EUROPEAN COMMISSION 
Brussels, 30.11.2011 
SEC(2011) 1384 final 
  
COMMISSION STAFF WORKING PAPER 
IMPACT ASSESSMENT 
Accompanying the document 
Proposal for 
 
a Directive of the European Parliament and of the Council amending Directive 
2006/43/EC on statutory audits of annu al accounts and consolidated accounts 
 
and a  
 
Proposal for 
 
a Regulation of the European Parliament and of the Council on specific requirements 
regarding statutory audit of public-interest entities 
{COM(2011) 779 final} 
{SEC(2011) 1385 final}  
 
EN 2   EN COMMISSION STAFF WORKING PAPER 
IMPACT ASSESSMENT 
Accompanying the document 
Proposal for 
 
a Directive of the European Parliament and of the Council amending Directive 
2006/43/EC on statutory audi ts of annual accounts and consolidated accounts 
 
and a  
 
Proposal for 
 
a Regulation of the European Parliament and of the Council on specific requirements 
regarding statutory audit of  public-interest entities 
TABLE OF CONTENTS 
Introduction ................................................................................................................... ............. 5 
1. Procedural Issues and Consulta tion of Interested Parties ............................................ 6 
1.1. Procedural issues......................................................................................................... .6  
1.2. External expertise and consulta tion of interested parties............................................. 6 
2. Policy context and problem definition ......................................................................... 7 2.1. Policy context............................................................................................................ ... 7 
2.1.1. Financial Statements of comp anies and statutory audit ............................................... 7 
2.1.2. Statutory auditors, audit firms and the audit market.................................................... 8 2.2. Summary of problems.................................................................................................. 9 2.3. Problems particularly affecting the statutory audit of PIEs ....................................... 11 
2.3.1. The question of impaired audit quality ...................................................................... 11 2.3.2. Problem drivers and consequences ............................................................................ 12 2.4. Problems affecting auditors of PIEs and ot her entities that are required to have an 
audit.......................................................................................................................... .. 21 
2.5. Problems in relation to the supervisio n of compliance by auditors with their 
obligations.................................................................................................................. 22  
3. Baseline scenario and Subsidiarity............................................................................. 23 3.1. Baseline scenario........................................................................................................ 2 3 
 
EN 3   EN 3.2. The EU's right to act and subsidiarity ........................................................................ 25 
4. Objectives.................................................................................................................. . 26 
5. Identification of policy options .................................................................................. 26 6. Analysis of Policy Options ........................................................................................ 31 6.1. Policy Options to deal with the role of  the auditor and the scope of audit ................ 31 
6.2. Policy Options to deal with  conflicts of interest ........................................................ 34 
6.3. Policy Options to improve market conditions  for audits of PIEs with a view to 
increasing audit quality .............................................................................................. 38 
6.4. Policy Options to deal with / avoid un necessary additional compliance costs for 
auditors/audit firms in a cross-border context............................................................ 46 
6.5. Policy Options to improve the effectiven ess, independence and EU-wide consistency 
of the regulation and supervision of auditors............................................................. 52 
6.6. Analysis of coherence with  other policy initiatives ................................................... 54 
6.7. Choice of legal instrument ......................................................................................... 55 7. Analysis of impact on stakeholders............................................................................ 56 8. Overall impact of the package.................................................................................... 56 8.1. Cumulative impacts and synergies............................................................................. 56 
8.2. Impact on different stakeholders groups.................................................................... 57 
8.3. Other impacts ............................................................................................................. 59 
8.4. Transposition and compliance aspects....................................................................... 60 9. Monitoring and evaluation ......................................................................................... 61 Annex 1. Summary of responses to the Green Pa per "Audit Policy: Lessons from the Crisis"
............................................................................................................................... ..... 62 
Annex 2. Existing European Union lega l framework on statutory audits................................ 99 
Annex 3. Approved statutory au ditors and audit firms .......................................................... 106 
Annex 4. Overview of recen t inspection reports of Auditor Oversight Bodies ..................... 108 
Annex 5. Revenues from audit and non-audit services.......................................................... 119 Annex 6. Barriers to more competition in the audit market for large PIEs............................ 121 Annex 7. Market concentration.............................................................................................. 126 Annex 8. Detailed policy options........................................................................................... 131 Annex 9. Summary of views of stakehol ders on preferred policy options ............................ 157 
Annex 10. The provision of non-a udit services to the audit c lient and the question of pure 
audit firms ................................................................................................................ 161 
 
EN 4   EN Annex 11. Mandatory rotation of audit firms ........................................................................ 171 
Annex 12. Joint audit of Financ ial Statements of PIEs.......................................................... 178 
Annex 13. Definition of public-interest entity ....................................................................... 186 Annex 14. Choice of legal instrument: detailed examination ................................................ 191 Annex 15. Impact on stakeholders: analysis .......................................................................... 195 Annex 16. Impact on SMEs (and PIEs of small dimension).................................................. 208 Annex 17. Impact on third countries...................................................................................... 220 Annex 18. Overview of the cumulation of the preferred policy options................................ 224 
Annex 19. Proportionality assessment ................................................................................... 231 Annex 20. Summary estimates of the costs and financial benefits of  the preferred policy 
options (including assessment of administrative burden) ........................................ 241 
Annex 21. Transitional issues regarding rotation of audit firms, tenderi ng and joint audit... 260 
Annex 22. Sanctions regime................................................................................................... 26 3 
Annex 23. Monitoring and eval uation: detailed plan............................................................. 265 
References ..................................................................................................................... ......... 269 
Acronyms and abbreviations.................................................................................................. 278  
 
EN 5   EN INTRODUCTION  
The measures adopted both in Europe and elsewhere in the direct aftermath of the financial crisis 
have focussed on the urgent need to stabilise the financial system1. While the role played by 
banks, hedge funds, rating agencies, supervisor s or central banks has been questioned and 
analysed in depth in many instan ces, little or no attention had be en given to the role auditors 
played in the crisis – or ind eed the role they should have pl ayed. Many banks revealed huge 
losses from 2007 onwards on the positions they had held both on and off balance sheet. Many of 
them have been aided by the Member States (and, in fine , the taxpayer). The maximum 
volume/exposure of Commissi on-approved measures, includ ing schemes and ad hoc 
interventions, amounted to €4 588.9 billion for the period between October 2008 and October 
2009. For 2009, the approved aid acc ounted for 39% of EU 27 GDP2. In this context, it is 
difficult for many citizens and investors to unde rstand how auditors could give clean audit 
reports to their clients (in particular banks) for those periods3. If indeed these reports were 
justified because current legislation is such that  it allows clean audit reports in spite of acute 
intrinsic financial weaknesses in the audited entity, then the role of the audit as well as the scope 
of audit merit further discussion and scrutiny. 
In this context, the Commission assumed leadersh ip by launching a fruitful and intensive debate 
on this issue also at the international level (close  co-operation with its glob al partners within the 
Financial Stability Board and the G20). Audit,  alongside supervision an d corporate governance, 
should be one of the key contributors to fina ncial stability as it provides assurance on the 
veracity of the financial statements of compan ies. This assurance should reduce the risks of 
misstatement, and in doing so, redu ce the costs of failure that would otherwise be suffered by 
both the company's stakeholders as well as by th e broader society. Robust audit is key to re-
establishing trust and market confidence. It cont ributes to investor pr otection by providing easily 
accessible, cost-effective and trustworthy info rmation about the financial statements of 
companies. It also potentially reduces the cost of capital for audited co mpanies by ensuring more 
transparency of information about financial stat ements and their veracity, thereby lowering the 
cost for financial institutions, an alysing their financia l situation before lending them capital.  
                                                 
1 European Commission (2009) and European Commission (March 2010).  
2 The large amounts of support approved under schemes can be explained by the fact that some Member 
States adopted blanket guarantee schemes which covered all their banks' debt. Member States relied mainly 
on guarantee measures. €546.08 billi on (4.5% of GDP) was approved as recapitalisation measures, of 
which Member States actually used about €141.5 billion in 2009. In the period between October 2008 and October 2010, the Commission authorised financial crisis measures in the field of State aid in 22 Member 
States: i.e. all Member States except Bulgaria, the Czech Republic, Estonia, Malta and Romania. See 
European Commission (April 2011c), p. 21. 
3 See for instance Sikka (2009). This paper notes that many European and US financial institutions have 
sought state support w ithin a short period of receivi ng an unqualified audit opini on. The events would raise 
questions about the value of company audits, auditor independence and quality of audit work, economic incentives for good audits and the knowledge base of auditors. In a similar fashion, a member of the US 
auditors oversight body, explains that " the events of the last few years have been a case study of the 
inability of auditors to provide investors with any meaningful signal about increases in financial reporting 
risks when management assessments or estimates change dramatically, or when debates over significant 
accounting issues become difficult or contentious ." He also explains that out of the 10 largest bankruptcies 
during the financial crisis, only two had going concern opinions. During the year leading up to their 
bankruptcy filings, the market capitalisation of the eight companies without going concern opinions 
diminished, resulting in a 99% loss in investor value. See Harris (2011) 
 
EN 6   EN It is also essential that any proposal adopted by the Commission reflects the objectives pursued 
by the Single Market Act4 and the Europe 2020 Strategy5, namely the creation of a  stronger, 
deeper and extended single market, as well as improving the access for SMEs to the single market . 
The market for audit services, as it stands today, is very fragment ated due to various barriers to 
the integration of the national markets. The crea tion of a Single Market fo r audit services would 
be beneficial for audit firms, in pa rticular small and mid-sized firms.  
Taking all the above into consider ation, the subject of this Impact  Assessment is to analyse the 
prevailing problems in the audit market and th e potential impacts of a package of intended 
measures, aiming at reconsidering the role of aud itors, the quality and scope of the services they 
provide to the market as well as the overall st atus of the audit profession in the society.  
1. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES  
1.1. Procedural issues 
An Impact Assessment Steering Group gatheri ng all relevant departments within the 
Commission6 was set up and convened on three oc casions: 15 March 2011, 12 and 27 May 2011. 
The Impact Assessment Board (IAB) met on 13 July 2011 and provided an opinion on 15 July 
2011. Following the IAB meeting and its opinion, changes were made  to the impact assessment 
in line with the recommendations of the IAB. Mo re particularly, illustrations of certain Member 
States' experiences with joint audits, mandatory rotation and non audit services have been added. 
Further improvements were made in the analysis of individual policy options, cost and benefit 
analysis of the preferred policy op tions and stakeholders views.  
1.2. External expertise and consulta tion of interested parties 
A comprehensive public consultation on audit was launched on 13 October 20107. A significant 
number of responses (around 700) were received and proce ssed by the Commission. The 
summary of responses was published on 4 February 2011(see Annex 1) . In addition, the 
Commission held a conference on audit on 10 February 20118. 
The Consultation has shown both an appetite for as well as resistance to change; some stakeholders were 
particularly opposed to changes in the current market stru cture. Even though there wa s convergence on the general 
principles (e.g. there was a strong endo rsement of the fundamental premise that 'independence should be the 
unshakeable bedrock of the audit environment ‘), different stakeholders had very divergent views when it came to 
concrete solutions to address shortcomings such as the st ructure of the upper segment of  the audit market: e.g. for 
instance, with regard to the possibility to require joint audit. There was also strong opposition from the audit 
profession to making significant changes with regard to th e independence of auditors and addressing the conflicts of 
interest inherent to the audit business model: e.g. for inst ance with regard to the prohibition of the provision of non-
audit services to the audit client or to the possibility to  require mandatory rotation of firms. However, there was 
general support on the need to clarify of the role of the auditor. Moreover, quite a broad number of the stakeholders 
support the introduction of a "European passport" for auditors as well as an EU wide co-ordination of audit 
                                                 
4 European Commission (April 2011a)  
5 European Commission (March 2010)  
6 IASG was led by DG Internal Market and Services and included members from DG Competition, DG 
Economic and Financial Affairs, DG Enterprise and Industry, DG Employment and Social Affairs, the Legal Service and the Secretariat General. 
7 European Commission (October 2010).  
8 http://www.youtube.com/watch?v=XUyvBrX-POM  See also Woolfe (2011). 
 
EN 7   EN oversight, including the improvement of communication between the auditor and the regulators of the audited 
companies. The responses have provided very useful input in the preparation of the Impact Assessment not only in 
examining the policy options but also in defining the problem drivers. 
The European Parliament adopted an own-initia tive report on this matte r, in reaction to the 
Commission's Green Paper on 13 September 2011. The European Parlimaent report requires 
more transparency and competition in the audit market9, but is critical of some of the ideas 
proposed in the Green Paper. The European Ec onomic and Social Committee adopted a similar 
report on 16 June 201110.The topic was also discussed with  Member States at the Financial 
Services Committee of 16 May 2011 and at th e Audit Regulatory Committee of 24 June 2011. 
2. POLICY CONTEXT AND PROBLEM DEFINITION  
2.1. Policy context 
2.1.1.  Financial Statements of co mpanies and statutory audit 
Confidence in financial statements  is essential for all stakeholde rs of a company, in particular 
those with limited liability11, as a basis to make a judgement on its financial situa tion. Basic trust 
in the veracity of financial statements is funda mental for normal market functioning and relations 
between economic entities, as confirmed in the context of the recent financial crisis. The 
verification by a third party of the veracity of such financia l statements is crucial.  
Indeed, the audit of companies' fi nancial statements is a service provided in the public interest. 
The role of the auditor is to contribute to the cr edibility as well as reliability of these financial 
statements. Not only auditors, audited companies,  shareholders and pote ntial investors have a 
stake in the veracity of companies' financia l statements, but also a wide range of other 
stakeholders benefit from audits . These include lenders, trade pa rtners, employees, credit rating 
agencies or equity analysts. If investors, lenders and trading part ners cannot trust the financial 
statements of companies, this could lead to less investments and higher costs of capital for 
companies and – ultimately – to higher prices for consumers. The auditors' output is also used for market stability by regulators/supervisors and for tax collection by tax and other government authorities.  
The Statutory Audit Directive sets out requiremen ts for statutory audit and defines 'statutory 
audit' as an audit of annual a ccounts or consolidated accounts in sofar as required by European 
Union (‘Union’) law . For companies with limited liability, the 4th and 7th Company Law 
Directives12 set out the content of the accounts as well as the requireme nt to have them audited. 
These directives are complemented by other texts regarding specific types of companies, such as 
issuers of securities admitted to trading in regu lated markets ("listed companies") or financial 
                                                 
9 European Parliament (2011).  
10 European Economic and Social Committee (2011). 
11 Due to their limited liability, compan ies are required to disclose their accounts. Such disclosure is even 
more important for listed companies. In unlisted companies, shareholders are more involved in the 
management of the company and creditors may have other means to assess the financial situation of the 
company. This is not the case for listed companies, where investors must essentially rely on publicly 
disclosed information. While for private companies, filin g financial statements in a registry is enough, for 
listed companies there is a requirement to "publish" audited financial statements so that they reach 
investors. 
12 For the full details of the legal instruments mentioned in this document, see R EFERENCES .  
 
EN 8   EN institutions. According to the latest available data13 7.3 million limited liability companies are 
covered by the 4th Directive on annual accounts and around 150,000 are covered by the 7th 
Directive on consolidated accounts. Among thos e, there are around 7400 companies that prepare 
their consolidated accounts under Interna tional Financial Reporting Standards (IFRS)14. A vast 
majority of the latter are listed on stock exchanges. The ongoing process to amend the 4th and 7th 
Company Law Directives15 aims to reduce burdens  on small enterprises by inter alia exempting 
them from statutory audit requirements (Member States already have the right to exempt small companies from audit). Figure
 1 summarises the relevant Union legal framework for the most 
important entities16 (see Annex 2 for a description of the existing legal framework). 
Figure 1 – Summary of EU legal framework:  audit of annual and consolidated accounts 
The following 
entities shall: a) publish their 
accounts b) prepare their accounts 
in conformity with  c) have their accounts 
audited d) be audited in 
accordance with 
Listed 
companies  Transparency 
Directive (TD) Article 4 of TD: IFRS for 
consolidated accounts and 
4th Company Law 
Directive for annual 
accounts Article 4 of TD 
Credit 
institutions Unless TD applies, 
Directive 
86/635/EEC shall be 
applicable Unless TD applies, 
Dir. 86/635/EEC shall be 
applicable Unless TD applies, 
Directive 86/635/EEC 
shall be applicable 
Insurance 
undertakings Unless TD applies, 
Directive 
91/674/EEC shall be 
applicable Unless TD applies, 
Directive 91/674/EEC shall 
be applicable Unless TD applies, 
Directive 91/674/EEC 
shall be applicable 
Unlisted 
companies 1st Company Law 
Directive and 4th 
Company Law 
Directive or 7th 
Company Law 
Directive  4th Company Law 
Directive for annual 
accounts  
7th Company Law 
Directive for consolidated 
accounts  4th Company Law 
Directive for annual 
accounts 
7th Company Law 
Directive for 
consolidated accounts 
[except for small 
companies] Statutory Audit 
Directive, which 
establishes: 
- rules on the 
qualification of the 
auditors (approval, 
registration etc.) 
- principles on the 
independence criteria of 
auditors (ethics, conflict 
of interest etc) 
- rules on public 
oversight and quality 
assurance 
- some additional rules 
of the audit of PIEs, 
including transparency 
of auditors 
 
2.1.2.  Statutory auditors, audit firms and the audit market 
The provision of statutory audit is  regulated. Only natural persons (statutory auditors) or legal 
persons (audit firms) approved by the competent authorities at the national level are allowed to perform statutory a udits (see Annex 3
 on approved auditors and fi rms). They are subject to 
external quality assurance as part of public overs ight. In general, statutory audit services to 
"public-interest entities" (PIEs)17 are provided by audit firms rath er than indivi dual statutory 
auditors. 
Although audit markets are national , not least because of the need to be locally approved to 
perform the audit, the market for PIEs and, in pa rticular, large listed comp anies is concentrated 
at a national as well as Union level: the so-cal led "Big Four" audit firms (PWC, KPMG, Deloitte 
                                                 
13 See European Commission (October 2011a), section 3.6. 
14 IFRS are world-wide financial reporting standards. Th e consistent quality of audits across the EU countries 
is paramount to make sure that accounts of EU lis ted companies are of equal quality, trustworthy and 
comparable by international investors  
15 See European Commission (October 2011b).  
16 Concerning certain types of financial institutions, ot her EU Directives specifically set the obligation to 
have their accounts audited. 
17 A collective term comprising listed companies, credit institutions, insurance undertakings and other entities 
considered by individual Member States of systemic importance by their sector of activity or size. See 
Article 2 of the Statutory Audit Directive. 
 
EN 9   EN and Ernst & Young) have a higher than 85% market  share for large listed companies in most 
Member States.  
Although not identical, certain elements of the audit market for large entites are similar to the market of Credit 
Rating Agencies (CRAs). While the former is dominatated by the Big Four audit firms, the latter is dominated by 
three large CRAs (S&P, Moody's and Fitch). Morover, in both markets there is inherent conflict of interest in that 
the subject of the opinion is also the client. From a liste d company perspective, the issuer of securities on whose 
accounts and on whose credit worthiness audit and rating opini ons are being provided is al so the party that pays the 
auditor and the CRA. Both auditors and CRAs derive their business from a legal requirement: companies must have 
their financial statements audited and many legal provisions require credit ratings. 
Recent consultations and hearings18 show that audit market concentration and limited 
competition are particularly serious issues for the audit of PIEs. As a consequence, this Impact 
Assessment is particularly focussed on the statut ory audit of PIEs. Nonetheless, this Impact 
Assessment also assesses implications for th e SME sector, covering both small and medium 
sized audit firms and practitioners (SMPs) as well  as SMEs as audited entities (see Section 8.2 ).  
2.2. Summary of problems 
There are five main problematic areas (see figure  2): (1) an expectation ga p related to the role of 
the auditor, (2) risks of conflicts of interest leading to impaired independence of auditors, (3) 
barriers to entry into the market of listed a nd large companies, (4) additional compliance costs 
due to fragmented national regul ation; (5) lack of effective national and EU-wide supervision 
over audit firms. These problems are represente d in the problem tree de picted in figure 2. A 
detailed explanation of the problems are prov ided in the ensuing se ctions (2.3 to 2.5).  
                                                 
18 Also confirmed by many respondents to the Green Paper as well as by the House of Lords (March 2011).  
 
EN 10   EN Role of the auditor does 
not meet the expectations 
of the stakeholders
Impaired professional 
scepticism and undermined 
independence of the audit firm
in the provision of statutory audit
Limited effective choice in the 
audit market of large PIEs, 
Lack of effective national and 
EU-wide supervision
over audit firms
Additional compliance cost
for auditors and audit firms Problem drivers Consequences General Problems
Expectation gap on the role of the auditor:
• Expectation gap regarding the scope of 
audit / lack of awareness of users about 
the role of auditors• Lack of communication between auditors 
and supervisors of audited companies 
• The format of auditor opinion and report 
does not meet the needs of the users
Insufficient existing measures to tackle 
the risk of conflict of interests due to:
• Provision of non-audit services to the 
same client 
• Existing system of "auditee selects and pays 
the auditor" • "Familiarity threat"
High barriers to entry into the market 
of listed companies and financial institutions:
• Big 4 reputation, also due to low 
transparency in the market on audit firms' 
financials and on audit quality
• Commercial barriers- contract clauses 
requesting Big 4 audits 
• Low percentage of audit firm switching
• Legal barrier- restrictive ownership rules;
Lack of genuine independence of public 
oversight authorities from the profession in many Member States:
• Inspections are not independently run in 
many Member States
• Practising auditors participate in the 
governance of the public oversight in many 
Member States 
• Members of the profession play a significant role in investigations and penalties
Other structural auditor supervision issues:
• Underfinanced and/or weak structures 
of national and EU-wide auditor supervision
• Uncoordinated supervision of audit networks
• Lack of consistent supervisory rules, 
powers and sanctions across Member States 
Burdens resulting from fragmented national 
regulation:
• Cross border statutory audits allowed only if an 
auditor passes an aptitude test and gets approved 
and registered in another Member State 
• Lack of common standards across the EU on 
audit practice, independence, internal control 
of audit firms
• Auditing standards do not take into account 
the size of the audited companies 
in particular SMEsImpaired 
audit quality
No level 
playing field 
for audit 
firms and 
auditors 
across the 
Union
Compliance
burdens 
Low business 
potential 
for SMPsRisk of moral 
hazard 
induced by 
« too big to fail »
PhenomenonRole of the auditor does 
not meet the expectations 
of the stakeholders
Impaired professional 
scepticism and undermined 
independence of the audit firm
in the provision of statutory audit
Limited effective choice in the 
audit market of large PIEs, 
Lack of effective national and 
EU-wide supervision
over audit firms
Additional compliance cost
for auditors and audit firms Problem drivers Consequences General Problems
Expectation gap on the role of the auditor:
• Expectation gap regarding the scope of 
audit / lack of awareness of users about 
the role of auditors• Lack of communication between auditors 
and supervisors of audited companies 
• The format of auditor opinion and report 
does not meet the needs of the users
Insufficient existing measures to tackle 
the risk of conflict of interests due to:
• Provision of non-audit services to the 
same client 
• Existing system of "auditee selects and pays 
the auditor" • "Familiarity threat"
High barriers to entry into the market 
of listed companies and financial institutions:
• Big 4 reputation, also due to low 
transparency in the market on audit firms' 
financials and on audit quality
• Commercial barriers- contract clauses 
requesting Big 4 audits 
• Low percentage of audit firm switching
• Legal barrier- restrictive ownership rules;
Lack of genuine independence of public 
oversight authorities from the profession in many Member States:
• Inspections are not independently run in 
many Member States
• Practising auditors participate in the 
governance of the public oversight in many 
Member States 
• Members of the profession play a significant role in investigations and penalties
Other structural auditor supervision issues:
• Underfinanced and/or weak structures 
of national and EU-wide auditor supervision
• Uncoordinated supervision of audit networks
• Lack of consistent supervisory rules, 
powers and sanctions across Member States 
Burdens resulting from fragmented national 
regulation:
• Cross border statutory audits allowed only if an 
auditor passes an aptitude test and gets approved 
and registered in another Member State 
• Lack of common standards across the EU on 
audit practice, independence, internal control 
of audit firms
• Auditing standards do not take into account 
the size of the audited companies 
in particular SMEsImpaired 
audit quality
No level 
playing field 
for audit 
firms and 
auditors 
across the 
Union
Compliance
burdens 
Low business 
potential 
for SMPsRisk of moral 
hazard 
induced by 
« too big to fail »
Phenomenon
 
