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Grant Thornton recommends overhaul of European audit policy

02 Aug, 2011

Grant Thornton, one of the world's largest accounting organizations, recommends an overhaul of European audit policy to respond to the modern business environment. In its official response to the European Commission (EC) Green Paper on audit policy, the global organization welcomes the Green Paper as a 'timely and significant opportunity for change' and encourages a robust dialogue on the issues raised in the Paper. Along those lines Grant Thornton makes three critical recommendations:

  • expand the role of the auditor to ensure better information for investors
  • reduce audit market concentration, and
  •  Encourage growth of private companies by easing access to capital and reducing their administrative burden.

Better information for investors
Ed Nusbaum, chief executive officer of Grant Thornton International explains, "Auditors simply have to do more going forward. We have to play our part in rebuilding confidence in the capital markets. Auditors should have a more valuable role in supporting the markets and wider society."

The EC's current debate on the role of the statutory auditor is a welcome opportunity to assess what investors really need and what model would answer that need. Investors should receive more meaningful information about companies with the aim of demonstrating how management has acted in their interests and how auditors have exercised appropriate professional scepticism.

Ed Nusbaum explains, "Auditors should provide better communication to investors - we need to be more transparent about how we reach audit opinions - and there should be greater transparency about management's decisions in preparing the financial statements. Aside from financial information auditors must work more closely with investors. Their needs are changing so our services must change too."

Auditors could also provide investors with:

  • enhanced communication from the auditor to a company's investors
  • assurance opinions on increased narrative disclosures in audit committee reports
  • Assurance opinions on other information provided by the company.

Audit market concentration
Investors and regulators are looking for a larger pool of audit providers to address the issues of risk, stability and innovation. The solution to audit market concentration is for more audit firms to have meaningful market share. Grant Thornton recommends three specific actions to dilute concentration:

  • greater investor and other stakeholder involvement in the auditor selection decision
  • companies use of more than one firm to provide their audit and non audit services
  • Removal by regulators of market practices and misperceptions which bias audit firm appointment and serve to direct large corporate audits towards a few large firms.

If the market participants alone fail to deliver an acceptable solution in terms of market stability, resilience and choice then it likely falls to the regulators to act on the market's behalf. European regulators could, for example, guide investors to impose restrictions on market share, measured by number of audits, over time in concentrated sectors of the market.

Audit market concentration is a problem because the potential failure of a major audit firm poses a threat to market confidence. If a major audit firm did fail it would mean significant disruption, with thousands of companies needing to find a replacement audit firm, and leave the European market consisting of too few major firms with the attendant long term hazards of reduced price competition and reduced incentives to maintain audit quality.

Facilitate growth of private companies
Private companies are a driving force behind the European economy and they will be one of the key sectors which leads the economy towards sustained growth. To finance growth companies need ready access to capital at a reasonable cost, and obtaining appropriate assurance on financial information is a vital contribution to the finance process. Grant Thornton recommends a framework for assurance in the EU which is tailored for companies' assurance needs, comprising:

  •  audits in accordance with international standards for those companies that need an audit
  • a different form of assurance for small and medium entities, and
  •  A compilation report for micro entities.

Grant Thornton also supports the EC's goal of reducing the administrative burden for private companies.

Ed Nusbaum concludes, "Grant Thornton will continue to contribute to the development of audit policy. The three areas outlined above are critical for the European economy and capital markets and we must ensure that recent momentum is maintained to build sustainable structures for the benefit of the European Union and beyond."

Grant Thornton's comment letter was submitted to the European Commission on 8 December and is available on our website at www.gti.org.

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