On April 1st, a group of major institutional investors, including the Head of Corporate Governance Group at BETTER FINANCE’s member organization UKSA (the UK Shareholders’ Association) Roger Collinge, sent a letter to the Financial Times editor welcoming “the rivals to the Big Four”.
Following Interserve’s replacement of its long-standing auditor Deloitte with Grant Thornton, the letter stresses that thisdecision is a “sign of increasing competition in the audit market”. A word of “courage” is also directed to all audit committees that should make every effort to “ensure fair and open competitions that look beyond the Big Four”.
This issue is also being scrutinized on EU-level following the European Parliament’s endorsement of a draft agreement with the Council of Ministers on legislation to open up the EU audit services market beyond the “Big Four” firms and tackle weaknesses in this industry revealed by the financial crisis today.
On 17 December 2013, the European Parliament and the Member States reached a preliminary agreement on the proposal for a Directive amending the Statutory Audit Directive and the proposal for a Regulation on specific requirements regarding statutory audit of public-interest entities. The compromise agreement was endorsed by the Member States at the COREPER meeting of 18 December 2013 and adopted by the Committee on Legal Affairs of the European Parliament on 21 January 2014.
Under the “audit reform package”, auditors in the EU will now be required to publish audit reports according to international auditing standards with the ultimate aim of improving audit quality.
The legislation aims to further clarify the role of the statutory auditor, reinforce the independence and the professional scepticism of the statutory auditor, facilitate the cross-border provision of statutory audit services in the EU, contribute to a more dynamic audit market in the EU, improve the supervision of statutory auditors and the coordination of audit supervision by competent authorities in the EU.
To open up the market and improve transparency, new rules, which will take effect within two years of the package’s entry into force, will prohibit the so-called “Big-4 only” contractual clauses requiring that the audit to be done by one of these firms.
Independence of non-auditing services is also an EU concern: to preclude conflicts of interest, audit firms will be required to abide by rules mirroring those in effect internationally.
The Member States in the Council are expected to formally adopt the texts by mid-April. Publication in the Official Journal of the EU will follow in the second quarter of 2014.
BETTER FINANCE has already expressed its concerns regarding the failure of auditors to provide adequate warnings, the lack of rotation of audit firms and especially the domination of the auditing landscape by a few large auditors that provide audit services to the largest listed companies. The quality of the audit is still of utmost importance for the institutional investors that BETTER FINANCE represents.
For more detailed information, please read the “Rivals to the Big Four are welcome” letter and the European Parliament press release.