Figure 2 – Problem tree 
 
EN 11   EN  
2.3. Problems particularly affectin g the statutory audit of PIEs 
2.3.1.  The question of impaired audit quality 
As mentioned in the introduction to this Impact  Assessment, the financial crisis has raised 
questions as regards the quali ty of the audits of PIEs . There are a number of ongoing 
investigations regard ing the audits of banks in the EU/EEA19. In addition, recent audit 
inspections in EU Member States have indeed re vealed audit quality issues in major audit firms 
(for more information on inspection findings see Annex 4) : 
The auditor supervisor in the Netherlands – Netherlands Authority for the Financial Markets 
(AFM) – concluded that " The quality of audits must fundamen tally improve <…> at the four 
largest audit firms in the Nether lands: Deloitte, Ernst &Young, KPMG and 
PricewaterhouseCoopers (the Big 4 firms). The AFM has concluded that a fundamental change 
of conduct is necessary to improve the quality of audits ."20 In the same report, AFM underlined 
that Big Four auditors "failed to  exercise sufficient and appropriat e professional scepticism in the 
conduct of their audits as well as to apply or to  apply sufficiently, auditi ng standards in too many 
cases. The AFM identified relevant weaknesses in 29 of the 46 audits reviewed in the context of 
its regular inspections". The report also men tions that recent inspections show that the 
deficiencies in audit quality are more widespread and system ic and do not concern only the 
performance of audits of companies in the financia l sector but also other s ectors like real estate 
and automotive. 
Inspections of UK audit firms revealed that " notwithstanding the quality of firms’ policies and 
procedures, the number of audits assessed as re quiring significant impro vement at major firms 
(eight audits or 11 % of audits reviewed at major firms excluding follow up reviews) is too high. 
Firms are therefore not always consistently applying their polic ies and procedures on all aspects 
of individual audits ."21 In this respect, the UK report underlines that " auditors should exercise 
greater professional skepticism particularly when  reviewing management’s judgments relating 
to fair values and th e impairment of goodwill and other in tangibles and future cash flows 
relevant to the consideration of going concern22." 
In Germany, a report of the Auditor oversi ght commission for the period 2007 – 2010 shows 
that, on average, 25% of inspections of aud it firms having PIE clients led to disciplinary 
proceedings, and the tendency is nega tive (19% in 2008, 24% in 2009, 27% in 2010)23. In the 
                                                 
19 Investigations are currently ongoing in a number of jurisdictions into the audits of the banks most affected 
by the crisis (but no sanctions so far). In Ireland, Ernst & Young is being investigated in relation to their 
audits of Anglo Irish Bank by a Special Investigator appointed in February 2009 by the ICAI Complaints 
Committee under the oversight of the IAASA (see IAASA 2009). In the UK, an investigation into the role 
of Ernst & Young LLP in Lehman Brothers' UK operations is being undertaken by the Accountancy and 
Actuarial Discipline Board (AADB) of the Financial Re porting Council (see FRC (June 2010)). In Iceland, 
PWC, auditor of Landsbanki and Glitnir banks in Icel and, is being investigated by the Icelandic Special 
Prosecutor as at December 2010. This is a criminal investigation. 
20 AFM (2010a) 
21 FRC (July 2010), p.3. The 2011 report presents " slightly better " results than those of 2010. But the UK 
inspection body " cannot confirm that this is a positive underlying trend " yet. See FRC (July 2011). 
22 International Standards on Auditing 570 (ISA 570) states that " Under the going concern assumption, an 
entity is viewed as continuing in business for the foreseeable future ". 
23 Abschlussprüferaufsichtskommission (2010), p.12. 
 
EN 12   EN context of the financial markets and the economic  crisis, the report observed a number of issues, 
such as the audit firms' assessment of going concern assumptions, the measurement of goodwill 
and other assets24. It also mentions weaknesses in the a ssessment of the risk s of breaches and 
irregularities (fraud), ma inly due to a rather pro forma  conduct of the audit work25. 
In addition, the same report iden tified several major weaknesses re lated to the internal quality 
control and remuneration systems of partners in big audit firms. In this respect, the report 
mentions that "in individual cases the partner appoi ntment, assessment and remuneration 
systems did not provide for any sufficient performance incentives  to secure the audit quality. 
Instead, economic and acquisition aspects were put  in the foreground. There was also partly a 
lack of consistent sanctioni ng of revealed quality defects ".  
On quality control, this report underlines that "an engagement quality control review is 
mandatory in the case of annual audits of public interest entities. During inspections, however, it 
was repeatedly observed that the required engage ment quality control review was not made at 
suitable points in time during the engagement pr ocess or did not incl ude all audit steps. 
Furthermore, there were some indications that the engagement quality control review was not 
always carried out with sufficient professional due care. In individual cases, the engagement 
quality control review was al so carried out by pe rsons who were themselves involved in 
conducting the relevant audit ." 
Also in the US, it is reported that " [t]oo often, PCAOB inspectors fin d that auditors have failed 
to exercise the required scep ticism and have accepted eviden ce that is less than persuasive ". It is 
also indicated that " [t]he PCAOB has now conducted annual inspections of the largest audit 
firms for eight years. Our inspectors have reviewed more than 2,800 engagements of such firms 
and discovered and analyzed hundreds of cases involving what they de termined to be audit 
failures "26. The PCAOB (US audit oversight body) remains " concerned about both the frequency 
and the type of audit deficiencies it continues to find ."27 
For instance, as a result of a such investigation of an audit performed by Ernst & Young, 
PCAOB launched disciplinary proceeedings and r ecently announced settled disciplinary orders 
against a former Ernst & Young partner and a senior manager for their roles in providing 
misleading documents and information to PCAOB inspectors and altering working papers. The 
orders imposed financial sanctions  as well as barring the audito rs concerned from associating 
with a PCAOB-registered accounting firm28. 
The next sub-section describes the problems that  contribute to this in sufficient audit quality. 
2.3.2.  Problem drivers and consequences 
Cause Expectation gap regarding the scope of audit and the audit report  
Effect The role of the auditor  does not meet the expect ations of stakeholders 
                                                 
24 Ibid; page 9. 
25 Ibid, page 8. 
26 See Doty (2011a), section III.B.  
27 US PCAOB (August 2011), p. 5 and seq.  
28 PCAOB Announces Settled Disciplinary Orders Agai nst Former Ernst & Young Partner and Senior 
Manager For Providing Misleading Documents to PCAOB Inspectors And Altering Working Papers 
(Washington, D.C., August 1, 2011). 
 
EN 13   EN i) Expectation gap regardi ng the scope of the audit . Many stakeholders and the larger public still 
do not understand how it was possible that large financial institutions failed only a few months 
after their finanica l statesments were given unqua lified (clean) audit reports29. EU rules do not 
require the audit opinion to give assurance as to the future sustainability of the audited company. 
In addition, they do not require any further info rmation e. g. explaining the methodology used or 
any other description of the work carried out by an auditor. EU rule s only require th at the auditor 
provides an opinion on the veracity of the financ ial statements and the ability of the audited 
company to continue as a "going concern"30. This creates some confus ion about the scope of the 
auditor's assessment and explains the expecta tions created among certai n stakeholders. This 
expectation gap raises questions about the exis ting legal requirements concerning the mission of 
the auditor, the scope of the audit and the type of verification carried ou t by auditors to confirm 
the auditee's ability to co ntinue as a "going concern"31. For instance, the Nyberg report of March 
2011 on the causes of the systemic banking crisis in Ireland refers to the statutory auditors as the 
"silent observers"  in the lead up to the crisis and is cr itical of the scepticism of the auditors32.  
ii) Audit opinion and report do not meet the needs of the user . Although under their current 
statutory audit mandates, auditors have access to substantial information about the audited company they do not provide suffici ent facts in their audit report
33; the most common audit 
opinion is effectively a “template” clean opinion, es pecially when it comes to the audit of listed 
companies or financial institutions (see example in figure  3). However, this "all or nothing" 
paradigm is not helpful to those who ha ve an interest in the audited company34.  
iii) There is not enough communication be tween auditors and supervisors of PIEs . In the specific 
case of financial institutions a nd providers of investment se rvices, auditors are required35 to 
                                                 
29 An examiner of the Lehman Brot hers bankruptcy stated that " the investing public is entitled to believe that 
a 'clean' report from an independent auditor stands for something ." See Valukas (2011). 
30 Going concern is the company's ability to continue functioning as a business entity (concern being an early-
20th century term for "business" or "e nterprise"). It is the responsibility of the directors to assess whether 
the going concern assumption is appropriate when preparing the financial statements. A company is 
required to disclose in the notes to the financial st atements whether there are an y factors that may put the 
company's status as a going concern in doubt. 
31 For instance, a representative of a large European investor stated at the February 2011 conference 
organised by the European Commission that " when there have been material problems at companies, audit 
reports have been useless time and time again " (see Accountancy Magazine, March 2011, p.5). See also 
Harris (2011) citing the opinion of US investors. It should be noted, however, that chief financial officers in 
audited companies appear comfortable with the current value of audit. See, for instance, Deumes et al 
(2010) or PWC (2011). 
 See also House of Lords (M arch 2011), p. 38 and seq. 
32 Nyberg (2011). This report does not criticise specific audi tors but does consider issues such as the statutory 
audit and going concern, audit limitations and an "expectations gap"- which widens during times of crisis, 
other communication by bank auditors, auditor communication with authorities. 
33 The majority of the replies to the 2010 Green Paper on audit related to the section on the role of auditors, 
underlining the usefulness of audit methodology being better explained to the audited companies by 
auditors as one of the tools to close the expectation gap about the value-added of auditors work. 
34 For instance, the majority of respondents to a recent survey organised by the CFA Institute think that more 
specific information is needed about how the auditors reach their opinion on whether a company has fairly 
presented its financial statements in accordance with the required financial reporting standards (see CFA 
(March 2011). Another 2010 survey also confirmed that  the audit report needs to  contain more information 
(see CFA 2010). See also IO SCO (2010), p.8 and seq. 
 See also House of Lords (March 2011), p.39, quoting an important investor: "[…] audit reports […] are 
very, very standardised in their content[…] are often […] riddled with 'get out of jail free' clauses ". 
35 Article 55 of MIFID, Article 53 of the Banking Directive, paragraph 4 of Article 15 of the Payment 
Services Directive, Article 106 of  UCITS Directive, the first paragr aph of Article 3 of the e-money 
 
EN 14   EN report promptly to the competent authorities any f act or decision which is liable to constitute a 
material breach of laws, affect the ability of th e company to continue as a going concern or lead 
to a qualified audit report36. But this has not led to sufficient engagement between auditors and 
supervisors of PIEs37. The UK House of Lords expressed a strong opinion on this issue: "[w]e 
regard the recent paucity of meetings between bank auditors and regulators, particularly in a 
period of looming financial cr isis as a dereliction of dut y by both auditors and regulators "38 
AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENTS 
To the Shareholders of XXX 
We have audited the consolidated financial statements of XXX ("t he Bank") and Subsidiaries ("the Group"), which comprise the co nsolidated 
balance sheet at 31 December 2010 and the related consolidated in come statement, consolidated statement of recognised income an d expense, 
consolidated statement of changes in total equity, consolidated statement of cash flow s and notes to the consolidated financial  statements for the 
year then ended. As indicated in Note 1.b. to the accompanyi ng consolidated financial statemen ts, the Bank's directors are resp onsible of the 
Group's consolidated financial statements in accordance with Inte rnational Financial Reporting Sta ndards as adopted by the Euro pean Union and 
the other provisions of the regulatory fina ncial reporting framework app licable to the Group. Our responsibility is to express an opinion on the 
consolidated financial statements taken as a whole based on our audit work performed in accordan ce with the audit regulations i n force in YYY 
which require examination, by means of sel ective tests, of the evidence supporting th e consolidated financial statements and ev aluation of 
whether their presentation, the accounting prin ciples and policies applied and the estima tes made comply with the applicable re gulatory financial 
reporting framework. 
In our opinion, the accompanying financial stat ements for 2010 present fairly, in all ma terial respects, the consolidated equit y and consolidated 
financial position of XXX Group at 31 December 2010, and the consolidated results of its  operation and the consolidated cash fl ows for the year 
the ended, in conformity with Internati onal Financial Reporting Standard s as adopted by the European Union and the other provis ions of the 
regulatory reporting framework applicable to the Group. 
The accompanying consolidated directors' report for 2010 contains  the explanations which the Ba nk's directors consider appropri ate about the 
Group's situation, the evolutions of its business and other matters,  but it is not an integral part of the consolidated financi al statements. We have 
checked that the accounting information in th e consolidated directors' report is consis tent with that contained in the consolid ated financial 
statements for 2010. Our work as auditors was confined to checking the consolidated directors' report with the aforementioned s cope, and did not 
include a review of any information other than that dr awn from the accounting records of XXX and Subsidiaries.  
Signature 
31 March 2011 
Figure 3: Example of audit report. 
There has been strong support from stakeholders who replied to the Green Paper consultation on 
audit policy and to the Green Paper on corp orate governance in fi nancial institutions39 to 
improve the dialogue between supervisors and aud itors, as there is a broad acceptance that the 
knowledge gathered by external aud itors through their work  may be useful to the regular work of 
regulators/supervisors40.  
Cause Insufficient existing measures to tackle the risk of conflict of interests  
                                                                                                                                                             
Directive and Article 72 of the So lvency II Directive. See also Ar ticle 20 of the MIFID Implementing 
Directive. 
36 A qualified audit report indicates that a company's fina ncial statement gives a true and fair view subject to 
certain qualifying remarks. 
37 Concerning the UK market, for instance, it has been observed that "[…] the regular dialogue … appeared 
to fall into desuetude following the 1997 transfer of supervisory responsibility from the Bank [of England] 
to the FSA .". See House of Lords (March 2011), §160 and 161. 
38 Ibid. §161. 
39 See question 3.1 in European Commission (June 2010), p.15: " Should cooperation between external 
auditors and supervisory authorities be deepened? If so, how ?" In the various responses received so far, 
there seems to be a general support for improving cooperation between external auditors and supervisors. 
The responses to a UK consultation also go in  the same direction. See FSA and FRC (2011). 
40 See for instance Dewing and O'Russell (2011), FSA and FRC (2010).  
 
EN 15   EN Effect Impaired professional scepticism and undermined independence of audit 
firms  in the provision of  statutory audit 
There are different threats to the independence of the auditor. The following paragraphs present 
three which have a major impact on auditors' i ndependence: the provision  of non-audit services, 
the " auditee selects and pays the auditor " and the familiarity threat. None of these threats are 
considered to be, per se , a greater source of conflict of intere st than the others. On the contrary, 
they are considered to have a cumulative effect  on the overall independenc e of auditors. At the 
same time, in at least one of the cases (" auditee selects an d pays the auditor "), the conflict is 
inherent in the existing business mode l for the provision of  audit services. 
i) Conflict of interest arising from the prov ision of statutory audit and other non-audit services . 
Providing non-audit services (NAS) while auditi ng a company presents a potential source of 
conflict of interest arising from or within the a udit firm: i.e. the audit firm has an interest to 
secure additional revenue from the pr ovision of other (non-audit) services41. In instances where 
the revenues from NAS become subs tantial from a statutory audit client, the independence of the 
auditor is even more at risk. If  the provision of statutory audit effectively becomes a gateway to 
the provision of NAS to the same client, "professional scepticism" – i.e. the ability of the auditor to question the assumptions made by the audi ted entity – would naturally be compromised
42.  
There is currently no EU-wide ban preventing auditors from of fering NAS to audit clients. 
According to Article 22 of the Statutory Audit Directive, audit should not be provided in cases 
where " an objective, reasonable and info rmed third party would conc lude that the statutory 
auditor's or audit firm's independence is compromised ". However, Article 22 stipulates only the 
principles and, given the Member States' discretion, it has so fa r been implemented in a very 
divergent manner across the EU. For example, in  France there is a ban on the provision of NAS 
from any member of the auditor's network to  any member of the audited company's group43. In 
many other Member States, rules are less restrict ive and the provision of NAS by auditors to the 
companies they audit remains commonplace44. 
                                                 
41 It has also been brought to the attention of the Commission services that legislation (whether at the EU or 
national level) regarding the provision of other assu rance services (e.g. regarding the review of the 
corporate governance statement, of corporate social responsibility information etc) is leading to an additional problem. The legislation often requires th e statutory auditor (of accounts) in place to also 
provide those additional assurance services (which, st rictly speaking, would not be "non-audit services"), 
therefore, creating a captive market. Conceptually, however, it could be possible that these other assurance 
services be provided by competing auditors.  
42 The International Standards on Auditing (ISAs) define professional scepticism as " an attitude that includes 
a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence ". The application of an appropriate degree of 
professional scepticism " is a crucial skill for auditors ". See FRC (March 2011), p.1. See also FRC (August 
2010) generally. 
43 There is, however, some margin of manœuvre  concerning some NAS provided to the parent or the 
subsidiaries of the audited entity by members of the ne twork of the auditor. As a result, for instance, in the 
case of BNP Paribas the provision of NAS by its auditor(s) amounted to 28% of total fees; and in the case of Crédit Agricole to 13%. See AMF (2010), p.5. In Belgium there are also strict rules on the provision of 
NAS to the audit client. 
44 For instance, the provision of NAS amounted to 34%, on average, of the combined audit and NAS fees of 8 
important UK banks (Abbey National, Alliance & Leiscester, Barclays, Bradford and Bingley, HBOS, 
Lloyds TSB, Northern Rock and Royal Bank of Scotland). Data from Sikka (2009). In the case of 11 Eurostoxx 50 (non-French) members active in the fina ncial sector (Aegon, Allianz, BBVA, Deutsche Bank, 
Deutsche Börse, Generali, ING Group, Intesa Sanpaolo, Munich Re., Santander and Unicredit), the NAS 
provided amounted to 17% in 2009 and 14% in 2010 , on average, of the comb ined audit and NAS fees, 
 
EN 16   EN The importance of NAS for audit firms is growi ng: the share of NAS provided to their (not 
necesssarily audit) clients relativ e to audit services is increasi ng both globally and in the Union45. 
Audit is no longer the dominant re venue generator for audit firms46. 
Recent evidence from the UK market shows cases of  potential/perceived conflict of interest: " In 
addition to auditing Northern Rock, PwC receive d some £700,000 in 2006 in consultancy income 
from Northern Rock. The House of Commons Treasury Select Committee referred to this as an 
apparent conflict of interest "47. Also, in May 2009, the Treasury Select Committee of the House 
of Commons called for the appropri ateness of the provision of non-a udit services by auditors to 
the entities that they audit to be revisited, stating: " We strongly believe that  investor confidence, 
and trust in audit would be enhanced by a prohi bition on audit firms conducting non-audit work 
for the same company, and recommend that the Financial Reporting Council consult on this 
proposal at the earliest opportunity "48. The UK inspection report  of 2010 stated that: “ firms are 
perhaps too ready to conclude that existing pr ocedures, required in any event in the audit, 
provide the necessary degree of safeguard. They must accept that non-aud it services should not 
be provided where safeguards  cannot appropriately mitigate th reats to their independence . […] 
and the AIU is concerned that one major firm has embarked on a growth strategy where a key 
driver is the development of non-audit serv ices to be provid ed to audit clients ”49. In 2011, the 
UK inspection report confirmed the conflict of interest problem: " It is clear from the AIU’s 
review of appraisals and partner admission pro cedures that senior aud it staff at some firms 
continue to believe that success in the sellin g of non-audit services to audited entities is a 
significant contributory factor to promotion an d remuneration decisions "50. Recently, the US 
oversight body's reviews found examples of " seemingly unrestrained en thusiasm…for selling 
services to audit clients ". Those examples were " in a sufficient number to raise troubling 
questions "51. 
ii) Conflicts of interest are intrinsic in th e audit firm selection and remuneration mechanism 
("auditee selects and pays the auditor") . Auditors are appointed and paid by the entity that needs 
to be audited. The auditor's responsibility is to the shareholders of the audited company and other 
stakeholders, but the auditor is often de facto  selected and paid by the management of the audited 
company (Chief Financial Officer and/or Chief Executive Officer). In fact, shareholders have 
little or no impact on the selection of the auditor a nd the choice of auditors is at best validated by 
                                                                                                                                                             
with a significant peak for Santander: 46% in 2009 and 40% in 2010 (AMF (2010) and AMF (2011)). 
Recent data on distressed banks around the world show similar trends (see Annex 5 ). 
45 For example, data from the German market shows that while the total Big Four firm revenues from audit 
services was static between 2004/05 and 2009/10, the revenues from non-audit services increased by 59% 
over this period (see Annex 5 ). Data on Big Four audit firms in the UK shows that audit and other related 
services represented only 33% of total revenues (cf. Accountancy Magazine, January 2011). Moreover, Big Four audit firms have outlined ambitious expansion plans for their consultancy arms in the UK: KPMG 
announced plans to treble its consulting revenues by 2013; PWC also plans to treble its fees from 
management consulting by 2013 and to double its consulting staff in the same period; Ernst & Young plans to double its revenues in the next three years; and Deloitte also intends to increase its activity. See Huber 
(March 2011).  
46 Casta et Mucol (1999) explain that the big audit firm s, which initially have focused on their audit mission, 
have progressively developed consulting services creating conglomerate corporate structures like real 
multi-professional teams associated to the audit serv ice. This repositioning regarding the profession itself 
has not been done without creating potential ethical problems. 
47 House of Lords (March 2011), p. 24.  
48 House of Commons (2009).  
49 FRC (July 2010). 
50 FRC (July 2011), p. 21. 
51 See Doty (2011a), section II.  
 
