided by the external auditors in the EU will affect the consultancy/advisory
The Danish and the EU audit industry are confronted with continued massive pressure on many fronts. The most recent event is the upheaval caused by the sudden and surprising merger of KPMG's Danish activities in E & Y.
The pressure on the big audit companies is due to reduced auditor fees, severe competition on the advisory and consultancy activities. However, the EU commission's agenda will result in significant changes (over the coming years) to increase the independence, relevance and quality of audit. The effort will provide for a robust framework for auditor independence, and corporate governance provides a list of prohibited services in relation to non-audit services.
The original legislation required some (but not all) audit networks to be 'audit-only' within the EU, limit the non-audit services to audit clients and require mandatory firm rotation after a maximum of six years in the original EU proposal.
The mandatory rotation of audit firms is now extended to 10 years; however the significant pruning of the advisory and consultancy tasks that the statutory auditor can deliver within other advice continues to be an issue for the big 4, even though the expected advisory limitations are quite limited that earlier proposed by the EU commission.
To a large degree the requirement that auditors improve the quality requirements has been left to be decided by each country by govt. legislation or by the local CPA Associations in the EU. In Denmark the local CPA Association, has presenting 17 proposals for quality improvement, Governance in accounting firms, and focus on the new audit trends.
The new trend is to follow the recommendations of good corporate governance for UK accountants through out the EU. These are primarily the recommendations associated with external professionals to ensure independence of the management of the audit and additional issues around reputation FSA disclosures for non-compliance and good corporate governance.
The agreement reached recently between the European Parliament and EU Member States on the reform of the audit sector is considered to be the first step towards increasing audit transparency and quality. Depending on the new EU commissioner after Mr. Barnier (summer 2014) and performance of local FSA on audit issues in the member countries, further actions could be proposed by the new EU commission.
The new rules also provide tools to limit the risk of conflict of interest. To avoid the risk of self-review, several non-audit services are prohibited under a strict 'black list', including stringent limits on tax advice and services linked to the financial and investment strategy of the audit client. In addition, a cap on the provision of non-audit services is introduced.
As a result of the above restrictions it could be expected that the consultancy/advisory divisions of the big audit companies will focus on providing non-financial, non-tax related services like; Corporate Social Responsibility or Environmental Social Governance or anti- Bribery, Fraud and Corruption implementations and processes.
- Focus on investor: The new rules will require auditors to produce more detailed and informative audit reports, with the required focus on relevant information to investors.
- Enhanced transparency: Strict transparency requirements will be introduced for auditors with stronger reporting obligations vis-à-vis supervisors. Increased communication between auditors and the audit committee of the audited entity is requested.
- Better accountability: The work of auditors will be closely supervised by audit committees, whose competences are strengthened. In addition, the package introduces the possibility for 5% of the shareholders of the company to initiate actions to dismiss the auditors.
- Prohibition of certain non-audit services: Audit firms will be strictly prohibited from providing non-audit services to their audit clients, including stringent limits on tax advice and services linked to the financial and investment strategy of the audit client. This aims to limit risk of conflicts of interest, when auditors are involved in decisions impacting the management of the business. This will substantially limit the 'self-review' risks for auditors.
- Cap on the provision of non-audit services: To reduce the risks of conflicts of interest, the new rules will introduce a cap of 70% on the fees generated for non-audit services others than those prohibited based on a three-year average at the group level.
- The above restriction will create a need for a major international consultancy company, which is able to provide the same quality services that currently are provided by the BIG 4, but with a different approach on experience, rate, delivery and insight.
- More choice: In order to promote competition, the new rules prohibit restrictive 'Big Four only' third party clauses imposed on companies. Incentives for joint audit and tendering will be presented, and a proportionate application of the rules will be applied to avoid extra burden for small and mid-tier audit firms. Tools to monitor the concentration of the audit market will be reinforced.
The above agreement is still subject to technical finalisation and formal approval.
