Draft legislation has been released and public debate is critical in ensuring a positive and welcome outcome of the EU reforms for businesses operating under the proposed legislation, but also the auditing sector worldwide.
The extent of economic distress and collapse of businesses during the global financial crisis exacerbated the perception of a need for change in the sector, and the difficulty facing businesses in the EU is not unfamiliar to the challenges facing all businesses globally, including in Australia.
What’s proposed
The draft legislation contains a raft of measures aimed at increasing competition and improving quality of the services provided in the auditing sector. The creation of a more dynamic audit market is essential to ensuring the audit industry is progressive and effective in a difficult financial climate. However, a package of measures is essential as no single measure would adequately address the quality and competition concerns raised.
The EU needs a package of practical and pragmatic solutions to improve quality and competition in the audit market to ensure the auditing sector continues to perform effectively and instills confidence in the businesses it serves. The focus must remain on providing a framework for the highest standards of audit quality to benefit investors and other key stakeholders.
Some observations
There are concerns that the initial proposals have already been weakened, particularly with regard to implementing a requirement for mandatory joint audits, which have the potential to strengthen confidence in the audit process and, importantly, improve the diversification of the audit market. The prohibition of clauses limiting the choice of auditor and mandatory tendering for public interest entities are examples of measures aimed at increasing competition.
While the principle of mandatory rotation of audit firms is credible, there is also concern that rotation every six years is too aggressive. The proposal to prohibit the provision of non-audit services to non-audit clients would have significant consequences in the profession.
Ultimately any changes need to take into account their collective impact on the audit market and consider the needs of investors, the profession, the economy and public interest. For this reason it is critical that these reforms are debated thoroughly, with input from a variety of stakeholders, before being finalised. The EU has an important role to play and the capacity to contribute to enhancing global financial stability and fostering economic growth.
Audit reform at home
While the Australian market has been largely protected from the volatile economic climate, there is no doubt that it is volatile and that the Australian business environment is experiencing difficulties. The mining boom in Queensland and Western Australia is helping to prop up business and the economy nationally but can also mask difficulties in other areas such as manufacturing and in the SME market.
Proposals to reform the Australian auditing sector have been comparatively conservative and focus more on transparency of audit firms and public reporting of audit deficiencies than competition in the audit market. This could be a reflection of the stronger perception of a quality audit profession in Australia when compared to the perception in other jurisdictions.
Nevertheless, it is vital that the auditing sector continues to assist in providing stakeholders with confidence in the profession and a strong and diverse market for audit services.
Any changes to come out of the EU audit reform will ultimately impact on the Australian audit market, either directly or indirectly, which means that audit professionals and Australian businesses need to keep a close eye on the developments to know where the auditing sector in Australia might go next.