EN 17   EN them at the annual general meeting52. This fact creates a serious di stortion within the system in 
that it undermines auditor independence in repo rting findings and provi ding negative feed-back 
about the performance of the management (C FO and /or CEO) of the audited company.  
In this framework, Audit Comm ittees are expected to count er-balance the influence of 
management, acting as independent agents of investors within the audited entities. However, the 
current practices and functioning of Audit Comm ittees across the Union raise doubts about their 
effectiveness53. This in turn has a negative impact on their independence from the management 
of the company54. Moreover, the Statutory Audit Di rective does not require complete 
independence of the Audit Committee members a nd leaves discretion for Member States to 
impose additional independence criteria55. The feed-back from all stakeholders to the Green 
Paper consultation clearly supports the need to strenghten both th e level of competence as well 
as the structure of the Audit Committee.  
iii) Potential conflict of interest due to the "Threat of Familiarity" . Just the rotation of key audit 
partners, which is required by EU legislation, an d self-regulation regardi ng the organisation of 
audit firms does not address the threat of familiarity56 that results from the audited company 
often appointing and re-appointing the same aud it firm for decades. For example, a new audit 
partner of the same audit firm will likely feel ob liged to live with the decisions and agreements 
made by the former partner; he may ha ve little flexibility to reopen them57. Only in is Italy the 
situation different58.  
In a 2006 study, more than half of the respondent compan ies reported that their audito r had served the company for 
more than 7 years, and 31% reported th at the auditor had served for more th an 15 years: the general tendency was 
that the bigger the audited company, the lower the switching rate59. According to a recent report in the UK, a FTSE 
100 auditor remains in place for about 48 years on average; for the FTSE 25 0 the average is 36 years. It is 
noteworthy that Barclays has been aud ited by PWC or its predecessors since 189660. In Germany, two thirds of the 
DAX 30 companies have not changed their auditor for the last 20 years, including leading financial services 
entities61. At global level, nearly 60% of all Fortune 1000 public  companies have had the same auditor for more than 
10 years and 10% for 50 years or more62. 
                                                 
52 In accordance with the Statutory Audit Directive, the appointment of the auditor(s) in a PIE must be made 
by the general meeting of shareholders, upon a proposal by the board based on the audit committe 
recommendation. 
53 See European Commission (June 2010) and European Commission (April 2011b), section 1.1.1. on 
Professional diversity. 
54 An interesting recent example: the CFO of a large listed German company expressed his views on the 
expectation of an international group towards its  auditor during a conferen ce (Schmalenbach-Tagung) 
stating that he would fulfil the dominant role in the selection of the auditor. Moreover, he stated that he 
would 'examine' the auditor and expect  that the auditor be available 24 hours a day, seven days a week; and 
have a global right to issue instructions and to disc ipline the auditor in case of an unsatisfactory result of 
the audit. Cf. Börsen-Zeitung, 04.05.2011. 
55 Article 41 of the Statutory Audit Directive requires that " at least one member of the audit committee shall 
be independent and shall have compet ence in accounting and/or auditing ", allowing Member States 
discretion to decide on stricter independence /competence rules for the remaining members. 
56 Familiarity threats, which may occur when, because of a close re lationship, a professional accountant 
becomes too sympathetic to the interests of others (IFAC code of ethics). 
57 Doty (June 2011b), section II. 
58 Italy enforces the mandatory rotation of audit firms every 9 years, in order to enhance the independence of 
the auditor from the aud ited PIE. See Annex 11 for further detail on this issue. 
59 See London Economics (September 2006). 
60 See House of Lord s (March 2011). 
61 Source: German public register of companies. 
62 Aubin (2011). 
 
EN 18   EN This lack of change in auditors creates a perver se pressure on the incoming partner not to lose 
long standing 'audit clients'63. Recent data from the US64 outlines that " as in other professions, 
auditors want to advanc e in their chosen profession which often means keeping the client happy 
and growing their business ." Indeed, research on the subject shows that  audited entities who 
received an emphasis of matter/ qualified audit opinion on the fina ncial statements from their 
auditors changed auditors more often than entities that received audit opinions with no 
observations65. 
Cause Barriers to entry  into the statutory a udit market for PIEs 
Effect Limited effective choice of auditor for large PIEs  
Changing the auditor could contribute to addr essing some of the threats to independence 
described above. However, in responses to the recent Green Paper, companies reported that the effective choice in the market for audits of larg e listed companies and large financial institutions 
has been progressively limited to the Big Four a udit firms. In some cases, the choice for the 
audited entity is limited to less than four firms: i.e. to avoid potential conflicts of interest if one of the Big Four audit firms is already providing other services to the entity.  
This limited choice is the consequence of a numbe r of barriers preventing new audit firms from 
entering (or existing ones from growing within) the audit market for large PIEs
66: (1) there is 
asymmetric information related to th e quality of auditors in the market67, which results in, the 
reputation of the Big Four audit firms becoming th e most important factor for auditor choice; (2) 
contract clauses that effectively require Big Four audits: (3) comp anies rarely change their audit 
firm and there is hardly any opportunity to comp ete for new audit assignments, which has led to 
market stagnation; and (4) restrictive ownership rules have led to distortions in the market by 
creating a competitive advantage for audit firms even in NAS on one hand and by creating de facto barriers to the growth of  smaller audit firms on the othe r hand, therefore protecting large 
audit firms from competition from medium-sized fi rms. These barriers also  affect the extent to 
which the market can penalise audit firms producing low quality audits. See Annex 6 
for further 
details on these barriers68. A study in 2006 c oncluded that " only if the existing barriers, in terms 
of perception/reputation and low switching rates, could be reduced might substantial market 
entry by mid-tier firms become feasible ".69  
These barriers result in high concentration  in the vast majority of audit markets70, even at the 
global level (see figure  4)71. 
                                                 
63 See for instance FRC (August 2010), p.10: " it is also clear that audit firms place considerable importance 
on retaining their client base. Emphasis on client service planning and relationship management within the firms may act as a disincentive for auditor sceptic ism if audit teams believe that by demonstrating 
scepticism they risk having an 'unhappy client' ". 
64 See Doty (2011a), section II.  
65 Prat et Hauret (2003). 
66 Other factors could also influence th e inability of audit firms to grow: insufficient trained or qualified staff, 
lack of sufficiently developed international network etc. 
67 Inspections reports are not disclosed to those charged with the governance of the audited entity. As a result, 
the audited entity has insufficient information on this point. Only in the UK do audit committee receive 
some information on inspection findings.  
68 See also OFT (2010). The OFT has provisionally deci ded that there are competition problems in the audit 
market that pass the statutory test fo r referral to the Competition Commission. 
69 Oxera (April 2006), page i. 
70 See London Economics (September 2006), table 5, pages 22-23.  
71 For more information on the history of market concentration see Annex 7(1) . 
 
EN 19   EN PricewaterhouseCoopers International
Deloitte Touche Tohmatsu
Ernst & Young Global
KPMG International
BDO International
Grant Thornton International
RSM International
Praxity (Mazars; Moores Rowland
International)
Horwath International
 
Figure 4 . Relative market shares (i n terms of global revenues) of 24 internati onal audit firm networks/associations in 2009 
0. In 2009, the 24 biggest international audit firm networks generated more than $130 billion revenue world-wide 
with the Big Four audit firms market share at 71%72 73. 
1. There has been practically no change between 2004 and 2009 in the revenue shares among the ten biggest audit 
firm networks. In terms of revenues, every non-Big Four audit firm network lagged at least four times behind the 
smallest Big Four audit network (See Annex 7(1)  for the historical overview  of market concentration). 
2. The market concentration among audit fi rms is much higher than in the mark ets of other professional services 
providers. (See Annex 7(2)  for comparison between audit and law firms). 
3. In terms of the individual size of the Big Four audit firms, it has been observed that the Big Four international 
networks are the biggest providers of professional services in the world (figure  5). 
261006600470026102112
0 5000 10000 15000 20000 25000 30000PricewaterhouseCoopers
International (audit &
consultancy)McKinsey & Company
(management
consultancy)BlackRock (investment
management)Standard & Poor's (credit
rating)Baker & McKenzie (law)
 
Figure 5. Global revenues of biggest service providers in 2009 (in million USD)74 
                                                 
72 Accountancy Magazine, June 2010, page 37, table Top 25 international networks. 
73 Total revenues from audit and non-audit services provided to public interest entities and other individuals 
or companies. 
74 Sources: Accountancy Magazine June 2010; http://www.forbes.com/lists/2010/21/private-companies-
10_McKinsey-Co_IPPW.html ; http://www.wikinvest.com/stock /BlackRock_(BLK)/Filing/10-
K/2010/F46751551 ; http://www.standardandp oors.com/about-sp/key-statistics/en/us ; 
http://www.law.com/jsp/tal/PubA rticleTAL.jsp?id=1202448484841  
 
EN 20   EN As regards the Union, high concentration75 is observed in national markets for audits of listed 
companies76 as well as financial institutions77. The market share of the Big Four audit firms for 
listed companies exceeds 85% in the vast majority of Member States78 (see Annex 7(3) for  
additional data) . For example, all EUROSTOXX 50 compan ies were audited by the Big Four in 
2009 and 201079. In the UK, not only did the Big Four audit firms audit 99% of the FTSE 100 
index companies, they also audited more than  95% of the FTSE 350 companies and represented 
99% of audit fees in the FTSE 350 (data covers the period 1995-2004)80. Moreover, they also 
had about 80% of the FTSE small capitalisation a udits. In some important market segments, the 
degree of concentration is even greater: for exampl e, only three of the Big Four audit firms audit 
banks in the UK81. In Germany, two audit firms (KPMG and PWC) have the audit mandates for 
90% of the companies listed on the DAX 3082. In Spain, where all IBEX 35 companies are 
audited by the Big Four audit firms, Deloitte audits 15 of those comp anies (corresponding to 
46% of the IBEX 35) as well as all major banks83. In France, joint audit is mandatory. As a 
result, although all CAC40 company are audited by at least one Big Four audit firm, a fifth audit 
firm has been able to gain some market shar e by providing audit services to several CAC 40 
companies84. 
A particular feature to underlin e is the policy of Big Four audit firms to absorb smaller 
competing audit firms: e.g. in France, competing local networks were taken over by KPMG in 
2004 (Salustro Reydel) and Deloi tte in 2006 (acquiring Marque et  Gendrot which was before 
associated to BDO) and in 2008 (Constantin); in Denmark, PwC has announced its intention to 
take over the local firm affiliated to  Grant Thornton International in 2011. 
This high concentration is leading to an important  risk affecting society at large: the risk of 
failure of a large audit firm and the  "too big to fail" phenomenon  is creating a risk of moral 
hazard85. A negative side effect of the structure of the audit market is that on the one hand there 
is either the risk (or at least the perception) of serious possible disturbance in the case of a large 
                                                 
75 It should be noted that high concentration, per se , does not result in an infringement of EU antitrust rules. 
Currently, the UK competition authority (Office of Fair Trading) has come to the preliminary conclusion 
that there are reasonable grounds for suspecting that there are features of the market that restrict, distort or 
prevent competition in the UK. See OFT (2011). 
76 London Economics (September 2006), table 5, pages 22-23.  
77 London Economics (September 2006), table 12, pages 32.  
78 For some commentators, we are facing an oli gopoly situation. See Billard et al. (2011).  
79 AMF (2010), p.8 and AMF (2010), p. 9.  It should be noted that Mazars al so audit 6 of these companies, as 
joint auditor. 
80 Oxera (April 2006), p.i. See also Chambers (2011). 
81 House of Lords (March 2011), Chapter 3. 
82 For the information on Germany, see London Economics (2006), table 5, p. 22.  
83 CNMV (2009), p.34.I In 2010, Deloitte audited 39 of the 92 smaller listed companies in Madrid (excluding 
IBEX 35). See Expansión, 23 May 2011, p.13. 
84 In France, two additional firms held 13 (joint) manda tes (Mazars [12] and Corévi sie [1]) out of the 79 
mandates in CAC 40 companies (three of the CAC 40  companies are non-French companies and do not 
have joint audit, while two companies, BNP Paribas and GDF Suez have 3 auditors). The Big Four held the remaining 66 (83%). In terms of fees, Big Four firms accounted for 92% of the audit fees of CAC 40 
companies.  
 The joint audit rule in France was not designed to address market concentration and therefore does not 
establish any restriction on the selection of the audit firms. However, the implementation of the joint audit 
rule shows that it may have effects on the market structure. This rule has in particular allowed a fifth player to have an important presence (compared to other markets) in the market for the statutory audit of large 
PIEs. See Annex 12
. 
85 See European Parliament (2011), §49.  
 
EN 21   EN firm failing86 and on the other hand the "too big to fa il" phenomenon that the risk of serious 
disturbance perversely perpetuates87. The current structure induces a moral hazard whereby 
public authorities could be  required to save an audit firm or , at least, to display regulatory 
forbearance. The experience of US public instit utions in dealing with US based KPMG LLP 
regarding its sale of tax shelters88 may indicate such a problem.  
2.4. Moreover, such market concentrat ion also results in high prices89: one of the 
notable phenomena of the current market st ructure is that Big Four audit firms 
generate higher profit marg ins than other internationa l networks. 2010 data from 
the UK market shows that the average prof it margins in Big Four audit firms were 
50% higher than the next four audit firm s (27% versus 18%). The levelling out of 
Big Four profit margins to those of the ne xt four, in the UK alone, would lead to 
annual savings of more than £600 million to companies90. These findings are 
consistent with the conclusions that "i n the period 2002-2006 the premium paid for 
being audited by a top-ti er auditor was around 20%".91Problems affecting 
auditors of PIEs and other entities that are required to have an audit 
Cause Burdens resulting from fragmented national regulation   
Effect Additional compliance cost for auditors and audit firms  
i) Provision of statutory audits in  a different Member State is po ssible only if the auditor passes 
an aptitude test.  Auditors and audit firms should be approved in all Member States in which they 
want to carry out statutory audits. Such appr oval entails a bureaucratic process. For natural 
persons, the procedure also requires passing an aptitude test in the Member State of the audited entity (Article 14 of the Statutory Audit Direc tive). The approval and aptitude test requirements 
result in additional complia nce costs across the Union.  
ii) Cost-burden to auditors and audit firms resul ting from a lack of common standards across the 
Union on audit practice, independen ce and internal control of audit firms . Each Member State 
has the discretion to design and enforce the rules as regards practice standards (auditing and independence standards) and internal controls for audit firms. Public oversight and quality assurance practices are also different from on e Member State to another. This environment 
entails compliance costs (e.g. becoming familiar with  a different legal framework) to audit firms 
if they or their networks wish to operate in more than one Memb er State and may be 
disproportionate to the size of the businesses, th us being a bigger hurdle to small and medium 
                                                
 
86 E.g. resulting from a liability proble m. There is also a reputational prob lem, as underlined by the European 
Parliament (2011), §48: " […] in view of the current configuration of the audit market, […] the collapse of 
one of the Big Four firms would undermine the credibility of the auditing profession as a whole ." 
87 The effects would not be comparable, it is true, to a similar situation in the banking sector. 
88 The US Justice Department and the Internal Revenu e Service in 2005 announce d that KPMG LLP (KPMG) 
had " admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution and penalties as 
part of an agreement to defer prosecution of the fir m. <…> KPMG has admitted that it engaged in a fraud 
that generated at least $11 billion dollars in phony tax losses which, according to court papers, cost the United States at least $2.5 billion dollars in evaded taxes ". See US IRS (2005).  
89 See Oxera (April 2006), p. v, explai ning that the results of an eco nometric analysis on the relationship 
between market structure and audit fees show that ma rket concentration (as measured by the HHI per sector 
in any given year) and the market share of a given auditor in a given sector/year both have a statistically 
significant and positive impact on audit fees. 
90 Calculations made on the basis of data published in: Accountancy Magazine, January 2011; Baker Tilly 
UK Audit LLP Report and Financial Statements for the year ended 31 March 2010.   
91 See  Kittsteiner and Selvaggi (April 2008), Chapter 4.6 "Big-N premium", p. 26. 
 
EN 22   EN sized practitioners. In addition, the lack of  common standards has a negative impact on the 
credibility and quality of financial statements as  well as on the acceptance of audit reports from 
other jurisdictions. A study commissi oned by the European Commission92 has assessed and 
compared the costs and benefits of applying inte rnational standards, the so-called 'clarified 
ISAs'93 as common standards throughout the Union. Th e study estimates the total recurring net 
benefits of 2 billion euros per ye ar from the expected reduction in the cost of capital for audit 
clients as a result of the app lication of common standards.  
iii) Auditing standards, both national and international , do not take into account the size of the 
audited companies in particular SMEs . The fact that audit standards are not simplified to take 
into account the smaller size of the audited entities94 creates an unnecessary cost burden for the 
small and medium sized audited entities (e.g. ex cessive time spent on audit compared to the 
complexity of the company), without necessarily contributing to a better quality of audits. This 
view has been confirmed by some SM E respondents to the Green Paper. 
2.5. Problems in relation to the supervision of compliance by auditors with their 
obligations 
This section concerns auditors of PIEs as well as other entities that  are required to have an audit. 
Cause Representatives from the audit profession and/or practicing auditors are actively 
involved in the public auditor ov ersight in many Member States 
Effect Public oversight authorities are not "genuinely" independent from the profession in 
many Member States 
The presence of practicing auditors in the gov ernance of the public ove rsight authorities is 
currently allowed by the legal framework. This , however, undermines the whole concept of 
independence and effective public oversight for statutory auditors and audit firms95. Some 
Member States like, Austria, Bulgaria, Denmark, France, Greece, Italy, Luxembourg, the 
Netherlands, Spain, Sweden and the UK have independent inspec tions systems which are run 
and executed by the staff of the public  oversight authorities, at leas t with regard to the audit of 
PIEs96. However, in most Member States, professiona l associations and/or practicing auditors are 
still involved in the execution of  external quality assurance revi ews. Also, there were instances 
where the system of investigations and penaltie s was run under the substantial influence of the 
profession and failed to implement its mandate97. 
                                                 
92 Köhler et al. (June 2009). 
93 Clarified Standards (IFAC)- The final set of clarified standards comprises 36 International Standards on 
Auditing (ISAs) and International Standard on Quality Control (ISQC) 1, including: One new standard, 
addressing communication of deficiencies in internal control; 16 standards containing new and revised 
requirements (these have been referred to as "revised  and redrafted ISAs"); and 20 standards that have been 
redrafted to apply the new conventions and reflect matters of general clarity only (these have been referred 
to as "redrafted ISAs and redrafted ISQC 1"). 
94 In France, the need to adapt the application of the auditing standards to the size of small companies has 
been recognised. See Annex 16 . 
95 Competent authorities for the tasks provided for in the Statutory Audit Directive (2006/43/EC): 
http://ec.europa.eu/internal_market/auditing/docs /dir/100201_competent_authorities_SAD_en.pdf  
96 These authorities may delegate their inspection tasks to the professional bodies, ev en with regard to the 
audit of PIEs, considering notably the low number of full-time inspectors they have. 
 In the other Member States, inspections are generally not carried out by the authorities. 
97 See IAASA (2010). Following the completion of a Preliminary Enquiry and the subsequent initiation of a 
Full Enquiry under section 23 of the Companies (Auditing and Accounting) Act 2003, the Authority and 
 
EN 23   EN Cause Underfinanced and/or weak structures of  national and EU-wide auditor supervision 
Effect  Lack of effective national and EU-wid e supervision of audit network firms 
There are many differences among the national audit regulators in terms of the structures, 
mandate or administrative capaciti es. The Commission Recommendation on external quality 
assurance for statutory audits and audit firms auditing public interest entities  has not achieved 
its objective of reducing the gap between audit re gulators. Some Member States have devoted 
considerable resources to an eff ective public oversight over the prof ession. This is the case of the 
Netherlands, France or Bulgaria, where inspecti ons are carried out by bodies both independent 
from the profession and from polit ical influence. In other Memb er States, the oversight bodies 
are relatively weak due to either budgetary constr aints or to weak oversight structures in certain 
Member States. Economies of scale could be generated if merged with other authorities, such as 
market regulators. 
The current EU-wide cooperation mechanism under the aegis of the European Group of 
Auditors' Oversight Bodies (EGAOB), an expe rt group chaired by the European Commission, 
does not have appropriate means to  ensure the convergence of supe rvisory rules, powers and the 
system of investigation and pena lties. The supervisory framework is not commensurate with the 
integrated structures of audit fi rms that go beyond national borders.  At present, the cross-border 
management entities that cover an audit network' s operations in various Member States are not 
supervised (only the "na tional" component of the network is supervised at a national level).  
With respect to effective supervision, the empi rical evidence (feed-back received from EU MSs 
supervisory bodies) shows that some of the na tional banking supervisory authorities have the 
right under national law to "veto" the appointment of statutory audi tors for financial institutions, 
although information is not publicly available as to  how frequentlly this ri ght has been exercised 
by supervisors. Also, to-date, no  auditor of the failed banks b een sanctioned fo r issuing clean 
audit reports to banks, which failed shortly afte r the report has been delivered (though a number 
are currently being investigated).  
3. BASELINE SCENARIO AND SUBSIDIARITY  
3.1. Baseline scenario 
If no change in policy occurs, statutory audit will be performed on the basis of the existing 
obligations under the Statutory Audit Directive and other rela ted legal acts (see Annex 2  for the 
existing legal framework), respective national le gislation, as well as se lf-regulatory codes.  
Continuing under the existing framework would pres erve the expectation ga p regarding the role 
and value of audit. Maintaining the current fo rmat of the audit repor t risks exacerbating the 
uncertainty among market agents ab out the real contribution of auditors as well as the capacity of 
the audited entity to continue as a goi ng concern, in particular for PIEs.  
                                                                                                                                                             
the Institute of Chartered Accountants in Ireland have agreed Terms of Settlement (‘Settlement’) on the 
basis that it has been determined that the Institute failed to comply with its approved investigation and 
disciplinary procedures. The Settlement details the Au thority’s findings and the associated sanctions.  
 
