While the audit reforms, that have been adopted by the EU and are to be implemented from 17 June 2016, are viewed as a cause for complications in the financial audit process, some firms see this as an opportunity to enhance their value proposition and increase their business footprint.
Including the mandatory firm rotation, the reforms related to financial audit for companies registered in the EU would become applicable.
And this is not only limited to companies based in the EU region but encompasses all subsidiaries that are registered in any EU member state. Such companies would also have to conform to new audit rotation rules and restrictions on non-audit services. EU independence requirements also need to be followed by the audit firms that are appointed for this purpose.
For companies based outside of the EU, the new regulations mean that they would have to bring in sweeping changes, coordinate with their European subsidiaries and obtain professional guidance from accounting firms with EAR experience.
The mandatory rotation of audit firms is an opportunity that companies engaged in the practiced are looking forward to. Such companies are given with an opportunity of expanding their valuation offering.
The EU members and the auditors are however preparing feverishly to adhere to the new regulations. The primary aim of the regulations is to ring in measures to enhance confidence in the quality of audits and increase the value of auditor reporting to the investor community.
"The Audit Regulation and Directive is large and complex. We are working closely with professional bodies to make sure the new regulatory regime works as effectively as possible,” says Stephen Haddrill, FRC chief executive of Financial Reporting Council of UK.
"We must ensure that it builds on the progress already made in the UK and that the regulatory regime that emerges provides confidence to investors and to firms by being fair, understandable and independent," Haddrill adds.
“American companies with a presence in the EU would be affected by the new regulations. American companies must anticipate sweeping changes and coordinate with their European subsidiaries, as well as getting professional guidance from an accounting firm with EAR experience,” says Fatemeh Jailani, European affairs project director at Mazars Group.
“EU is generally interested in improving financial stability, and new regulations naturally go this way. Hence a bigger focus on transparency, good governance and obviously preventing conflicts of interests. In that framework European regulators have now required auditors to rotate,” says Yann Magnan, head of European valuation practice at Duff & Phelps, which is among the global leaders in valuation services and financial advising.
But how is the mandatory rotation helping firms engaged in the business of audit and valuation?
"Valuation is one of the offers that creates the most significant conflicts of interest with audit," Magnan of Duff & Phelps says. "Mandatory rotation is forcing market shares to switch; it creates uncertainty and an environment where clients of these auditors need to think how they deal with valuation," he adds.
The aspect of transparency that has driven the formulation and adoption go the new EU audit regulations is a must requirement for all firms in the EU as well as elsewhere.
In fact, the basis of formation of the new EU audit regulations were wrongful audit and financial reporting standards by some companies. There were several accounting firms that were tarred with scandal when Enron and WorldCom went bankrupt. Limited and sometimes unreliable information was passed on to investors by auditing firms who failed to report auditing errors, investigations found. There were also conflict of interests that resulted in this.
“These firms offered other services that generated more revenue than the audit, the integrity of the audit was compromised. They tended to operate with the goal of reducing costs and avoiding legal proceedings at the expense of relaying accurate data so that investors could make informed decisions,” says Louis Osmont, partner in the accounting firm WeiserMazars, with experience in assisting European companies in setting up affiliates in North America.
This aspect of conflict of interests is echoed in the voice of Yann Magnan of Duff & Phelps, who has strong experience of dealing with C-level clients from the world over.
Stressing the importance on transparency in financial reporting, he explains how firms like Duff & Phelps take a stand on the new regulations: “we are an alternative to some of non-audit services offered by the Big Four, without the conflict of interests that the Big Four may have with their Audit services, all the more since the new European regulations require auditors to rotate every 6 or 12 years.”
Transparency and greater responsibility towards the investors is, in actual fact, the spirit of the new regulations.
“The spirit behind the reform lies primarily in a desire for reinforced governance by increasing the role of the Audit Committee and introducing a fair and transparent tendering process for the selection of the auditor(s),”says Paul Giglio, a partner at Mazars Malta.
For European valuation and assessment firms, the new regulations have also thrown up the opportunity to increase business footprint. Duff & Phelps is a prime example of this which would stand to gain a lot from their cross-sector expertise. Such firms, with their knowledge of new EU audit regulations, can now offer their services for European subsidiaries of foreign companies.
Time however is running out for companies with public entities in Europe, warns Hywel Ball, EY's UK head of audit. "Now that the regulators are on the home straight, time is running out for anyone who thinks they can start planning for these changes some other time,” alerts Ball.