EN 24   EN Furthermore, the lack of a streamlined and well developed dialogue between auditors and 
supervisors, especially in the cas e of systemic financial institu tions will be a missed opportunity 
to use the auditor's work as a tool for financial stability.  
The provision of NASs by audit firms will continue to compromise the full independence of 
statutory audit providers. At the same time, the Audit Committee in its curre nt structure will not 
be in a position to perform its independent mon itoring function due to a lack of sufficient 
technical expertise as well as independence from  management. Just the mandatory rotation of 
key audit partners and self-regulation on the organi sation of audit firms do not address the threat 
of familiarity resulting from the audited comp any often appointing and re-appointing the same 
audit firm for decades. 
The different market entry barriers (see Annex 6 ) will continue to prevent non-Big Four audit 
firms from entering the audit market for large listed companies and financial institutions. The 
absence of any requirement to change auditor af ter a certain period will further entrench the statu 
quo.  
This situation is not likely to improve in a si gnificant manner across the Union in the absence of 
a legislative intervention at Union level98. Self-regulation will hardly  be a solution. In the 
aftermarth of the crisis, as shown by the deba te launched by the Commission Green Paper, most 
of the audit profession has reve rted to a "defensive reflex"99, justiying their role100 or denying 
any wrongdoing during the crisis101. Complancency has also been  observed. For the profession, 
the answer will be "back to busines s as usual", as soon as possible. 
Developments in national legislation may be expected in the absence of an intervention at the 
level of the Union. But such developments would inevitably lead to an even greater unlevel 
playing field, to the detriment of the internal market. The lack of ha rmonised application of 
clarified ISAs in the internal market will continue to generate a cost burden for audit firms, which combined with the requirement of an apti tude test in each Member State for access to a 
national statutory audit market will further prevent SMPs from  providing cross-border audit 
services.  
Considering the findings on audit quality, nationa l supervisors should have an interest in 
addressing the deficiencies revealed. However, the supervision of audit firms at national and 
European levels is not independent enough from the profession and its cu rrent effectiveness is 
questionnable. Moreover, individual recommendati ons after inspections can supplement but not 
replace a modern legal framework for auditing se rvices. As a result, supervisory action under the 
current circumstances is likely to exacerbate the problems of patchy audit quality in the internal 
market. 
                                                
 
98 See for instance Cham bers (2011), p.33: " Measures to address the folly of an oligopoly that has monopoly 
rights to practice upon a captive client base are overdue ." 
99 Expression borrowed from Bos (2011). 
100 See for instance the following extract  from the FEE (the Federation of European Accounts) reply to the 
Green Paper (p.2): "[…] evidence to date suggests that, despite very challenging economic circumstances 
and the financial market crisis, auditors have, overall, been performing their role as requested with 
diligence  […]" 
101 See for instance Valukas (2011) on  the role of the audito r in the events preceding the collapse of Lehman 
Brothers: " So to review the bidding, Lehman's senior execu tives weren't responsible because they relied on 
the auditors and other executives. The auditors weren' t responsible because they relied on the executives 
and the lawyers. And the lawyers relied on the executi ves. But the public – who relied on the financial 
statements – who do they get to rely on? " 
 
EN 25   EN 3.2. The EU's right to act and subsidiarity  
EU rules have partially regulated statutor y audit since 1984, when a directive (Directive 
1984/253/EEC) harmonised the procedures for the approval of auditors. That directive was replaced in 2006 by the Statutory Audit Directive, which expanded the scope to also cover some 
principles concerning the carry out of statutory audit and rela ted supevision and a few specific 
provisions on the audit of PIEs . The Statutory Audit Directive is based on the freedom of 
establishment provisi ons of the Treaty
102. Moreover, the EU has enacted ample legislation 
regarding the financial markets,  in many cases using the general internal market legal basis103, 
either alone or in combination with the freedom  of establishment provisions. Therefore, the EU 
has a right to act in this area,  covering both the rules on the access to the profession as well as 
the rules on the provision of the st atutory audit service to audited entities in the wide context of 
the financial markets. 
EU rules have always left large discretion to Member States, which in turn relied on self-
regulation by the profession. Even after the adop tion of the Statutory Audit Directive in 2006, 
self-regulation continued to exis t in most of the Member States in the areas covered by the 
Directive, including the statutory audits of PIEs. The crisis has shown that  self-regulation is not 
sufficient when looking towards the future. Thes e objectives cannot be ac hieved by the Member 
States either as important differe nces would continue to exist in  the regulatory framework put in 
place by them, which would undermine the single market. 
Concerning the problems that affect PIEs (see section 2.3 ), given the interc onnected nature of 
securities markets and financial actors, it is important that there is a harmonised framework 
within which audit is conducted ac ross the Union. It is critical that the role, independence of 
auditors and the market structure are dealt with at the level of the Union as PIEs in Europe often have cross-border activities. Legisl ation on protection of investment in issuers of securities or 
regarding conduct of business of financial institutions is also enacted at European level. 
Maintaining different approaches in Member States' audit regulation will not eliminate the 
problems discussed in the sections above. The need  for market initiatives to be coordinated at 
Union level was broadly acknowledged in the UK where the UK House of Lords recently organised a hearing regarding the audit market. A c oordinated approach at th e level of the Union, 
supplemented by international support, would also  lower the risk of regulatory arbitrage. 
                                                
 
102 Article 50(2)(g) of the Treaty on the Functioning of the European Union, TFUE (ex Article 44(2)(g) of the 
Treaty on the European  Community, TEC). Article 50 TFUE states: 
 "1. In order to attain freedom of establishment as regards a particular activity, the European Parliament 
and the Council, acting in accordance with the ordinary legislative procedure and after consulting the Economic and Social Committee, shall act by means of directives. 
 2. The European Parliament, the Council and the Commission shall carry out the duties devolving upon 
them under the preceding provisions, in particular: 
 […] 
 (g) by coordinating to the necessary extent the safeguards which, for the protection of the interests of 
members and others, are required by Member States of companies or firms within the meaning of the second paragraph of Article 54 with a view to making such safeguards equivalent throughout the Union; 
[…]."  
103 Article 114 of the TFUE (ex Article 95 TEC). Article 114 TFUE states: "1. Save where otherwise provided 
in the Treaties, the following provisions shall apply for the achievement of the objectives set out in Article 
26. The European Parliament and the Council shall, acting in accordance with the ordinary legislative procedure and after consulting the Economic and Social Committee, adopt the measures for the 
approximation of the provisions laid down by law, regulation or administrative action in Member States 
which have as their object the establishment and functioning of the internal market ." 
 
EN 26   EN The Commission also endeavours to co-ordinate its  work and that of Member States' with its 
international partners. To get international soluti ons to global problems it is therefore necessary 
to get a robust solution at the level of the Union and not just at the level of the Member State. 
The problems described in section 2.4 , which affect both auditors of PIEs and other entities 
(procedures for the approval of auditors and aud it firms of other Member States and the use of 
auditing standards), also call for harmonisation as they have a cross-border dimension. Action at 
Union level is therefore necessary and justified. 
4. OBJECTIVES  
Contribute to the efficient functioning of financial and non-financial markets by strengthening the market role 
of the audit profession: to provide relevant economic agents and the market with more reliable, transparent, 
meaningful and timely information at an acceptable cost about the veracity of financial statements of companiesGeneral objectiveSpecific objectives1. Clarify and define 
the role of the statutory 
auditors generally as well 
as with specific 
regard to PIEs2.Reinforce the
independence and
professional scepticism
of statutory auditors 
and audit firms in
the  provision of 
statutory audit to PIEs3.Improve market 
conditions for audits of 
PIEs with a view  to 
increasing audit quality4.Avoid unnecessary 
additional compliance 
costs for audited 
SMEs as well as 
for audit providers 
in a cross-border 
context 5.Improve the 
effectiveness, 
independence and 
consistency of the 
regulation and 
supervision of 
auditors
1.1.Improve business 
preparers/market 
understanding about the
scope of  audit generally
1.2.Improve the 
information that the 
auditor provides to users
and audited entities (PIEs) 
1.3.Improve the 
communication channels 
between auditors and 
supervisors of PIEsOperational objectives2.1. Reduce and mitigate
the risk of any conflict 
of interest due to the
provision of non-
audit services to PIEs
2.2. Reduce and mitigate 
the risk of any conflict of 
interest due to the existing 
system  of " auditee selects
and pays the auditor "
2.3. Reduce and mitigate 
the risk of any conflict 
of interest due to 
"familiarity threat"3.1.Facilitate 
switching of 
an audit firm
3.2.Facilitate an 
objective choice 
of an audit provider
3.3.Increase the 
choice of audit 
providers for PIEs4.1.Facilitate the 
cross-border recognition 
of audit providers' 
competence
4.2.Streamline and
harmonise standards on 
audit practice, independen-
ce and internal control of
audit firms across the EU
4.3.Ensure that 
statutory audit is 
adapted to SMEs needs5.2.Set-up an 
effective EU-wide
supervisory cooperation
mechanism that would
also ensure an
effective supervision
of supranational 
audit firm structures5.1.Ensure 
independence and
effectiveness of 
supervision of national
statutory auditors
and audit firmsContribute to the efficient functioning of financial and non-financial markets by strengthening the market role 
of the audit profession: to provide relevant economic agents and the market with more reliable, transparent, 
meaningful and timely information at an acceptable cost about the veracity of financial statements of companiesGeneral objectiveSpecific objectives1. Clarify and define 
the role of the statutory 
auditors generally as well 
as with specific 
regard to PIEs2.Reinforce the
independence and
professional scepticism
of statutory auditors 
and audit firms in
the  provision of 
statutory audit to PIEs3.Improve market 
conditions for audits of 
PIEs with a view  to 
increasing audit quality4.Avoid unnecessary 
additional compliance 
costs for audited 
SMEs as well as 
for audit providers 
in a cross-border 
context 5.Improve the 
effectiveness, 
independence and 
consistency of the 
regulation and 
supervision of 
auditors
1.1.Improve business 
preparers/market 
understanding about the
scope of  audit generally
1.2.Improve the 
information that the 
auditor provides to users
and audited entities (PIEs) 
1.3.Improve the 
communication channels 
between auditors and 
supervisors of PIEsOperational objectives2.1. Reduce and mitigate
the risk of any conflict 
of interest due to the
provision of non-
audit services to PIEs
2.2. Reduce and mitigate 
the risk of any conflict of 
interest due to the existing 
system  of " auditee selects
and pays the auditor "
2.3. Reduce and mitigate 
the risk of any conflict 
of interest due to 
"familiarity threat"3.1.Facilitate 
switching of 
an audit firm
3.2.Facilitate an 
objective choice 
of an audit provider
3.3.Increase the 
choice of audit 
providers for PIEs4.1.Facilitate the 
cross-border recognition 
of audit providers' 
competence
4.2.Streamline and
harmonise standards on 
audit practice, independen-
ce and internal control of
audit firms across the EU
4.3.Ensure that 
statutory audit is 
adapted to SMEs needs5.2.Set-up an 
effective EU-wide
supervisory cooperation
mechanism that would
also ensure an
effective supervision
of supranational 
audit firm structures5.1.Ensure 
independence and
effectiveness of 
supervision of national
statutory auditors
and audit firms
 
Figure 6. Objectives. 
5. IDENTIFICATION OF POLICY OPTIONS  
The set of policy options on substantive requirements  presented in this section aims at addressing 
the problems analysed in the problem definition section. They are presented in accordance with 
the objectives set out in section 4  above. A more detailed descri ption of each policy option is 
found in Annex 8 . 
The inherent complexity of the audit market and the important role audit plays for the market as 
a whole has been taken into account in the sel ection of options. In this  analysis, the existing 
business model for the provision of statutory audit services has also been challenged, and 
possible options for changing this business model have been assessed. As  a starting point, three 
alternatives have been discarde d. Firstly, it could be conceivable to require that the statutory 
 
EN 27   EN audit service is provided by a public authority (e.g. a court of auditors or similar) rather than by 
regulated (private) professionals . This could effectively address the problem of lack of 
independence. However, the practical implemen tation of such an alternative model present 
doubts as to the capacity of public national bodi es to undertake the huge task of providing 
statutory audit services to thousands of audited entities and the desirabili ty to create a public 
monopoly for the provision of statut ory audit services to companies. It would also raise questions 
as to who would supervise such body (the " Quis custodiet ipsos custodes ?" problem).  
A second alternative business model, which ha s been analysed is th e option to abandon the 
requirement to have the companies' accounts aud ited and to replace it with an obligation to 
insure the financial statements104. Under this option, insuran ce companies could provide 
coverage for investors in the audited company against losses su ffered as a result of problems 
with the company's published financial statements. Insurance companies, in order to lower their 
own risk, would then appoint an d pay audit firms to certify the accuracy of the financial 
statements. Thus, the auditor would no longer provi de a direct service to  the audited entity, 
which would reinforce his/her independence. Th e auditor's opinion would assist the insurance 
companies in setting future premiums and coverage  levels. The practical implementation of this 
alternative business model, however, is not with out difficulties. It would imply creating a new 
insurance market which currently does not exist. Doubt s have been expressed about the capacity 
of insurance companies to insure financial statements in this way105. As a result, this option 
would present several uncertainties as to its real practicability.  
As a third alternative model, merely strength ening the sanctioning regime has also been 
considered. However, it is estimat ed that if this  were done in isolation an d without changes to the 
legislative framework, it would be insufficient to  address the identified problems and achieve the 
described specific objectives . As shown in section 2.5 , the national supervis ory authorities are 
not always sufficiently independe nt from the profession, in part icular as regards inspections. 
Also, the number of sanctions is modest (see the description of the baseline scenario for 
objective 5.1 in Annex 8 ). The need to reinforce the sanctioning regime, as a complement to the 
policy options proposed, is examined below in section 8 .  
Specific objective 1: Clarify and define the role  of the statutory auditors generally as well 
as with specific regard to PIEs 
1.1 Policy options to improve business preparers/market understanding of the scope of audit generally 
0. Baseline scenario. No definition at EU level on the scope of audit. 
1. Clarify and specify the scope of statutory audit in the EU rules (without enlarging it) to reduce the 
expectation gap. Auditors/firms will be required to apply their professional scepticism throughout the 
performance of the audit. Requirements will be established regarding the important tasks to be undertaken 
when performing the audit work: i.e. appointment of adequate staff; organisation of audit file; market 
integrity and fraud prevention; responsibility of group auditors; internal quality control or record keeping.  
2. Redefine the scope of statutory audit to fill the expectation gap. The auditors will be required to assess 
forward looking information provided by the company, particularly in the context of "going concern". 
1.2 Policy options to improve the information that the auditor provides to users and audited entities (PIEs)  
0. Baseline scenario. Minimum requirements for the aud it report result in very short reports with standard 
language, no requirements for the provision of additional information to the audited entities.  
                                                 
104 This option is examined in US GAO (2008), p. 58. See also House of Lords (2011), §74 and Chambers 
(2011), p.33. 
105 See also House of Lords (2011), §74, in fine . 
 
EN 28   EN 1. Improve and expand the content of the audit report disclosed to the public. Set additional requirements for 
the audit report so it provides more information to the public.  
2. Require the preparation of a longer and more detailed report for the audited entity. An additional internal 
report providing detailed information on the audit carried out to the audit committee and management. 
3. Increase the communication between the auditor and audit committee. Articulating relations between the 
auditor and audit committee as regards reporting, regular dialogue and subsequent information to 
management. 
4. Combination of options 1 to 3. 
1.3 Policy options to improve the communication channels between auditors and supervisors of PIEs 
0. Baseline scenario. Beyond the obligation to report breaches of rules in certain  cases, no requirement for 
auditors to regularly engage with supervisors of the PIEs. 
1. Enabling (in law) and recommending regular dialogue between auditors and supervisors of PIEs (banks and 
insurance companies). No br each of confidentiality rules if auditors engage in a regular dialogue with the 
supervisors of PIEs.  
2. Requiring the establishment of regular dialogue between auditors and supervisors of PIEs (banks and 
insurance companies). Requiring th at such dialogue takes place e ffectively in all circumstances. 
Specific objective 2: Reinforce the independen ce and professional scep ticism of statutory 
auditors and audit firms in the provi sion of statutory audit to PIEs 
2.1 Policy options to reduce and mitigate the risk of any conflict of interest due to the provision of non-audit 
services to PIEs 
0. Baseline scenario. General criteria on independence applicable, but no direct prohibition of the provision of 
additional non-audit services to the audited entity. 
1. Prohibition of the provision of certain non-audit servi ces to the audited entity (blacklisting certain services). 
2. Prohibition of the provision of any non-audit services to the audited entities. But the provision of non-audit 
services to entities which are not audited would remain possible. 
3. Pure audit firms. Approved audit firms will only be allowed to provide statutory audit services and be 
unconnected to firms providing certain no n-audit services to audited entities.  
2.2 Policy options to reduce and mitigate the risk of an y conflict of interest due to the existing system of 
"auditee selects and pays the auditor " 
0. Baseline scenario. Companies continue to appoint auditors with a light intervention of the audit committee. 
1. Stricter rules on the procedure for the appointment of auditors with an increased role for a strengthened 
audit committee. Its recommendation for the appointment of the auditor shall be discussed at the general 
meeting of shareholders. Reinforcement of the indepe ndence and technical competence of the committee: at 
least two of its members must be independent and at least one have knowledge on audit.  
2. Appointment of auditor by a third party. A third party (i.e. a regulator) appoints the auditor. 
2.3 Policy options to reduce and mitigate the risk of any conflict of interest du e to a "familiarity threat" 
0. Baseline scenario. Restrictions on the duration of audit engagements only apply to the key audit partner; no 
specific requirements at EU level, except regarding ethics and the prohibition of contingent audit fees.  
1. Mandatory rotation of an audit firm. Audit firms will step down after a certain number of years of 
engagement and would only be allowed to take a new engagement with the same audited entity after a 
cooling-off period. 
2. Strengthening the role of the audit committee in overs eeing the work of the statutory auditors/audit firms. 
3. Establishing additional requirements on the in ternal organisation and governance of audit firms. 
4. Combination of options 1 to 3. 
Specific objective 3: Improve market conditi ons for audits of PI Es with a view to 
increasing audit quality. 
 
EN 29   EN 3.1 Policy options to facilitate switching of an audit firm106 
0. Baseline scenario. Companies do not want to spend management time to organise tenders and are ready to 
pay a premium to Big Four auditors as audit costs are relatively low compared to total turnover for most of 
PIEs. If the issue of "low switching" is not tackled, all other measures to improve the market functioning 
(objective 1.2 and objec tive 1.3) are likely to fail to achieve specific objective 1. 
1. Regular tendering. Audited entities will invite a mi nimum number of auditors/firms to participate in a 
tendering procedure, including an audit firm which is not among the four biggest players in the market.  
2. Mandatory rotation. The statutory auditor/audit firm will not be allowed to audit the same company after a 
certain number of years and an appropriate cooling off period (the same as option 1 under objective 2.3). 
3. Mandatory rotation of an audit firm via tendering (combination of option 1 and option 2).  
3.2 Policy options to facilitate an objective choice of audit provider 
0. Baseline scenario. Due to the lack of sufficient information and criteria to assess and compare the quality of 
audits, the reputation of Big Four audit firms will remain the most important proxy of audit quality and audit firms will continue to be selected on the basis of reputation rather than on the basis of more objective 
criteria of audit quality/price. In addition, in certain cases the objective selection of the auditor is also 
hampered by contractual clauses, which predetermine the choice of the auditor. 
1. Prohibit contractual clauses limiting the choice of audit firms (e.g clauses between the audited entity and a 
third party (such as a bank) requiring that the statutory audit is performed by a "Big-Four firm” only). 
2. Increase transparency on audit quality and on audit firms. Audit firms auditing PIEs will disclose their 
financial statements and more information in their tran sparency reports that they are currently required to 
publish annually. They will also report information on fees to supervisors. Competent authorities will 
disclose the results of inspection reports by firm.  
3. Establish an audit quality certification. A pan-Europe an system that certifies that an auditor or firm meets 
some quality requirements enabling them to carry out high quality statutory audits of PIEs. 
4. Combination of options 1 to 3. 
3.3 Policy options to increase the choice of audit providers for PIEs 
0. Baseline scenario. PIEs continue  to face the issue of limited percei ved choice of audit firms with the 
capacity to perform high quality statutory audits, in particular in the segment of large and systemically important PIEs. 
1.1 Pure audit firms. PIE audits will be performed by fi rms who will be allowed to provide only audit services 
(same as option 3 under objective 2.1). 
1.2 Joint audits: obligation for large PIEs to have more than one audit firm, at least one of which is not among 
the largest four audit firms. In the tendering process for their selection,  the scope and responsibility of each 
auditor should be clearly defined. Both audit firms will have joint responsibility for the audit. 
1.3 Joint audits: obligation only for Large PIEs in the Financial sector to have more than one audit firm, at least 
one of which is not among the largest four audit firms. In the tendering process for their selection, the scope 
and responsibility of each auditor shoul d be clearly defined. Both audit fi rms will have joint responsibility 
for the audit. 
1.4 Joint audits for all large PIEs conducted by pure audit firms.   
1.5 Mandatory joint audit only to FIs by pure audit firms  
1.6. Voluntary joint audit to all PIEs: creates incentives for audit providers and audited entities alike to use joint 
audit on a voluntary basis.  
2. Lift restrictions on the ownership of audit firms. Lifting any restrictions currently preventing investors from 
non-audit backgrounds to buy shares and invest in audit firms. But holders of voting rights in an audit firm 
shall be independent of the audited entity and not involved in the decision-taking of the audited entity.  
3. Establish market share ceilings for large audit servi ce providers. No audit firm shall be allowed to have 
more than 20% of the market share regarding the statutory audit of PIEs (which would ensure at least five 
players in the market). 
                                                 
106 Some of the policy options in 3.1 are closely connected to the objective identified in 2.3 (mitigate the risk 
of familiarity threat). As explained in section 2.3, there is a link between the l ack of effective choice of 
auditor for large PIEs and the independence problems. 
 
EN 30   EN Specific objective 4: Avoid unnecessary additi onal compliance costs for audited SMEs as 
well as for audit providers in a cross-border context  
4.1 Policy options to facilitate the cross-border recognition of audit providers' competence 
0. Baseline scenario. Auditors and audit firms shall be approved in all MS in which they wish to carry out 
statutory audit. Auditors are required to pass an aptitu de test in each Member Stat e in which they want to 
perform audits. 
1. Mutual recognition of audit firms. An audit firm a pproved in a MS will automatically be approved in all 
MS, provided that the key audit partner leading the audit is approved as an auditor in the concerned MS. 
2. Mutual recognition of statutory auditors approved in a Member State. 
3. Introduction of an adaptation period scheme and incr eased convergence, transparency and predictability in 
the aptitude test. 
4.2 Policy options to streamline audit standards on practice, independence and internal control of audit firms 
across the EU 
0. Baseline scenario. Auditing standa rds may differ in Member States. 
1. Introduction of clarified ISAs. With possible national add-ons but no carve-outs  
2. Introduction of clarified ISAs. With possible national carve-outs by Member States. 
4.3 Policy options to ensure that statutory audit is adapted to SMEs needs 
0.  Baseline scenario. Same auditing standards apply irrespective of size of audited entity. 
1. Adapt audit standards to the size and complexity of the business of the audited entity. Request Member 
States to ensure a proportionate and simplified audit for SMEs. 
2. Introduce limited review s for SMEs instead of statutory audit.  Audits could be replaced by "limited 
reviews", which are less costly, but provide a lower le vel of assurance compared to a statutory audit. 
Specific objective 5: Improve the effectivene ss, independence and EU-wide consistency of 
the regulation and supervision of auditors  
5.1. Policy options to ensure independence and effecti veness of supervision of national statutory auditors and 
audit firms 
0. Baseline scenario. The current legislative framework does not prohibit the close involvement of the audit 
profession through their professional bodies in audit supervisory matters. 
1. Establishment of an independe nt EU oversight authority. This authority will be responsible for the 
supervision of national audit firms auditing PIEs with a cross-border impact for stakeholders. 
2. Strengthening national audit supervisory authoritie s. The mandate, powers and independence requirements 
for audit supervisors will be set at EU le vel, but supervision carried out nationally. 
5.2 Policy options to set up an effective EU-wide supe rvisory cooperation mechanism that would also ensure 
an efficient supervision of supr anational audit firm structures 
0. Baseline scenario. Commission services continue to lead a group of experts composed of representatives of 
national public oversight authorities.  
1. Cooperation within a level-3 Lamfalussy-type committee. Independent legal status and EU-wide structure 
which would decide on its own work, with the Commission as observer only. 
2. EU-wide cooperation within ESMA. In cooperatio n with EBA and EIOPA, ESMA takes the responsibility 
for EU-wide cooperation on auditor supe rvision matters for audits of PIEs. 
3. New European Authority of audit supervisors. New au thority specifically devoted to the supervision of the 
audit market. 
 
EN 31   EN 6. ANALYSIS OF POLICY OPTIONS  
Sections 6.1 to 6.5  show the analysis of the policy options107: sections 6.1 to 6.3 deal with 
objectives 1 to 3 and only concer n the statutory audit of PIEs; wh ile sections 6.4 and 6.5 address 
statutory audit in general. Annex 20  provides specific information on the costs associated with 
the preferred policy options. Annex 9  summarises the stakeholder views with regard to the 
preferred policy options. 
Summary tables measure the comparative advantages and disadvantages of the different possible solutions against 
three criteria:  
(1) effectiveness  (the extent to which the option is likely to fulfil the objectives formulated in section 4);  
(2) convergence  (the extent to which the framework for the conduct of statutory auditors and audit firms is governed 
by the same requirements in all Member States and a level playing field created; and  
(3) cost-effectiveness  (the extent to which the objectives are likely to be met having considered the costs of 
implementing the option).  
The tables present the magnitude of im pact as compared with the baseline s cenario (indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  
Section 6.6  analyses the policy options from the perspective of the coherence  criterion (the 
extent to which options are coherent with th e overarching objectives of EU policy). Finally, 
section 6.7  discusses the choice of legal instrument.  
6.1. Policy Options to deal with the role of the auditor and the scope of audit  
Objective 1.1: Sub-policy options to improve bu siness preparers/market understanding of the 
scope of audit generally 
Figure 6 Effectiveness 
Objectives 
Policy option  Objective 1.1 Convergence Cost-
effectiveness
0. Baseline scenario 0 0 0 
1. Clarify and specify the scope of statutory audit to reduce the expectation gap  + + ≈  
2. Redefine the scope of statutory a udit to fill the expectation gap - + - 
Under the baseline scenario  the expectation gap would remai n. Existing legislation and self-
regulatory standards (developed by the profession) on the scope of statutory audit do not provide 
enough clarity to stakeholders. Option 1  would not change the scope of the statutory audit. It 
would clarify the scope of the a udit without enlarging it and speci fy the role of  the auditor by 
requiring that auditors/ firms a pply their professional scepticism throughout the performance of 
the audit. Establishing clear rules and disclosi ng more information on th e scope would contribute 
to increased clarity and certainty on the audit scope – and as a result  audit quality – as well as the 
convergence of legislation across the EU; current ly the scope of statutory audit is largely 
dependent on self-regulatory audit standards. Fu rthermore, by disclosing further information on 
the work carried out by auditors, it would enable a broader public to better understand this scope 
and therefore, provide a measure to close the e xpectation gap. However, the scope of an audit 
would not include the assurance on the future viab ility of the audited entity. Nevertheless, this 
does not exclude an assessment of the "going con cern" as part of the opinion. This option is 
                                                 
107 The European Federation of Accountants (FEE) has prepared, for its conference of 30 June 2011, five 
briefing papers addressing some of these options. They deal with: Developing the Role of the Auditor and 
Auditor’s Communication; Appointment of the Auditor; Provision of Non-Audit Services to Audit Clients; European Passport for Auditors and Audit Firms; and Future Supervision of the Audit Profession – Further 
Cooperation. The briefing papers  are available at FEE website 
(http://www.fee.be/news/default.asp? library_ref=2&content_ref=1363). 
 
EN 32   EN largely supported by the majority of  the respondents to the Green Paper108. The European 
Parliament underlines that " professional scepticism is vital in auditing "109. Option 2 , on the 
contrary, is controversial: it w ould enlarge the scope of stat utory audit to encompass the 
assessment of forward looking information provided by the company and to provide an economic and financial outlook for the company be yond the examination of the "going concern". 
This option is supported by some representatives of the profe ssion, whereas public authorities 
and preparers strongly disagree
110. Although option 2 would contri bute to the convergence of 
rules, it is generally perceive d, (at least by many respondents to the Green Paper), as not adding 
value to stakeholders. Management is primaril y perceived as being responsible for forward-
looking information and other market actors such as  equity analysts or credit rating agencies, are 
already processing and assessing the reliability of that information. Hence, option 2 would 
duplicate efforts and generally incr ease costs for audited entities wi thout any clear benefit. As a 
result, option 1 is the preferred policy option . 
Objective 1.2: Sub-policy options to improve the information that the auditors provide to users 
and audited entities (PIEs) 
Figure 7 Effectiveness 
Objectives 
Policy option  Objective 
1.2  Objective 
5 Convergence  Cost-
effectiveness
0. Baseline scenario 0 0 0 0 
1. Improve and expand the content the a udit report disclosed the public + + + ≈ / + 
2. Preparation of a longer and more deta iled report for the audited entity ++ ++ ++ ≈ /+ 
3. Increase the communication between the auditor and the audit committee  ++ ++ ++ ≈ /+ 
4. Combination of options 1 to 3. ++ ++ ++ ≈ / + 
Current practice (baseline scenario ) is to prepare template aud it reports, so investors have no 
means to understand what is behind the audit work111. In the absence of legislative developments 
at EU level it is unlikely th at objective 1.2. would be achieve d through voluntary efforts by 
auditors and audited entit ies to prepare more m eaningful audit reports112 or to present an 
additional longer and more detailed report to  the audited entity for internal purposes113. Also, the 
current flexibility in the relations between audi tors and supervisors of PIEs, although valuable, 
does not guarantee sufficient engagement between these actors. Therefore, the value added of 
statutory audit is likely to continue to be pe rceived as low by stakeh olders. The expanded and 
improved content of the audit report (option 1 ) would provide greater incentives for higher 
quality audits114. Moreover, option 1 will also facilitate greater engagement by the investors who 
would attach greater value to the stat utory audit. The longer report (option 2 ) and the increased 
communication between the auditor and the audit committee (option 3 ) would also result in 
                                                 
108 Including professional bodies, associations linked to th e profession, investors, public authorities, preparers 
and others (some representatives of the profession, howe ver, maintain that the expectation gap is unlikely 
to be closed). There is wide support as well for reinforcing professional scepticism. 
109 See European Parliament (2011), §16. 
110 The European Parliament suggests studying this issue. See European Parliament (2011), §10. 
111 Only in France, due to a legislative requirement, do audit reports systematically provide more information 
than the current minimum requirement in the EU rules. 
112 Despite the integrated networks of audit firms, this  has not resulted in this best practice being extended. 
Fear of possible liability implications appears as a strong deterrent for auditors/audit firms to provide more 
information. 
113 This longer internal report is mandatory in Germany, Austria and Switzerland. Despite the integrated 
networks of audit firms, this best practice has not been extended. 
114 This option would also help to reduce the expectation gap on the scope of the audit. As described above, 
the audit report is a proxy to the scope of the audit.  
 
EN 33   EN greater incentives for hi gher quality audits since it would facilitate the monitoring of statutory 
audit work and an assessment of quality by the audit committee. This should facilitate the tasks of audit supervisors thus al so contributing to achieving th e objective of improving audit 
supervision in the EU (objective 5
). These options have received large support from many 
categories of stakeholders, as outlined in the replies to the Green Paper. The European Parliament is also in favour of providing more information in the aud it report, of auditors 
focusing more on substance rather than on form and of enhanced dialogue between the auditor 
and the audit committee
115. The additional costs116 resulting from these options are estimated to 
be moderate (see Annex 20) . Options 1 to 3 are not mutually exclusive. Indeed, the combination 
of the three (option 4 ) would result in positive synergies, in particular as regards the incentives to 
improve audit quality, facilitate  the monitoring tasks of the a udit committee and the supervision 
of auditors' performance. Enhan ced monitoring and supe rvision of the audit work would lead to 
improved quality and added value of the statutor y audit. Therefore, option 4 is the preferred  
option . 
Objective 1.3: Sub-policy options to improve the communication channels between auditors 
and supervisors of PIEs 
Figure 8 Effectiveness 
Objectives 
Policy option  Objective 1.3 Objective 5 Convergence Cost-
effectiveness
0. Baseline scenario 0 0 0 0 
1. Enabling (in law) and recommending regular dialogue between 
auditors and supervisors of PIEs (banks and insurance companies) + ++ + + 
2. Requiring the establishment of re gular dialogue between auditors and 
supervisors of PIEs (banks and insurance companies) ++ ++ + + 
The current situation and financial crisis (baseline scenario ) shows that structured dialogue 
between regulators/supervisors of PIEs, in particular financial in stitutions (such as banks), and 
their auditors does not appear to be sufficiently developed117. However, research underlines the 
benefits of establishing such structured dialogue118, thus meeting the objectives of improving the 
communication channels between auditors an d supervisors (objective 1.3) and EU-wide 
supervision over auditors (objective 5 ). Establishing dialogue betw een supervisors of banking 
and insurance supervisors and the auditors of banks and in surance companies received 
substantial support in th e public consultation. The European Parliament also supports two-way 
                                                 
115 See European Parliament (2011), §§9, 11 and 18. 
116 The additional costs for options 1 and 2 are the additional time spent in drafting the expanded audit report 
and the additional internal report. Concerning option 3,  additional costs for the audited entity would result 
from the increased engagement of audit committee members and key audit partners (e.g. hourly fees of key 
audit partners and the compensation for the audit co mmittee members). This increase may vary largely 
from company to company.  
117 See for instance Dewing and O’Russell (2011), explaining that in the UK, the banking supervisor prior to 
the crisis did not really engage in any struct ured dialogue with the auditors of banks.  
118 Ibid. Since 1934 auditors have had a role in regulating banks in Switzerland – in a so called 'dualistic' or 
'two-tiered' system. All auditors in Switzerland get a normal audit licence from the audit oversight 
authority, but to audit banks they must also obtai n a special licence from the banking supervisor. Only a 
small number of auditors are licensed to undertake bank audits. The banking supervisory has power to 
observe the audit on-site during the audit. Auditors of banks undertake normal statutory auditors and report 
to the shareholders under company law. They also undertake risk-based financial and regulatory audits, including direct supervisory tasks, and report to the banking supervisor under banking law. For large banks 
(e.g. Credit Suisse and UBS), the banking supervisor ca rries out additional direct supervisory activity. It is 
the banking supervisor who inspects the auditors work with regard to the audits of banks.  
 
EN 34   EN communication between auditors and supervisors of financial institutions119. Of the two options 
presented, option 1  has the advantage of giving supervisor s more flexibility as to whether they 
should hold such dialogue or not depending on the different size a nd nature of audited entities 
involved. The disadvantage is that it may lead to no dialogue at all if the auditor decides not to 
engage. Option 2 , however, ensures that the dialogue will e ffectively take place and, at the same 
time, allows for sufficient flexibility to be built into the system so as to avoid the requirement 
becoming a meaningless bureaucra tic obligation. The expected be nefits for the supervisory 
system from both options would outweigh the expected moderate costs (e.g. meetings)120. The 
preferred option is option 2 . 
6.2. Policy Options to deal with conflicts of interest 
Objective 2.1: Sub-policy options to prevent any co nflict of interest arising from the provision 
of non-audit services to PIEs 
Figure 9 Effectiveness 
Objectives 
Policy option  Objective 2.1  Objective 3.3. Increase the choice 
of audit providers for PIEs Convergence Cost-
effectiveness
0. Baseline scenario:  0 0 0 0 
1. Prohibition of the provision of certain non-audit 
services to the audited entity + ≈ + +/  ≈ 
2. Prohibition of the provision of any non-audit 
services to the audited entities ++ - + +/ ≈ 
3. Pure audit firms  ++ + + + 
A significant proportion of the prof ession consider that the existi ng situation (bas eline scenario ) 
is sufficient to avoid or mitigate any threat to  independence. However, the existing rules allow 
for a “case-by-case” examination of potential conflicts of interest121, giving a large interpretation 
margin to auditors. As a result, it is likely that the audit of PIEs will continue to be potentially 
compromised due to the 'business potential'  of providing NAS. Option 1 (blacklisting122) would 
have a positive effect on streamlining and harmonising policies among Member States123, 
creating a level playing field for all audit providers in the EU. It  would also eliminate the legal 
uncertainties and potential conflicts of interest124 due to discrepancies in  the blacklisting among 
Member States on the one hand and the global ge ographical coverage of big audit firms on the 
other hand. This is the option supported by the European Parliament125. Some stakeholders 
(authorities, investors) could al so accept it. This option could be supplemented with a cap on the 
                                                 
119 See European Parliament (2011), §§13 and 42 to 44). 
120 See Annex 20 for the cost estimates for this option as  well as the cost estimates for such meetings – FSA 
(2011). 
121 Only France and Belgium have developed lists of authorised and non-authorised services. 
122 The blacklist could include services such as prep aring accounting records an d financial statements, 
bookkeeping services, designing and implementing financial information technology systems, etc. See 
Annex 8 . 
123 Belgian and French lists are not identical, for instance. 
124 For instance, an audit firm proving the same NAS to  several entities of the same group in different MSs 
may be in a situation of conflict of interest in one and in not in the other MS due to the differences in the 
way NASs are treated. In such a case in order to provide  the audit service to the parent undertaking of the 
group, the audit firm may apply the more lenient rules on independence of the country of the parent 
undertaking in the assessment of potential conflict of inte rests at the level of a given subsidiary, even if the 
legislation in the country of the subsidiary is stricter.  
125 European Parliament (2011), §29 and seq. The European Parliament also suggests that the role of the audit 
committee in deciding whether the provision of NAS is possible should be reinforced. 
 
EN 35   EN NAS fees compared to the tota l audit fees for a given client126. However, recent evidence from 
the US127 shows that it is unlikely that option 1 woul d be sufficient to fully address the issue of 
audit firm independence128. Option 2  would prevent a potential conf lict of interest and would 
preserve professional scepticism129. This would be similar to the previous option but would have 
a greater positive effect on independence becaues no NAS could be provided to the audit client
130. This option is supported by investors and accepted by some representatives of the 
profession, provided it applies to PIEs only131. A drawback, however, is that if the audit firm 
provides NAS to a particular client, it would no longe r be able to provide audit services to that 
client, which could de facto  reduce the number of audit firms eligible toaudit large PIEs in the 
short term132. At the same time, this option should fac ilitate the growth of mid-size audit firms 
focusing on audit services. As a result, option 2 does not integrate well with the policy options 
regarding objective 3.3. Option 3  (see Annex 10  on this option) would also  solve the issue of the 
potential conflict of interest, as the audit firm would only be allowed to provide audit services. 
Audit firms consider that this option might de prive them of the knowledge and understanding of 
their clients' businesses which they deem necessary for the provision of good quality audit services. However, contrary to this percepti on, this option would create incentives, on both the 
demand and the supply sides, to focus on audit quality: PIEs would have to select an auditor 
purely on the basis of their a udit capabilities and audit firms would have to focus on audit 
services, which would significantly reinforc e audit quality and th e perception of the 
independence of the audito r. At the same time, this option would not result in a reduction of 
eligible audit firms
133 and therefore, has positive effects regarding the audit of large PIEs, 
particularly from the perspectiv e of objective 3.3 (see  below, also regard ing the proportionality 
assessment and the need to adapt this option to the size of audit firms). From the point of view of 
                                                 
126 An option that would be based, however, only on a cap on NAS fees (without blacklisting certain services) 
would not be practicable because of the risk of self-review. 
127 This option is currently the situation in the US afte r the enactment of the Sarban es-Oxley Act. In the US, 
the blacklist is combined with a cap on the maximum amount of NAS fees compared to the audit fees for a 
given client. 
128 See Doty (2011a): " Despite those requirements [blacklisting of the provision of certain non-audit services], 
PCAOB inspection reviews of partner evaluation and compensation processes find examples of seemingly 
unrestrained enthusiasm – in partners' self-evaluatio ns, in their supervisors' evaluations of their 
performance, and in agreed performance goals – for selling services to audit clients ."  
129 For instance in the EU , credit rating agencies are not allowed to provide consultancy or advisory services 
to the rated entity or a related third party regarding th e corporate or legal structure, assets, liabilities or 
activities of that rated entity or related third party. See Regulation (EC) No 1060/2009.  
130 The incentive for the audit firm to rename a non-audit service so as to avoid being captured by the black list 
would disappear. 
131 On the contrary, audit firms fear the weakening of  the range of skills they can offer and anticipate 
difficulties in attracting talented staff. It may be argu ed, however, that if talented staff is recruited to 
provide NAS rather than audit services, this would have no direct effect in raising audit quality. 
132 For instance, information provided by Assonime, the association of Italian listed companies, suggests that 
large Italian PIEs, when implementi ng the rotation of audit firm rule, find themselves faced with a very 
limited choice. Sometimes, only one audit firm (a Big-Four audit firm) is available to provide the statutory audit service (the outgoing audit firm being prevented from providing the service during the cooling-off 
period; the two other large audit firms being prevented from providing the service because of independence 
rules either in Italy or with regard to subsidiaries in  other countries, and smaller audit firms are not always 
able to cope with the geographical coverage of the group of the PIE). This implies a shift of bargaining 
power to the detriment of the PIE. It also effectivel y results in rotation between two Big-Four audit firms. 
Chambers (2011) also points at this idea: " In several sectors only three firms are active auditors. It may be 
impossible for a large bank to change to another Big Four auditor due to conflicts […] ". 
133 Under options 1 and 2, an audit firm providing a blacklisted NAS or simply NAS to a client is de iure  not 
eligible to provide audit services to that client. If su ch firm is a Big Four audit firm, it would significantly 
reduce the number of available providers of audit services to large PIEs, at least in the short term. On this 
issue, see US PCAOB (August 2011), p. 21. 
 
EN 36   EN convergence, it has similar positive effects as the ot her two options. In terms of the costs, there is 
likely to be an increase in the costs of audit, in particular for PIEs, due to lost synergies derived from the provision of both audit and NAS by the a uditor. A combination of options 2 and 3 could 
be possible, depending on the size of the audi t firm, and is the preferred policy option.  
Objective 2.2: Sub-policy options to mitigate the ri sk of any potential conflic t of interest due to 
the existing system of "audit ee selects and pays the auditor"  
Figure 10 Effectiveness 
Objectives 
Policy option  Objective 2.2:  Objective 3: improve market 
conditions for audits of PIEs Convergence Cost-
effectiveness
0. Baseline scenario 0 0 0 0 
1. Stricter rules on the procedure for the 
appointment of auditors with  an increased role for a 
strengthened Audit Committee ++ + + ≈/+ 
2. Appointment of auditor by a third party ++ + ≈/+ ≈/- 
Under the baseline scenario,  the inherent conflict of interest would remain, as would the different 
independence requirements in Member States. Option 1134 would positively contribute to 
ensuring better monitoring of th e independence of auditors. Impr oving the capacity  of the audit 
committee to take informed decisions during the se lection process for the statutory audit provider 
would also facilitate the entry of new statutory audit providers into the market (counterbalancing 
the company's overreliance on the continuing provisi on of audit services by the same Big Four 
audit firm). Such selection processes would be based on streamlined criteria across the Union. 
There may be additional costs for PIEs in re cruiting Audit Committee members with relevant 
technical profiles as well as remuneration for their greater involvement as experts. Option 2  as a 
general rule was not supported by the vast major ity of respondents to the Green Paper as this 
option might be costly and difficult to enforce135. It would also take away  the discretion of the 
Audit Committee and the shareholders. Convergence would remain challeng ing as the selection 
process would be difficult to streamline across th e EU. Option 2 could be considered for PIEs 
with systemic importance (e.g. some financial in stitutions), where the c hoice and performance of 
the statutory auditors could have a big infl uence on preserving market  stability and where 
banking and insurance supervisors have an interest in closel y monitoring the audit work. 
However, it is questionable whethe r it would add any value compared  to a solution that currently 
exists in several Member States136: the possibility for banking supervisors to veto the 
appointment of an auditor. A veto possibility ap pears sufficient to allow the banking supervisors 
to exercise influence on the appointment of the auditor while integrating within the mechanisms 
and dynamics of option 1, thus pr eserving the rights of the PIE shareholders. The introduction of 
such a veto at a Union level app ears to be a preferable approach137. Option 1 , maintaining the 
                                                 
134 Strengthening the requirements for the selection of audit committee members would mean that at least one 
member shall have an audit qualification and at l east two members shall have competence in accounting 
and/or auditing. In addition, the committee members as a whole should have experience in the sector of 
operation of the company. In terms of independence, the majority of the members should be independent (including the chairman).  
 The European Parliament supports this option. See European Parliament (2011), §§ 15, 22 and 23. 
135 It received, however, some su pport from public authorities fo r certain specific situations. 
136 Veto rights exist in at least the following count ries: AT, BE, BU, CZ, DE, FR, IE, LT, LV, MT, PT, RO 
and SK. A pre-approved list of bank auditors exists in BE. In EE, the authority can appeal to the courts if 
unsatisfied with the auditor appointed. There is not enough public evidence on the formal use of these 
rights in most of these countries. It appears that authorities use soft powers in this regard. 
137 This option could be accepted by some stakeholders , including investors, authorities and the profession. 
 
EN 37   EN possibility for banking and insuran ce supervisors to veto the appoint ment of an auditor, is the 
preferred policy option.  
Objective 2.3: Sub-policy options to mitigate the ri sk of any potential conflic t of interest due to 
a "familiarity threat" 
Figure 11 Effectiveness 
Objectives 
Policy option  Objective 2.3 Objective 3.1: facilitate 
switching of an audit firmConvergence Cost-
effectiveness 
0. Baseline scenario 0 0 0 0 
1. Mandatory rotation of an audit firm ++ ++ + + 
2. Strengthening the role of the audit committee in 
overseeing the work of the st atutory auditors/audit firms + + +  ≈/+ 
3. Establishing additional requirements on the internal 
organisation and governance of audit firms + n.a. +/  ≈ ≈ 
4. Combination of options 1 to 3  ++ ++ + + 
The European Parliament seems satisfied with the statu quo  on this point (baseline scenario ): 
while it regards external rotation as a means of  strengthening the indepe ndence of auditors, it 
reiterates its view that " the existing partner rotation arrangements provide the independence 
necessary for audits to be effective "138. This view is also supporte d by the majority of the 
profession, who refer to academic research showing that rotation of audit firms would harm audit 
quality and increase costs. The Italian experience is not considered to have had positive effects (see Annex 11
 for a description of the ma in arguments for and against the rotation of audit firms, 
including the Italian experience). The baseli ne scenario, however, risks perpetuating the 
syndrome of decades-long audit engagements, where the partner of a firm's long standing (sometimes over a hundred years) audit client na turally remains under pressure not to lose the 
client
139. The audit committee, at its current level of low effectiv eness (cf. respondents to the 
Green Paper) would continue to have little impact  on the elimination of the 'familiarity threat'.  
Limiting the duration of the audit engagement an d requiring the rotation of audit firms (option 1 ) 
is likely to have a positive effect on mitigati ng potential conflicts of interest due to the 
"familiarity threat"140. Furthermore, having a uniform rule across the Union will create a level 
playing field in the internal market. It will have  a certain cost for both PIEs (assigning resources 
to help the new auditor in the first year) and audit firms (more resources needed to cover the 
learning curve in the first year of the assignmen t). These costs could, howe ver, be contained by 
enforcing clear rules on access to information a nd the transfer of knowledge about the audited 
entity from the previous audit firm141. It would be crucial to find the right balance between the 
                                                 
138 See European Parliament (2011), §26. On the cont rary, the US has recently launched a reflection on 
"whether mandatory audit firm rotation would help address the inherent conflict created because the 
auditor is paid by the client " (see Doty (2011a), section III.B). A consultation paper was published in 
August 2011. See US PCAOB (August 2011). 
139 See above Section  2.3.2. 
140 In the words of the US audit oversight body: " [b]y ending a firm's ability to turn each new engagement into 
a long-term income stream, mandatory firm rotation could fundamentally change the firm's relationship with its audit client and might, as a result, signific antly enhance the auditor's ability to serve as an 
independent gatekeeper ." See US PCAOB (August 2011), p. 9. 
141 This cost may diminish if a specific and detailed handover file is provided by the outgoing auditor to the 
incoming one. Article 23(3) of the Statutory Audit Directive sets a general principle that the former 
statutory auditor has to provide the incoming audit firm with all relevant information concerning the audited entity. However, this general principle is not further specified. 
 Interestingly, Assonime (the Italian asssociation of listed companies) suggest a different solution to this 
problem of potential loss of knowledge. Assonime sugg ests that audited companies could be allowed to 
 
EN 38   EN appropriate duration of the mandate of the auditor to ensure that disproprortionate costs due to 
very short mandates are avoided and ensure that  the "familiarity threat" is addressed. Indeed, 
given that such switching will only occur periodi cally, the cost will effectively be spread over 
several years. Therefore, a 9 year  maximum duration appears proportionate142. Strengthening the 
role of the audit committee143 as a more independent body to ov ersee the work of the statutory 
auditors/audit firms (option 2 ) will have an overall positive effect (see also previous section). 
However, option 2, in isolation, would not achieve  the same positive effets that rotation achieves 
in addressing the familiarity threat: its effectiv eneess could be affected depending on the quality 
of the audit committee members and their engagement144. The cost-effectiveness of this option, 
due to the additional cost resulting from the enhanced engagement of the audit committeee, might be only slightly positive. Establishing additional requirements for the internal organisation and governance of audit firms (option 3
) will have a positive impact on the performance of audit 
work so as to avoid conf licts of interest. Since such policies/ procedures already exist in a number 
of audit firms, mainly resulting from self regulation or national st andards, option 3 would 
streamline good practice at almost no cost for audit service providers.  
The combination of these options (option 4 ) has potential positive synergies, specifically because 
the strengthened audit committee would be better placed to play an active role in the selection 
process. Option 4 is the preferred policy option. In terms of proportionali ty, it is necessary to 
adjust options 2 and 3 to the size of  PIEs and audit firms respectively. 
6.3. Policy Options to improve market conditions for audits of PIEs with a view to 
increasing audit quality 
The conflict of interest problem leading to und ermined independence of the auditor is direcly 
addressed by objective 2. However, as described in  the problem definition, the conflict of interest 
problem cannot be solved if ther e is a limited choice of auditors in the market. Hence, the need 
to pursue objective 3.  
Objective 3.1: Sub-policy options to facilitate switching of an audit firm145 
Figure 12 Effectiveness 
Objectives 
 
Policy option  Objective 
3.1:  Objective 2.3: mitigate the risk of 
any potential conflict of interest 
due to "familiarity threat" Convergence Cost-
effectiveness
0. Baseline scenario 0 0 0 0 
1. Regular tendering +/  ≈ +/  ≈ +/  ≈ ≈ 
                                                                                                                                                             
appoint the new audit firm during the 12 months before the expiry of the previous audit firm engagement. 
In this way, the incoming auditor could have the possibility to gain an understanding of the company in advance and to start the audit work on day 1 of the financial year that he/she will audit. Currently, audited 
entities would typically appoint the ne w auditor in the annual general meeting approving the accounts of 
the previous financial year, which usually takes place in  April. Therefore 4, months are lost for the new 
auditor. See the reply of Asso nime to the Green Paper.  
142 This is the maximum duration of audit engagements in Italy, where the rotation rule is mandatory. In 
Brazil, where rotation of audit firms currently takes pl ace every 5 years, there stock exchange supervisor is 
considering to extend this peri od to 10 years. See CVM (2011). 
143 On the audit committee, s ee generally ECODA (2011). 
144 Investors, public authorities and acad emics are split on this issue. For some, regular tendering of audit 
contracts (see section 6.3) with greater involvement of audit committees and shareholders would be enough 
to address the familiarity threat. For others, rotation of audit firms would be necessary.  
145 Some of the policy options in 3.1 are closely connected to the objective identified in 2.3 (mitigate the risk 
of familiarity threat). As explained in section 2.3, there is a link between the l ack of effective choice of 
auditor for large PIEs and the independence problems. 
 
EN 39   EN 2. Mandatory rotation of an audit firm + ++ +  + 
3. Mandatory rotation of an audit firm via tendering ++ ++ + +/++ 
Under the baseline scenario , auditors will continue to enjoy long continuous engagements and 
companies will remain reluctant to spend management time to organise tenders. Companies are 
ready to pay a premium to Big Four audit firms as audit costs are relatively low compared to 
total turnover (see figure  13) for most of PIEs.  
 
Figure 13. Indication of the differential in audit fees between the Big Four and mid-tier audit firms. 
Source: Oxera (April 2006), table 5.2, page 71.  
If the "low switching" issue is not addresse d, all other measures to improve the market 
functioning (e.g. with regard  to objectives 1.2 and 1.3) are likely  to fail. Infrequent changing of 
audit firm – "low switching" – is one of the most  important barriers to entry into the market for 
audits of large and listed companies, and is t hus an obstacle to enhancing competition in the 
audit market. Option 1  (the company regularly tenders for a new auditor and considers several 
audit providers) is broadl y supported by stakeholders146 and also by the European Parliament147. 
However, this option provides less certainty than option 2 to audit firms. There is no guarantee 
that the audited entity will change its audit firm as it could decide to continue to engage the same 
auditors after completing the tende ring procedure for reasons other than quality or price. Less 
certainty would also mean less willingness for aud it firms to invest resour ces in participating in 
tendering procedures. In terms of the costs, mandatory retendering will increase the cost for 
audited entities without providing any certainty on the achievement  of this objective. Option 2  
(mandatory rotation of an audit firm – see above  the analysis regarding the policy options for 
objective 2.3)  will ensure that a certain number of ne w audit contracts would become available 
in the market148. Requiring mandatory rotation of audit firms on its own woul d not ensure that 
non-Big Four firms would gain a higher market share149, but it would increase competition both 
                                                 
146 There is strong support among professional bodies and associations linked to the profession for tendering 
on a regular basis. Mid-tier firms, many investors as well as some public authorities are also in favour.  
147 See European Parliament (2011), §59, supporting tende ring with a strong role for the audit committee in 
the tendering procedure and the re quirement to invite at least two non-Big Four audit firms. 
148 Audited entities insist that the company should decide in certain circumstances to keep the same auditor if 
benefits of continuity are demonstrable.  
149 This is evidenced by the Italian experience. 
 
EN 40   EN among Big Four audit firms and also with other ex isting or potential non-Bi g Four entrants into 
the market. Mandatory rotation of audit firms w ould also address the "familiarity" threat, which 
stems from the long tenure of the same audit firm. Mandatory rotation of audit firms faces 
opposition from the profession and has not been supported by the European Parliament150, 
although there are arguments supporti ng its enforcement (see Annex 11 ). 
Option 3  (the combination of mandato ry rotation with tendering)  is the most effective option for 
the market of audits of PIEs: (i) mandatory rota tion of audit firms will ensure that new audit 
contracts will be available in the market for audits  of PIEs. The change of an audit firm after a 
fixed duration will provide certainty to market pa rticipants that every year a certain percentage 
of PIE audit mandates will be subject to competi tion; (ii) the tendering rules will require that 
non-Big Four audit firms are also invited to tender and that a tran sparent process is ensured; and 
(iii) mandatory rotation with tendering will ensure that consistent policies will be applied across 
the Union. There will be also a strong positive impact on mitigating the "f amiliarity threat" (see 
option 1 under objective 2.3): audit quality should improve due to the abse nce of familiarity and 
the enhancement of auditor independence.  
In terms of costs, there would be additional costs on both sides- PIEs (preparation and selection 
of the successful bidder) and aud it firms (preparation of the bid a nd participation in the tender 
process). There could also be an additional initial cost, for audit firms and PIEs alike, in the first 
year of a statutory audit mandate. In the case of audit firms, those costs would cover expenditure 
on additional investment to better understand th eir new audit client, although there are mitigating 
factors151. In the case of PIEs, these costs would be opportunity costs due  to the need to 
reallocate resources in the first year of the mandate to assist the new auditor. Concerning the 
direct costs for audit firms, the impact of th e tendering rule could be high, especially in 
jurisdictions where there has been no statutory requirement to have regular tendering.  It has been 
particularly difficult to gather information from audit firms and audited companies since they are 
reluctant to unveil what they consider sensit ive commercial information. However, we were 
provided informal information that, for example, re sponding to the tender fo r the audit of a large 
PIE (with a market capitalisation above €1 billion) cost €1 millio n; for a particularly complex 
and geographically extended compa ny with a market capitalisation in excess €40 billion, the cost 
reported was in excess of €5 million. In the case of medium-sized PIEs, tender costs would be 
significantly lower: on aver age €160 thousand (roughly €18 thousand per annum). On the 
assumption that companies would have to organise a tender periodically (given that a tender for a 
given company would take place every 9 years, cost s would be amortised to almost a tenth of the 
above amounts), the annual tend ering cost would be less than 1% of the total audit fees152. On 
                                                 
150 See European Parliament (2011), §59, supporting tender ing but not rotation of audit firms. It is noted that 
the rapporteur  of the EP report expressed his favourable position on rotation of audit firms, for instance in 
the Conference organised by the Commission in February 2011 and in the conference organised by FEE on 
30 June 2011. In the latter, the rapporteur distanced himself somewhat from the EP report. Subsequently, Mr Masip explained at an EP meeti ng that he has received threats from a member of a Spanish audit firm. 
See the minutes of the meeting of the EP Committee on Legal Affairs of 11 July 2011 
(JURI_PV(2011)0711-1), point 17 in fine .  
151 See the analysis regarding the policy options under objective 6.2. 
152 Of course not all responses to a tender would result in a mandate and to this extent some of these costs 
would prove fruitless. This may sound like a step increase  in jurisdictions with little tendering over the past 
decades but will in effect only be bringing the audit world into line with  normal business practice in other 
fields including other financial services. In any case, marketing costs such as tendering costs have to be seen in the context of th e potential reward: in France, the averag e annual audit fees for CAC40 companies 
for 2009 / 2010 were around €17 million. For the most complex companies, audit fees were above €40 
million. In the UK, the average audit fees for FTSE 100 companies in 2008/2009 were around £5.5 million; 
 
EN 41   EN the side of PIEs, the feed-back from stakeholde rs shows that costs would range from 150 to 200 
working days for the majority of PIEs, while in the case of larger PIEs theis could increase to 1.000 working days. The above indication of costs does not take into account any mitigating aspects for both 'clients' and auditors: tendering will obviously result in competitive bidding; this 
may in turn temper any additional costs for aud ited entities. For firms, increased and repeat 
experience with tenders will stream line and institutionalise the process thus lowering the costs of 
preparing tenders (see Annex 20 for more details on costs and benefits
).  
One could expect that, over time , tendering procedures for audit services would result in lower 
audit fees. If this happens, the savings in audit f ees for the audited entity  may be higher than the 
costs incurred in organising the tender. Howeve r, since one of the obj ectives of the tendering 
procedure is to ensure that the selection of the auditor is base d on expected a udit quality, it 
cannot be assumed that audit fees  will systematically be lowe r. In any case, in terms of 
proportionality, it is important to ensure that rotation and te ndering do not lead to 
disproportionate costs for audited comp anies or to a loss of audit quality.  
Therefore, the period after which an audit firm  should rotate must be carefully considered: 
considering the costs that tende ring would entail (see Annex 20 ), a period of 9 years between 
tendering procedures (and implying  rotation of the audit firm) a ppears reasonable. It would be 
appropriate to adjust the tendering oblig ation to the size of  PIEs (see Annex 19 ). Option 3 is the 
preferred policy option. 
If incentives will be created for PIEs/ audit fi rms to use joint audits (see also analysis under 
objective 3.3), this would have a further positive  impact on the effectiveness of option 3 due to 
the fact that auditors in a join t audit scheme could rotate at di fferent points of time, which would 
ensure a smooth transition of the audit engagement  from one audit firm to another. However, 
joint audits would have a negativ e impact on the cost of audit and thus option 3 would be a cost-
effective only in the case of large PIEs or syst emically important financial institutions (SIFIs) 
where audit costs are relatively low (e.g. 0,04% of the total turnover153) compared to turnover 
(for more details on additional cost s of joint audits see Annex 20). 
Objective 3.2: Sub-policy options to facilitate  the objective choice of an audit provider  
Figure 14 
Objectives 
Policy option  Effectiveness 
(objective 3.2) Convergence Cost-
effectiveness 
0. Baseline scenario 0 0 0 
1. Prohibit contractual clauses lim iting the choice of audit firm  +/  ≈ + + 
2. Increase transparency on audit quality and on audit firms + +  + 
3. Establish a pan European a udit quality certification + + ++ 
4. Combination of options 1 to 3 ++ + ++ 
Under the baseline scenario , it is anticipated that there will not be sufficient information on audit 
quality available to the public. Therfore, auditors  will continue to be selected more on the basis 
of reputation rather than on the more objective criteria of audit quality/price. There are different 
options to increase the market transparency with a view to facilitating th e objective choice of an 
audit provider. Option 1  would have a preventive role, to avoid this prac tice (the so-called “big 
four only” clauses) to spread. This option would be integrated with the appointment procedure 
                                                                                                                                                             
the fees for some companies exceeded £30 million. For medium-sized PIEs , the average aud it fees are £766 
thousand (FTSE 250 companies in 2009) in the UK and €700 thousand for French listed companies in the 
B and C segments of the French stock exchange (2010). 
153 Oxera (April 2006), figure 5.2, page 71. 
 
EN 42   EN described under objetive 2.2: i ndeed, any private contractual clause of this type would de facto  
deprive the shareholders of the right to select the auditor on the proposal of the audit committee 
and therefore jeopardise its effectiveness. Th e concrete significance of this option cannot 
however be assessed due to the confidentiality of contracts including this type of clause. This option would not be costly and has been supported by respondents to the Gr een Paper as well as 
by the European Parliament
154. Under option 2 , more information would be available on the 
audit quality and financial heal th of audit firms. The Statut ory Audit Directive required the 
establishment of independent a uditor supervisors and inspection systems. While there are some 
imperfections in the regi me (see above section 2.5 ), reinforced inspection mechanisms would 
allow strengthened national audi t supervisors (see below section 6.5 ) to monitor the actual, rather 
than perceived, quality of audits. The information resulting from reinforc ed inspections systems 
would be better disclosed by compet ent authorities and us ed by the relevant parties such as audit 
committees in the selection of an audit firm. More over, the disclosure of financial information by 
statutory auditors and audit firm s (in addition to the existing obligation to publish a transparency 
report)155 would facilitate the audited entity's evaluation of whether an auditor or firm is in a 
position to devote sufficient resources to the st atutory audit in question. A voluntarily pan-
European audit quality certification (option 3 ) would be a cost-effectiv e option to increase the 
visibility, recognition and reputa tion of all audit firms having the capacity to  conduct high 
quality audits of PIEs156. The certificate would be delivered by ESMA157, in cooperation with 
national competent authorities. Specific secondar y legislation (i.e. technical standards prepared 
by ESMA) would be necessary to develop the de tails of the certificate. Additionally, such a 
voluntary system would avoid creati ng a barrier to entry for small audit firms with a small base 
of PIE clients158. The question of visibility, recogniti on and reputation of audit firms cannot 
readily be addressed by national li cences or the cross-bo rder recognition of national licences (see 
objective 4.1)159. The likely positive impact of strenghened national supervision (see option 2160) 
could contribute to improving the reputation and recognition of firms. The certification system 
would be expected to ta ke the results of inspec tions into account. Therefore, it will consolidate 
the inspection findings (and other information), al so on a cross border basis. There will be 
additional costs for audit firms in  applying for and obtai ning the certificate, but these will be 
negligible for any audit firm network opera ting across the Union since there will be the 
possibility of issuing one certificat e for the whole audit firm network. 
The combination of options 1, 2 and 3 (option 4 ) is the preferred option. All are individually cost 
effective and are complementary to each other in achieving objective 3.2 by making more information on audit quality and audit firms availabl e to market participants. This would in turn 
facilitate the objective choice of  the statutory audit provider
161. 
                                                 
154 European Parliament (2011), §§56 and 57. 
155 This option is supported by the European Parliament. Ibid., §35. 
156 This option is supported by the European Parliament. Ibid., §58. 
157 See objective 5.2. 
158 A compulsory certification system, or  even more, a special licence for th e audit of PIEs would result in a 
barrier to entry or to growth for small firms that have a few PIE clients or could have. Such firms may refrain from providing audit services to PIEs so as to avoid the organisational requirements and/or 
administrative burden that they  may associate with a compulso ry certification or licence. 
159 This certification should not be assimilated to a na tional licence or to the recognition of a national licence. 
The mutual recognition of a national licence will not address the reputational problem, in the same manner 
as the national licence does not address it either. It is not because a firm is allowed to provide services in 
more than one country that the pe rception of the quality of its serv ices will necessarily increase.  
160 See objective 5.1. 
161 See also European Parliament (2011), §§53 on the need to better judge the quality of audit services. 
 
EN 43   EN Objective 3.3: Sub-policy options to increase  the choice of audit providers for PIEs  
Figure 15 Effectiveness 
Objectives 
 
 
 
Policy option  Objective 
3.3:  Objective 2.1: prevent 
any conflict of interest 
arising from the 
provision of non-audit 
services to PIEs  Objective 2.3: 
mitigate the risk of 
any potential conflict 
of interest due to 
"familiarity threat"  Convergence Cost-
effectiveness
0. Baseline scenario 0 0 0 0 0 
1.1. Pure audit firms + ++ ≈ + + 
1.2. Mandatory joint audi t applied to all large 
PIEs + ≈ ≈/+ + +/- 
1.3. Mandatory joint audit applied only to 
large PIEs in the financial sector,  + ≈ ≈/+ + +/- 
1.4. Mandatory joint audit to all large PIEs by 
pure audit firms + ++ ≈/+ + +/≈ 
1.5. Mandatory joint audit only to large PIEs 
in the financial sector by pure audit firms       
1.6. Voluntary joint audit to all PIEs: 
creates incentives for audit providers and 
audited entities alike to use joint audit on a 
voluntary basis.  + ≈ ≈/+ + ++ 
1.7 Voluntary joint audit to all PIEs by 
pure audit firms  + ++ ≈/+ + + 
2. Lift restriction on ow nership of audit firms + -/≈ ≈ + + 
3. Establish market share ceilings for large 
audit service providers +/- ≈ ≈ + -- 
Under the baseline scenario t he choice of auditors for PIEs would remain limited. Option 1 is 
composed of six sub-options . Sub-option 1.1  (pure audit firms, the same as option 3 under 
objective 2.1: see above for the position of stakeholders as well as the discusison on independence; see also Annex 10
) would introduce more dynamism and choice in the upper 
segment of the market, as all the Big Four audit firms would be available to supply audit services 
to any client162. However, it is likely to present difficulties for smaller firms which mainly 
provide audit (and non-aud it) services to non-PIEs.  The obligation to conver t to pure audit firms 
might deter these firms from entering in to (or remaning in) the PIE audit market163, which would 
be in contradiction with the in tended objective to enlarge the choi ce of auditors. Therefore, in 
terms of proportionality, option 3 does not appear the most suitable in all circumstances (see 
Annex 19 ): it would be necessary to at least provi de exemptions from the pure audit firm 
obligation to take account of the size and dimensi on of the activities of the audit firms. In terms 
of costs, further to the synergie s lost (see above), there would be costs resulting from the need to 
split audit firms. While this option is effec tive in ensuring auditor independence and audit 
quality, the potential downside s mentioned above should be ca refully considered. Under sub-
option 1.2 , (the obligation for PIEs to have more than  one auditor at least one of which is not 
among the largest audit firms164), will provide opportunities for smaller firms165 to get exposure, 
demonstrate their capability and build up a reputation over time so that they may become real 
                                                 
162 This is highlighted, for instance, by Chambers (2011): " Pure audit firms would turn the Big Four into a Big 
Eight for some purposes as clients could look to the non-audit spin-offs for advice on non-audit matters ." 
163 E.g. the provision of NAS might constitute a very significant proportion of their revenues. 
164 This sub-option differs from the French joint audit. While  it also combines at leas t two audit firms, it would 
require that at lest one of them should not have a s ubstantial market share in the top listed company market 
segment in a Member State. In other terms, a joint audit carried out by two large audit firms together would 
not be possible. 
165 Not unsurprisingly, this option is supported by mid-tier firms and SMPs.  
 
EN 44   EN competitors to the current Big Four audit firms both in size and in expertise166. The French 
experience shows that join t audits (despite the fact that the French model does not intend, and 
therefore it is not designed, to address market co ncentration) could facilitate the growth of non- 
Big Four audit firms by giving them access to a new market segments previously covered only 
by Big 4 audit firms167. The European Parliament has recognised that " the implementation of 
joint audits could have positi ve effects on the diversification of the audit market ".168 There would 
be a tendering process (see policy options for objective 3.1) for the selection of joint auditors where the scope and responsibility of each audito r is clearly defined. In addition, joint audits 
would contribute to higher audit quality thro ugh complementary and combined audit work, 
applying the four-eyes principle in the strategic pr eparation of the joint audit as well as in the 
analysis of the findings. This is , in particular, one of the stre ngths of the French joint audit 
model
169, although it must be underlined that the Danish experience was not very positive170 (see 
Annex 12  for further detail on joint audit, including the French and Danish experiences). Public 
authorities generally support the introduction of joint aud its provided that there are clear rules as 
to how it will work in practice. There is a risk  of coordination failures between the two audit 
firms (considering that in the joint audit model the firms would not necessarily present joint bids) and/or of dominance by the larger firm of  the consortium (thus, weakening the four-eyes 
principle). Indeed, one of the lessons of the Fr ench experience is the need to structure and 
allocate the audit tasks between the two firms and the audited PIE.  For the audited entities joint 
audit, if required by legislation, should be well balanced. In the replies to the Green Paper they raised cost considerations were raised. Indeed , concerning the additional costs resulting from 
joint audit, two factors should be considered. On  the one hand, it is estimated, assuming that the 
two audit firms charge an identical  level of audit fees, that the ad ditional work that joint audit 
entails could result in audit costs increasing from 5% to 10% of total audit fees
171. On the other 
hand, large audit firms are gene rally more expensive than ot her networks (see section 2.3 , in 
fine). Therefore, if a mid-size audit firm is part of  the audit consortia, the audit fees charged by 
such a firm could be lo wer than those that would be otherwis e charged by a large audit firm. The 
possible savings from lower fee rates are, however, difficult to estimate. 
Sub-option 1.3. is expected to have all the descri bed caracteristics presented above with the only 
difference that it will have a more limited scope sin ce it will be onlty applied to large PIEs in the 
financial sector. This option co uld be considered as being mo re proportionate to the problem 
tackled taking into account that it will be appl ied on the most systemical ly important entities, 
representing a higher risk for the whole economy  as shown by the financial crisis (for more 
information on enforcement, possible exempti ons and the role of ESMA see Annex 8). 
                                                 
166 This is particularly important for sectors such as  financial services, where there are few audit firms 
providing services. Additionally, sufficient safeguards wo uld be needed so that competition is not distorted. 
167 Chambers (2011) also outlines the efforts by the Big Four audit firms to "eliminate" competitors by 
acquiring them. " Evidence to the UK House of Lords claimed that the experience of, for instance, France 
did not suggest joint audits reduced audit concentration as there was only a Big Five there. […] The limited success of joint audits in widening choice is re lated to the absorption by the Big Four over the past 
15 years of three firms that were each No 6 in France when they were acquired, with only Mazars holding 
out. The same pattern can be seen elsewhere. In 2010, the fifth and sixth Brazilian firms joined forces with 
members of the Big Four firms, depriving Grant Thornton and BDO of their network partners. Grant 
Thornton's Danish partnership has just fallen to one of the Big Four. It is hard to think of any market 
behaviour less conductive to widening competition. " It should be noted that in Brazil the mandatory 
rotation of audit firm rule applies. 
168 See European Parliament (2011), §54. 
169 Joint audit is currently required in France for the au dit of consolidated accounts, whether PIEs or not.  
170 Joint audits were recently abolished in Denmark.  
171 See Annex 20 . 
 
EN 45   EN Sub-option 1.6 considers the introdu ction of joint audit as a vol untary measure by only creating 
incentives for auditied entities  to use it as a way to incr ease audit quality and auditors' 
independence. This sub-option takes into account the existing uncer tainty among market 
operators and regulators alike about the real cost of this measure compared with its potential value-added (one of the reasons for which joint audits have been abolished in Denmark). The 
lack of sufficient and comprehens ive data on the cost side of the joint audit does not provide 
sufficiently strong arguments justifying its mandato ry introduction, since it could result in an 
excessive cost burden for certain PIEs. Therefore, also considering that jo int audit is used by 
PIEs in the finacial sector on a voluntary basis in certain count ries like Austria and Sweden, it 
could be considered more economically prudent a nd proportionate to test the viability of this 
measure by only creating incentives for its use on a voluntary basis, while leaving to the discretion to PIEs to test  it and decide about its us e on an individual basis. 
The respective combination of sub-options 1.1/ 1.2, 1.1/ 1.3, and 1.1/ 1.6 (sub-options 1.4, 1.5,
 
and 1.7 ) maintains the positive impacts of both sub-op tions in each case. In addition, joint audit 
would help smaller audit firms to compete ag ainst large pure audit firms focusing on audit 
services only. In terms of propor tionality, however, join t audit and pure audit firms would need 
to be limited to large PIEs only in the case of sub-option 1.4 (see Annex 19 ). 
Removing restrictions on the owne rship structures of audit firms  (option 2 ) will eliminate the 
privileged position held by statut ory auditors regarding the owners hip of audit firms: currently, 
audit firms can expand into non-au dit business but non-auditors ca nnot easily enter the statutory 
audit market172. It will also allow smaller and medium-si zed firms to rapidly grow and take up 
the challenges and opport unities created by the mandatory ro tation, tendering and joint audit 
rules. While the provision of statutory audit servi ces is not a capital intensive business activity, 
organic growth through capital in jections by partners does not en sure, on its own, that small and 
medium-sized audit firms will have enough mean s to grow. A vast majority of investors 
supported a review of the ownership stru ctures. The replies to the Green Paper173 noted that 
changes in ownership structures might facilitate greater competiti on and choice in the market. A 
few investors made the Commissi on aware that changes might in crease the risks relating to 
independence and audit quality and asked fo r appropriate safeguards on independence174. The 
European Parliament also believes that the part nership model is the appropriate one for audit 
firms, since it protects their independence175. Many other investors believ ed these risks could be 
addressed satisfactorily. Option 2 takes account of those risks and, therefore, does not waive the 
requirement that an audit firm should be manage d by statutory auditors. Imposing a market share 
ceiling for audit services providers  (option 3 ) would immediately reduce the market share of 
large audit providers. Over a pe riod of time, however, this opti on is likely to lead to less 
competition since those who reach the limit would be banned from competing for other available 
audit engagements. Companies might be faced w ith further limitation of choice. Moreover, due 
to the fact that audit markets are national and mark et shares will have to be applied nationally, in 
those Member States with a small audit market (= small number of PIEs), individual audit firms 
would have to become very small and the econo mies of scale would be lost, suggesting that 
option 3 is not likely to be proportionate. 
                                                 
172 At the same time, it should be taken into account that if the pure audit firms option is introduced (see policy 
options under objective 2.1), this  would bar the audit firms concer ned from accessing the market for 
consultancy services, thus eliminating the problem of regulatory asymmetries explained in Annex  6.  
173 See also IOSCO (2010), p. 16 and seq. for stakeholders' views on this issue. 
174 For a critical view against lifting the restricti ons on ownership rules, see also Jean (2011). 
175 European Parliament (2011), §37. 
 
EN 46   EN Options 1 (sub-option1.7) and 2 are individua lly cost effective, complementary and 
proportionate to each other in achieving objectiv e 3.3. They are the preferred policy options. 
Option 3 is less effective and may present some additional implementation difficulties in terms 
of legal certainty176. 
6.4. Policy Options to deal with / avoid unn ecessary additional compliance costs for 
auditors/audit firms in a cross-border context  
Objective 4.1: Sub-policy options to facilitate the cross-border recognition of audit providers' 
competence  
Figure 16 Effectiveness 
Objectives 
 
Policy option  Objective 
4.1:  Objective 5.2: Set-up an 
effective EU-wide 
supervisory cooperation 
mechanism  Convergence Cost-
effectiveness
0. Baseline scenario 0 0 0 0 
1. Mutual recognition of audit firms ++ ≈ ++ ++ 
2. Mutual recognition of statutory auditors ++ - ++ ++ 
3. Introduction of an adaptation period scheme and increased 
convergence, transparency and predictability in the aptitude test + ≈ + + 
If the current regime remains in place (baseline scenario ): the additional costs and barriers for 
auditors and firms would remain since they wi ll continue to require approval in all Member 
States in which they wish to undertake statutory audits177. Option 1  would be effective in 
immediately alleviating the administrative burd en that a multitude of approval procedures 
entails178. At the same time, it would allow for the emergence of real pan-European audit firms 
without an organisational structur e in every Member State and ther efore lower operating costs. It 
should be neutral concerning the quality of th e statutory audit work, since locally approved 
auditors would carry  out the work in any ca se. This automatic recogn ition of firms should not 
result in a reduction of supervisory quality: on condition that the local competence of the key 
audit partner representing the audit firm in the st atutory audit is maintained and supervisors will 
not be prevented from overseeing audit work carried out in their respective Member State179. 
However, this option will reinforce the need for greater cooperation be tween supervisors. A 
similar option for statutory auditors (option 2 ) would be effective as regards the reduction of 
costs associated with the approval of the audi tor and would facilitate the emergence of cross-
border competition. Indeed, the European Parliament is favourable towards a " European 
passport for auditors "180. This is also supported by many st akeholders (profession, investors). 
However, most public authorities are reluctant to  accept the passport. Such a mutual recognition 
                                                 
176 It is not evident that a valid legal basis in EU la w could support such an option. Therefore, it could be 
subject to legal challenges, which may in turn result in legal uncertaintly. 
177 This results in few auditors seeking approval in ot her Member States. For instance, according to the reply 
of the Belgian public oversight authority to the Green Paper, only 36 Belgian auditors are approved in other Member States (namely, 21 in LU, 7 in NL, 2 in FR, 4 in UK, 1 in DE and 1 in RO). It should be noted that 
Belgian auditors normally have fewer linguistic barriers and can speak fluently the official language of at 
least one of its neighbouring countries. However, 36 auditors is a very low figure compared to the 1044 
approved auditors in Belgium. 
178 The European Parliament considers that " easier access to the market and the removal of obstacles for firms 
wishing to enter the market are vital if a larger number of  market participants is to be attracted on to the 
auditing market ." See European Parliament (2011), §53. 
179 Supervision is, in principle, based on the principle of home-country regulation and oversight by the 
Member State in which the statutory auditor or au dit firm is approved and the audited entity has its 
registered office. 
180 See European Parliament (2011), §61. 
 
EN 47   EN system for individuals qualified as  statutory auditors would rais e questions on how to guarantee 
audit quality in the absence of a procedure to verify the auditor’s  knowledge of and/or familiarity 
with those areas that require national knowledge/expertise. Figure  17 provides the views of 
stakeholders on the need for furhter harmonisa tion before introducing a European passport for 
auditors. It also illustrates where the national knowledge/expertise is important. 
 
Figure 17. Source: FEE briefing paper European Passport for Auditors and Audit Firms , June 2011 
 
EN 48   EN Those arguments against the mutu al recognition system are, howev er, weaker in the case of the 
occassional cross-border provision of services. In this case, th e auditor concerned could easily 
fill the "national knowledge" gap181 by relying on ad hoc  services provided by a local auditor. 
Thus, the principles of Directive 2005/36/ EC on professional qua lifications could, mutatis 
mutandis , be applicable. This option could result in  initial operational difficulties for the 
supervisor of the host Member State182. At the same time, it will trigger the need for reinforced 
cooperation between supervisors at EU level both  as regards the exchange of information on 
supervisory matters but also as regards the convergence on the conditions for access to the 
profession183. Under option 3,  auditors would be allowed to choose their preferred method, a 3-
year adaptation period under the su pervision of a locally approved a uditor or an aptitude test, to 
obtain approval in another Member State. Usin g the option of adaptation period would largely 
facilitate such approval. The adaptation period sc heme would facilitate th e cross-border approval 
of experienced auditors who would become fa miliar with local requir ements through regular 
practice rather than th rough formal tests. Concerning the su pervision of auditors approved under 
an adaptation period, changes woul d be neutral since contrary to  option 2, the adaptation period 
acts as a procedure to verify the auditor’s knowle dge of and/or familiarity with specific national 
requirements and it is particularly suited for the case in which the auditor wishes to establish 
itself in another Member State. Option 3  also has positive impacts regarding the aptitude test, if 
this is the method preferred by the applicant auditor. More tr ansparent national requirements 
should result in more predictable aptitude test s. Options 1, 2 and 3 are the preferred policy 
options. In the case of options 2 and 3, their individual scope would need to be reduced to avoid 
overlapping : they are compatible with each other as long as each addresses a different scope: 
establishment under option 3 and cross-borde r provision of services under option 2184. 
Objective 4.2: Sub-policy options to streamline  and harmonise standards on audit practice, 
independence and internal contro l of audit firms across the EU 
Figure 18 Effectiveness 
Objectives 
 
Policy option  Objective 4.1. Facilitate 
the provision of cross-
border audit services Objective 4.2  Convergence Cost-
effectiveness 
0. Baseline scenario 
 0 0 0 0 
1. Introduction of clarified ISAs with possible national 
add-ons but no carve-outs ++ ++ ++ ++ 
2. Introduction of clarified ISAs with possible national 
carve-outs from MS  +/≈ +/ ≈ + +/ ≈ 
Under the baseline scenario,  there is no guarantee of convergen ce in audit standards: Member 
States will continue to be free to require an audit in accordance with the national auditing 
standards. On the contrary, the introduction of the clarified ISAs185 appears to be a plausible 
solution to ensure harmonisation and therefore obj ectives 4.1 and 4.2: the adoption of clarified 
                                                 
181 Adoption of the clarified ISAs (see policy options re garding objective 4.2) and the use of international 
accounting standards by the audited entity would cont ribute to closing the national knowledge gap. 
182 In the cross-border provision of services situati on, the supervisory authority of the host Member State 
(where the service is provided) would be in a position to supervise the quality of the audit carried out, since the audited entity would be a host Member State entity . However, the host Member State supervisor would 
not be in a position to exercise oversight over the stat utory auditor him/herself as  far as the conditions for 
access to the profession and organisational requirements ar e concerned. Hence, it would need to rely on the 
home Member State supervisor (of the countr y from which the service is provided).  
183 More convergence on these issues will increa se the trust among supervisory authorities.  
184 This is, mutatis mutandis , the regime for the recognition of professional qualifications in Directive 
2005/36/EC. 
185 See FEE (September 2011). 
 
EN 49   EN ISAs implies the substitution of various nationa l auditing standards by a uniform set of auditing 
standards within the Union and their consistent application, which would le ad to total recurrent 
net benefits of €2 billion to the EU economy as  a whole due to a reduction in the cost of 
capital186. The introduction of clarified ISAs rece ives very broad support among stakeholders187 
and also from the European Parliament188, although there is not alwa ys consensus on the legal 
instrument189. In order to achieve a maximum degree of harmonisation, under option 1  Member 
States would not be allowed to carve-out provisi ons from the clarified ISAs. However, in order 
to accommodate other reporting and audit requirements based on national corporate governance 
rules, the possibility to impose additional national audit procedures or requirements could be maintained only if these stem from specific nati onal legal requirements relating to the scope of 
the statutory audit of annual or consolidated acco unts, meaning that those requirments are not be 
covered by the ISAs.
190 Option 2  would be less effective regard ing the convergence objective. 
Allowing Member States to freely adapt and modify the clarified ISAs to the specificities and the 
requirements of individual jurisd ictions or to carve-out from th e clarified ISAs would better 
respect the specificities of the different audi t markets and the requir ements of individual 
jurisdictions. In the eyes of supporters of carve-outs, the Member States may use these to 
enhance the standards or tailor them to certain s ituations. However, this could lead to different 
sets of auditing standards and reduce the effect of harmonisation. This could also result in 
confusion for companies, investors and audito rs in understanding what an audit comprises 
(because carve-outs would severely undermine th e comparability of audits). Allowing for 
national carve-outs would be detrim ental to EU policy towards third countries. Finally, most of 
the benefits expected from a harmonisation at  EU and international levels in terms of 
transnational audit costs and credibility of the fi nancial statements would be lost. Option 1 and 2 
could also be combined to form a new option giving Member States complete freedom in the 
way they adopt the clarified ISAs but this op tion has been discarded as it risks reducing the 
harmonisation effect expected from the adopti on of a sole set of auditing standards. The 
preferred option is option 1.  
Objective 4.3: Sub-policy options to ensure th at statutory audit is adapted to SMEs needs 
Figure 19 Effectiveness 
Objectives 
 
 
 
 
Policy option  Objective 
4.3:  Objective 5: Improve the 
effectiveness, independence 
and EU-wide consistency of 
the regulation and 
supervision of auditors of 
PIEs Convergence Cost-
effectiveness
0. Baseline scenario 0 0 0 0 
                                                 
186 Köhler et al. (June 2009). 
187 Many stakeholders (users, investors, regulators...) generally support this option because it best advances 
transparency and consistent audit quality throughout  the EU, enhances confidence in the reliability of 
financial reporting and so contribu tes to a greater acceptance of aud it reports outside of their home 
jurisdictions within and outside of the EU. Audited companies express less enthusiasm for ISAs.  
 Some SMPs, however, requested sensitivity to the administrative burden involved in the adaptation to the 
standards. Audited companies expressed less enthusiasm about the adoption of the ISAs. The main reasons 
were that the ISAs do not take account of the diversity  of the audit model in Europe and that there is an 
important cost dimension asssociated with the adoption of the ISAs. 
188 See also European Parliament (2011), §§21 and 61. 
189 The European Parliament would favour the adoption of the standards by a European Commission 
regulation. Other stakeholders prefer a non-binding approach. 
190 Supporters of add-ons to the ISAs believe that national authorities should retain the right to introduce add-
ons only to meet national regulatory/legal obligations, in particular regarding company law. This implies 
that Member States may, for example, prescribe other reporting and audit requirements based on national 
corporate governance rules.  
 
EN 50   EN 1. Adapt audit standards to the size and complexity of the 
business of the audited entity ++ ≈ ≈  + 
2. Introduce limited reviews for SMEs instead of statutory 
audit + ≈ - ≈ 
3. Combination of options 1 and 2 + ≈ ≈ /- ≈ /+ 
The Commission proposal replacing the 4th and 7th Company Law Directives191 proposes that 
small companies shall no longer be subject to the obligation to  have their accounts audited under 
EU law.192 Therefore, the Union statutory audit requi rements would only apply to medium-sized 
and larger companies (although Member States w ould remain free to require the audit of the 
accounts of small companies)193. Voluntary efforts by auditors or governments to adapt audit 
work to medium-sized companies needs are unlikely. Thus, the baseline scenario  would remain: 
audit work will more than likely continue to be  disproportionate compared to the size and 
complexity of the business of many medium-sized companies, ultimately resulting in higher 
administrative burden and costs. Option 1  appears plausible in ac hieving the objective of 
adapting statutory audit194 to the needs of medium-sized companies195, building upon national 
experiences, notably in France, with small companies196. It is supported by the European 
Parliament197 and by stakeholders, particularly SMEs and SMPs. It maintains the value of the 
audit in requiring the same le vel of assurance on the medium-sized companies' financial 
statements198 (compared to the larger companies) a nd, at the same time, it results in cost 
reductions since the hourly engagement fee of auditors will probably diminish199. In so far as the 
level of assurance remains identical to that in  a normal audit, a proportionate audit would be 
neutral from the perspective of the cost of capital for a medium-sized company. Additionally, 
this option allows for its voluntar y extension, at national level, to  the audit of accounts of small 
companies200, which although not required by EU law, may be carried out voluntarily by the 
                                                 
191 European Commission (October 2011b). 
192 Small companies are those which do not exceed two of the following criteria: balance sheet total (€5M), net 
turnover (€10M) and average number of employees (50).  
193 In the case of PIEs, the requirement to have the accounts audited applies irrespective of size. 
194 Since the ISAs are scalable to size,  it is technically possible for a statutory auditor/audit firm to issue a 
valid audit opinion ("an audit is an audit") while limiting the audit work to the essential steps that are 
meaningful to the dimension and complexity of the business of SMEs. 
195 Medium sized companies are those which do not qualif y as small companies and do not exceed two of the 
following criteria: balance sheet total (€20M), net turnover (€40M) and average number of employees 
(250).  
196 Recent experience in France shows th at it is possible to apply the aud iting standards in a proportionate 
manner to small companies without resulting in a reductio n of the value attached to  the audit of SMEs. The 
positive experience results from the combined effect of a legislative empowerment to carry out proportionate and simplified audit and a substantial effort from the audit profession to provide operational 
guidance and training to auditors auditing SMEs (see Annex 16
 for further detail). It should be noted that 
the French experience is with regard to smaller companies than those targeted by option 1 and is relatively recent (since 2009). 
197 European Parliament (2011), §21. 
198 Indeed, stakeholders are generally att ached to the level of assu rance of an audit (“an audit is an audit”) and, 
as outlined by the replies to the Green Paper, there is little support for any auditor opinion that would give a 
lower level of assurance than statutory audit. See also FEE (2006). 
199 The experience with small companies goes into th at direction. For instance,  the French standard ( norme 
petite enterprise ) is modelled to carry out the statutory audit in 40 hours; and a Canadian estimation 
considers it possible to undertake a statutory audit of a small compan y in 12 hours – cf. Cowperthwaite 
(2011). These examples, however, are for small companies and would not be fully transposable, in terms of 
hours needed for an  audit, to a medium-sized company, 
200 Therefore guaranteeing that  "an audit is an audit". 
 
EN 51   EN small company or upon reque st by national legislation201. In order to ensure  coherence with the 
preferred policy option under object ive 4.2 (introduction of ISAs w ith national additions but no 
carve outs), this option should not result in the enactment of  specific national standards 
derogating from the ISAs, but rather in ensuri ng that the ISAs, whic h are scalable by nature202, 
are applied in a proportionate manner (following professional guidance)203 and that the audit 
oversight bodies accept the proportionate and simp lified audits as a valid  application of the 
auditing standards. Since this option grants ce rtain discretion to Member States in how the 
standards should be applied, it will not lead to increased convergen ce of rules. At the same time, 
it should not result in an unlevel playing field: on the one hand, the Member  States discretion is 
limited by the ISAs framework; on the other hand, th e discretion granted to Member States takes 
into account the fact that sma ll and medium-sized companies gene rally have, contrary to PIEs, a 
national dimension and usually apply the national accounting rules. Option 1 is neutral as regards 
the possibility of statutory audtiors/audit firms to provide NAS to the audited entity204. The 
introduction of proportionate/simplif ied audits should also be neut ral as regards supervision. It 
may lead to an initial investment for superv isors (e.g. training of in spectors/reviewers) to 
understand the particularities of the proportionate audit of medium-sized companies, but in any 
event this investment would be marginal (cons idering that inspectors/reviewers are already 
knowledgeable on the subject) and limited in time. Option 2 , on the contrary, would be less 
effective. In terms of scope, it could only be applicable to small companies (for which an 
obligation to carry out a statutor y audit is not required under EU law) but not to medium-sized 
companies (which are obliged under EU law to  have their accounts audited). Additionally, 
requiring Member States to introduce a “limited review” for small companies205, would 
introduce uncertainty as to the actual level of assu rance provided (cf. replies to the Green Paper): 
a limited review is an assurance service, less ex haustive than a statutory audit, which provides 
some assurance as to the reliability of the financial data of the company206. Such uncertainty 
would impact on the credibility of the accounts s ubject to a "limited review". Also, the concept 
of "limited review" is not harmoni sed and international standards on this issue are not widely 
applied207. Therefore, in the absence of substantia l harmonisation, its cross-border value would 
                                                 
201 The cost advantage of the proportionate audit is particularly importa nt from the perspective of maintaining 
the attractiveness of statutory audit for small companie s that will no longer be obliged by EU law to have a 
statutory audit, but would nevertheless be interested in voluntarily having their accounts audited.  
202 See IAASB (2009).  
203 There is already international guidanc e on this matter. See IFAC (2010). 
204 The possibility to provide NAS to the audited entity would depend on the general application of Article 22 
of the Statutory Audit Directive and the national legislation implementing it, including in the future the 
adopted ISAs.  
205 The limited review could be an alternative to any possible statutory audit of small companies required by 
national law. Alternatively, the requirement to have a limited review of the accounts of small companies at 
national level could be construed as preventing Member States from requiring the statutory audit of the accounts of those companies.  
206 An audit generally implies that the auditor has obtained "reasonable assurance" as to whether the financial 
statements are free from material misstatement. Auditors express a positive opinion ("… in our opinion the 
financial statements give a true and fair view …") and should perform sufficien t work to reduce the risk of 
a material misstatement so as to support a positive form of conclusion.  
 On the contrary, the International Standard on Review Engagements (ISRE) 2400 explains that the 
objective of a review of financial statements is to enable a practitioner to state whether, on the basis of 
procedures which do not provide all the evidence that would be required in an audit, anything has come to 
the practitioner’s attention that causes the practitioner to believe that the financial statements are not 
prepared, in all material respects, in accordance with the applicable financial reporting framework (negative 
assurance). 
207 See FEE (2009) explaining the difference between two se ts of international standards on this issue and its 
limited application in EU Member States. See Annex 16  for a description of the voluntary limited 
review/assurance service for SMEs av ailable in the UK and Switzerland. 
 
EN 52   EN be limited. From the perspective of supervisi on, the issues would be similar to the ones 
mentioned in option 1. The combination of a pr oportionate/simplified audit for medium-sized 
companies with a limited review for small companies (option 3 ) would create the risk of 
confusion between the two levels of  assurance, in particular if the same company could make the 
choice between the two. This may in turn impa ct on the reputation of, and therefore the value 
attached to, the proportionate/simplif ied audit. As a result, option 1  is the preferred option208.  
6.5. Policy Options to improve the effect iveness, independence and EU-wide 
consistency of the regulation a nd supervision of auditors  
Objective 5.1: Sub-policy options to ensure th e independence and effec tiveness of supervision 
of national statutory auditors and audit firms  
Figure 20  Effectiveness Subsidiarity 
respected Costs Cost-
effectiveness 
Objectivees  
 
 
 
 
 
 
Policy option  
Consistency of 
supervision of 
audit firms of PIEs 
Independence from 
the audit 
profession 
Ensuring a level 
playing field for 
audit firms 
Coherence with 
other supervisory 
structures 
 
  
0. Baseline scenario  0 0 0 0 Yes 0 0 
1. Establishment of an EU overs ight authority ++ ++ ++ -- No - + 
2. Strengthening national audit supervisory 
authorities + ++ + 0 Yes -- + 
The baseline scenario  has so far failed to ensure the robus tness and independence of all national 
audit supervisors. The external quality assura nce and supervisory pract ices are still very 
divergent between Member States: this does not ensure a level play ing field for audit firms. Both 
option  1 and option  2 are effective in achieving objective 5.1. Option 1  would entail some initial 
direct costs (setting up the st ructure), but would over time be less expensive than having 27 
national competent authorities. However, option 1 does not meet  the subsidiarity criteria: 
currently, supervisory powers lie with Member States and give n the number of auditors and 
firms (see Annex 3 ), an EU oversight authority would be di sproportionate in this regard. Thus, it 
will not be analysed further. Under option 2 , more specific Union level requirements (i.e. in the 
areas of independence, mandate and powers209) on the functioning of national supervisors would 
ensure a higher quality and more consistent supervision of aud it in Member States. Overall, 
strengthening the national audit oversight authorities would make them more coherent with other 
national supervision structures in the field of financial services. In terms of the costs, while no significant cost would be expected for those Me mber States which have established robust and 
independent (from the profession) oversight systems, other Member States will have to invest 
time and resources to upgrade th eir audit supervision systems. However, these costs should be 
proportional to the size of the audit market. Fo r example, Member States with smaller audit 
markets could consider integra ting their auditor supervisor into the existing structures of 
                                                
 
208 However, considering that there would no longer be a requirement for the statutory audit of small 
companies under EU law, it would be appropriate in the light of the subsidiarity principle that, should a 
Member State wish to introduce a mandatory “limited review” as an as surance service for small companies 
instead of a full audit, the Member  State would be allowed to do so. 
209 The European Parliament particularly supports the preparation of contingency plans and living wills to 
address risks arising from the market concentration. See European Parliament (2011), §49 and seq. It is 
noted that the policy response in this regard is integrated within this option. See Annex 8  for further detail.  
 
EN 53   EN financial supervision in order to obtain economies of scale and synergies. Option 2  is therefore 
the preferred option.  
Objective 5.2: Sub-policy optio ns to set-up an effective EU-wide supervisory cooperation 
mechanism that would also ensu re an efficient supervision of supranational audit firm 
structures  
Figure 21  Effectiveness 
Objectives 
 
 
Policy option 
Convergence in 
supervisory practices 
Independence from the 
European Commission 
Supervision of 
supranational audit firms 
structure 
Coherence with other 
supervisory structures Costs Cost-
effectiveness 
0. Baseline scenario  0 0 0 0 0 0 
1. Level 3 Lamfalussy Committee type structure + + + ≈ - - 
2. EU-wide cooperation on audito r oversight within ESMA + + ++ ++ ≈/- ++ 
3. New European Authority of Audit Supervisors ++ + ++ + - - +/  ≈ 
The continuation of the status quo (baseline scenario ) on EU-wide cooperation poses a threat to 
the development of effective coope ration at EU level. The current structure, an expert advisory 
group to the Commission (the European Group of  Auditors' Oversight Bodies (EGAOB)) is not 
aligned with the interests of both the Commissi on and national oversight authorities and cannot 
ensure supervisory convergence across the Union. Option 1  would give an independent legal 
status to the EGAOB, but it would not have th e same legal powers as those of the European 
Supervisory Authorities (ESAs), which are European regulatory agencies. The Level 3 Lamfalussy committee-type structure would be cos tly to establish: it would require the setting up 
of a specific administrative structure (a small secretariat) and specific ad hoc  premises. The 
funding would need to be granted by its Memb ers, while the contri bution of the EU budget 
would not be guaranteed
210. While a Level 3 Lamfalussy commi ttee-type structure constitutes an 
improvement compared to the existing situation, it does not easily fit with the new supervisory architecture for financial markets, which relies on the newly created Eur opean authorities rather 
than on hybrid Level 3 Lamfalussy committee-type structures. Option 2
 would benefit from the 
experience and ressources of ESMA  (and generally the ESAs). ESMA  is already working in the 
field of auditing (and accounting) regarding PIEs . Additionally, the legal framework foresees the 
cooperation of ESMA, EBA and EIOPA, within  their joint committee, on auditing matters211. 
The main limitation of ESMA (or ge nerally the ESAs) option is that any cooperation at the level 
of ESMA (or ESAs) would be largely limited to public interest entities (listed companies and financial institutions). At the same time, it is at this very level that cooperation is most needed 
(see Annex 8
, in fine  for a more detailed description of the advantages of ESMA (and ESAs 
generally). From the perspect ive of audit supervision, ta ken in isolation, option 3  would be the 
most effective proposal. A European Supervisor y Authority specifically devoted to the audit 
market would ensure that cooperation on the overs ight of the audits of non-listed companies is 
strenghten and streamlined. It would have simila r a mandate and powers to those of the ESAs, 
                                                 
210 In the past, initiatives for Lamfalussy Committee type  structures, such as CESR, CEBS and CEIOPS, came 
from the Member States and the European Parliament and were subsequently established by Commission decision. So far, however, Member States have not  shown any initiative and support for this type of 
structure for EU-wide cooperation on auditor supervision. 
211 Article 54(2) of the ESMA Regulation. 
 
EN 54   EN thus enlarging the number of Euro pean supervisory authorities in  financial markets. However, 
compared to the ESMA (ESAs) structure (option 2), option 3 presents th e disadvantage that it 
would require a high level of coor dination with the existing ESAs as auditing is already within 
the scope of their activities and they have the other PIE supervisors as members. Therefore, 
option 2 would facilitate more coherence among the different supervisory obligations regarding 
the financial markets. In terms of costs, option 3 would be disproportionate ly costly compared to 
option 2. In the case of ESMA (ESAs), the administrative structur es and premises are already in 
place: only the staff resources de voted to policy development w ould be needed (these staff 
resources may be reallocated fr om other activities). In the cas e of a new Authority, the cost 
would be significantly higher: sp ecific premises and an admini strative organisation (e.g. board, 
chairman, executive director, administrative staff)  would be required in a ddition to the staff in 
charge of policy development. This does not seem to be justified having regard to the scope of 
work envisaged: cooperation on st atutory audit. Hence, option 2  would be the most appropriate 
structure to enhance EU-wide cooperation on audit supervision. This is supported by the European Parliament
212. Option 2 is the pr eferred policy option. 
6.6. Analysis of coherence with other policy initiatives 
In the wake of the crisis, the Commission has worked on a number of domains with a view to 
strengthening the regulatory fr amework and, in doing so, enhanci ng financial stability in the 
Union. Any initiative in the domain of audit will have to complement what is being pursued in 
other domains of financial regulation. That being sa id, it is important to distinguish audit from 
other domains to the extent that audit is a st atutory obligation for comp anies; moreover, this 
statutory function can be performed by a select group of competent people who have qualified as 
statutory auditors. 
As audit provides comfort on the veracity of fi nancial statements, it is one of the primary 
building blocks of financial stability. Other general initiatives, i.e. initiatives that are not specific 
to any sector (banking, insurance, securities , etc), that are currently being worked on are 
corporate governance, accounting and credit ratings. All these in itiatives are complementary. 
They neither duplicate nor overlap with each other.  The following explains the coverage of each 
initiative. 
Internal to the Company 
Corporate Governance : relates to the internal management and supervisory structure of the day to day 
running of the company.213 
Accounting : relates to the recording of financial information and the use of appropriate internal controls 
and accounting systems to ensure that accur ate financial statements are produced.214 
External to the Company 
                                                 
212 See European Parliament (2011), §45: " Points to the need to harmonise audit supervisory practices and 
asks the Commission to consider integrating the European Group of Auditors' Oversight Bodies into the 
European System of Financial Supervision, possibly through the ESMA ." 
213 When preparing this impact a ssessment, account has been taken of  the on-going work on corporate 
governance regarding financial institutions and listed companies. See European Commission (June 2010) 
and European Commission (April 2011b). 
214 When preparing this impact asse ssment, account has been taken of Commission proposal to replace the 4th 
and 7th Company Law Directives. See Eu ropean Commission (October 2011a) and European Commission 
(October 2011b). 
 
EN 55   EN Credit rating : for issuers of 'tradeable' debt an external ra ting agency examines the potential of the issuer 
to service its debt over the period of issuance. Issuance could be at any point in time depending on market 
conditions and investor appetite and the duration of the issuance would run from that point in time. 
Auditing : is the verification of the veracity of historical  financial statements; such verification determines 
that the assets and liability at the reporting date, no rmally the (accounting) year end, are not misstated. 
Auditing also covers the 'going concern' principle to ensure that the company can meet its financial 
obligations over the twelve months following the year end. Although such a 'going concern' review will 
examine the ability to service the debt obligations arising over the twelve month period, audit reports are 
not a basis for the issuance of long term debt issuance; that is the domain of credit rating. 
Although the above four areas are distinct, th ey are complementary and to some extent 
interconnected. Any failure in corporate governan ce, for example, would raise doubts about the 
integrity of the accounting function and would in turn create problems for auditing and 
eventually credit rating.  
In this context, it is legitimate to consider wh ether the existing concept of "public-interest entity" 
should be extended beyond banks, insurance comp anies and issuers of securities admitted to 
trading in regulated markets to also encompass ot her financial institutions.  The importance of the 
shadow financial system for financial stability ha s grown in recent years. This has been reflected 
in new (e.g. directives on a lternative investment funds, pa yment institutions, e-money 
institutions) or modernised (e.g. UCITS directive or MIFID as regards inve stment firms) rules. 
Therefore, it appears appropriate that auditors  conducting the statutory audit of the financial 
statements of certain types of financial instit utions be subject to th e stricter requirements 
applicable to the audi t of PIEs (see Annex 13  for more information). 
6.7. Choice of legal instrument 
A non-binding legislative instrument would not be  appropriate to implement the policy options 
described before. As e xplained in section 3.2  there is a need for a more harmonised legal 
framework within which statutory audit is conducted across the Union, in particular as regards 
the audit of PIEs. The current legal framework (a principle-based directive) which allows a large 
margin of self-regulation by the profession has proved inadequate to a ddress all the problems 
described above. The objectives  presented in section 4  can only be achieved with a legally 
binding instrument, either a regu lation or a more detailed di rective. The advantages and 
disadvantages of a regulation or a dir ective have been examined (see Annex 14  for the detail of 
the examination) on the basis of 3 criteria: (1) effectiveness (the extent to which the measure 
fulfils the objectives in section 4 ), (2) certainty (highest possi ble confidence of the relevant 
stakeholders as to the content of  the rules to be respected and th at the rules followed in practice 
are closely aligned with the obj ectives of the framework) and (3) common framework (the same 
requirements applying in all Member States).  
The conclusion of this examination is that: (i) a regulation is a suitable and proportionate 
solution for the policy options relating to the audit of PIEs, including the supervision of compliance with the obligations as long as the rules on supervision are ancillary to the main 
substantive rules. Indeed, the policy options are sufficiently de tailed, the population concerned 
by the rules is relatively small (PIEs, audito rs of PIEs) and a high level of harmonisation 
possible; (ii) a modification of the existing dir ective is a suitable and proportionate solution for 
the policy options relating to the approval and registration of statut ory auditors and audit firms (a 
regulation would not be an appropria te legal instrument because of th e lack of a valid legal basis: 
Art. 50 TFUE would require a directive in this case) and those connected with the audit of SMEs, which are less detailed and need to be fram ed at the national level;  (iii) both instruments 
are equally effective, certain and provide a si milar harmonisation level concerning the adoption 
 
EN 56   EN of international auditing standard s; and (iv) both a directive or  a regulation would need to be 
completed with additional secondary legislation, either normal delegated or implementing acts or technical standards developed by ESMA. 
Figure 22  
Objectives  
 
Policy option  effectiveness certainty common framework 
Policy options relating to the aud it of PIEs, including supervision 
Regulation ++ ++ ++ 
Directive + + + 
Policy options relating to the audit of SMEs 
Regulation ≈ + + 
Directive ++ + + 
Policy options relating to the approval and re gistration of statutory auditors and audit firms 
Regulation -- -- -- 
Directive + + + 
Policy options relating to th e adoption of auditing standards 
Regulation + + + 
Directive + + + 
Policy options in connection to the supervision of the audit of non-PIEs 
Regulation ≈ ≈ ≈ 
Directive + + + 
Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; 
+ positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  
7. ANALYSIS OF IMPACT ON STAKEHOLDERS  
Annex 15  provides a summary analysis of the main impacts of the each of the preferred policy 
options on different stakeholders : users of audited accounts (e.g. inve stors, analysts etc); audited 
entities (PIEs and SMEs); and providers of statutor y audit services (i.e. Bi g Four firms, mid-size 
audit firms and smaller firms/auditors, referred to as small and medium-size practitioners, or SMPs). Audited entities and providers of statut ory audit services are the stakeholders most 
directly concerned by the policy options. SMEs, are hardly affected by these policy options, 
unless they are also PIEs. In any event, the im pact of these policy options on smaller companies 
(SMEs and small caps) has been taken into account in their design (see the specific analysis in 
Annex 16)
. The impact of these policy options on governments, employment and financial 
stability are jointly considered fo r each of the five general objectiv es in the analysis contained in 
Annex 15 . Concerning the impact on third countries , the measures proposed are rather neutral, 
but are expected to have an indirect positive impact on global economy (see a specific analysis in 
Annex 17 ). Section 8  provides an overview of the imp acts on the different stakeholders.  
8. OVERALL IMPACT OF THE PACKAGE  
8.1. Cumulative impacts and synergies 
This section presents the cumulative impacts and synergies from the implementation of the 
package of preferred polic y options (see Annex 18  for an overview of the cumulation of the 
measures). The package of prefer red policy options has been deve loped in a way to ensure the 
achievement of the overall objective to "contribute to the efficient  functioning of financial and 
non-financial markets by strengthening the market  role of the audit profession to provide 
relevant economic agents and the market with mo re reliable, transparent, meaningful and timely 
information at an acceptable cost about the vera city of financial statements of companies ".  
 
EN 57   EN It is expected that some of the measures (manda tory rotation of audit firms, restriction on the 
provision of NAS and joint audits) will result in  higher audit quality, a sustainable audit market 
structure and more choice in the audit market. This would encourage st atutory audit firms to 
focus on the subject of their statutory entrustment - statutory audit. Furthermore, this would have 
an indirect effect on the markets for NAS. Th e providers of NAS woul d no longer have to 
compete with firms with captive au dit clients. It is expected th at the overall package would make 
the market structure more dynamic. 
The policy options of mandatory rotation and joint audit will create genuine healthy competition 
in the statutory audit market; mid-tier audit fi rms will be encouraged to build up additional 
capacity and will eventually be able to serve th e upper segment of the market (listed and large 
companies).  
As an additional positive side effect, the increased number of statutory audit providers will 
contribute to financial stability by progressively reducing the risks in the statutory audit market 
of a "too big to fail" firm.  
Independent and effective national audit supervisors and their coor dination at EU level, as well 
as the regular dialogue between aud itors of large financial institutio ns and their supervisors, will 
ensure a more efficient flow of informati on, thereby increasing the quality of audit. 
As these measures will have a positive impact on the quality of audit, the audit practices in the 
Union will become the benchmark for global practice.  
In terms of proportionality , the proposed policy options address particularly the problems 
affecting the audit of PIEs, especia lly for large PIES in the financial sector; it is at this level that 
the impact of negligently or poorly audited fi nancial statements would be most severe on 
investors, on financial stabilit y and on the broader society. It thus follows that the proposed 
actions are more detailed for this segment of  the market. The proposed policy options appear 
necessary to achieve the identif ied objectives, both individually215 and in combination (see 
Annex 19  for a more detailed examination of the pr oportionality of the measures). Conversely, 
actions will be adjusted to the size and dimensi on of the “smaller” actors, be it auditors/firms or 
PIEs (see Annex 16 ). Regarding the measures that would ap ply to both the audit of non-PIEs and 
of PIEs, the proposed actions remain principl e-based, building on ex isting legislation and 
continuing to grant discretion to Member States  in adjusting rules to  the national situation. 
8.2. Impact on different st akeholders groups  
i) Investors and other use rs of financial statements . Investors will benefit substantially from the 
implementation of the preferred measures. The bene fits will result from the enhanced role of 
auditors in meeting the expectations of relevant stakeholders, in particul ar, the availability of 
more information on the audit findings as we ll as the rationale for confirming the “going 
concern” hypothesis underlying the audit opinion. I nvestors as well as other users of financial 
statements, such as analysts or employees will benefit from higher audit quality. The latter will 
be enhanced by fostering audit firms that will compete more, adhere to  stricter independence 
rules and be effectively supervised. A strong enfo rcement mechanism would be  critical to ensure 
that the benefits of ch anges are realisable.  
                                                 
215 See above for each policy option. 
 
EN 58   EN ii) Public interest-entities . Ensuring auditor accountability towards shareholders and those who 
are charged with the governance of the entity w ill help refocus statutory audit as a “service” 
provided not only to the entity, but also to it s investors, lenders and other stakeholders. 
Combined with robust and clear independence rule s, this refocused accountability shall increase 
audit quality.  
The requirement for pure audit firms would ensure that PIEs, especially large ones, will benefit 
from an increased choice of audit firms, since currently some cannot become their auditors as 
they already provide non-audit services. Th e ban on the provision of  a range of non-audit 
services by the audit firm will result in the audit committee focusing on audit quality issues 
rather than on ensuring that no  conflicts of interest  arise because of the provision of non-audit 
services. However, due to the split of audit and non-audit serv ices, the audited entity will no 
longer be able to avail of the “one stop shop”  they are frequently offered at present.  
iii) Small and medium size enterprises (SMEs) . SMEs will not be affected by the new measures 
regarding the audit of PIEs, unless they are PIEs themselves. In any event, these measures are adapted to size: PIEs of smaller dimension (including SMEs) will benefit from derogations or lower requirements (e.g. on the audit committee, te ndering procedures or the provision of joint 
audit). Where SMEs which are not PIEs are audited
216, Member States will be required to ensure 
that the application of the audit standards is ad apted to the size of the audited entity, which 
should result in better targeted audit services provided to SMEs. An analysis of the impact on 
SMEs, including SMPs, is provided in Annex 16 . 
iv) Big Four audit firms . If the Big Four audit firms were to st and still, they w ould be negatively 
affected in the short term due to the opening-up of the market for large and listed companies to more competition. Big Four audit firms may be unde r pressure to reduce thei r profitability levels 
in line with the levels of other internationa lly operating audit firm networks. However, the 
changes would create real incentives for restruct uring at the top end of the market, whereby “off-
shoots” from the Big Four audit firms may become feasible and even attractive. Given that the 
audit business is essentially a “people business” where highly qualified and intellectually nimble people are employed, it is expected that such change s will be seen as an o pportunity rather than a 
threat. Mandatory rotation via tendering will create the right incentives for “new” firms and other mid-tier firms to invest and emerge as real co ntenders for the very top segment of the PIE 
market. In any case, the risks of  failure of a “major” firm a nd the impact thereof will be 
substantially mitigated. In the short term, Big Four  audit firms may suffer if the requirement to 
become pure audit firms is enforced as some econo mies of scale and synergies would be lost due 
to the split between audit and non-audit services . However, incentives fo r cross-subsidiation 
between audit and non-audit services will be re moved. The Big Four aud it firms will certainly 
benefit from the measures to facilitate the cro ss-border recognition of aud itors' and audit firms' 
competence (e.g. possibility to provide services  in a cross-border context in all 27 Member 
States with a single licence or to move employed auditors with in the network), from more 
coordinated and effective superv ision as well as the applicati on of common standards on audit 
practice, independence and convergen ce of firms' internal controls. Big Four audit firms will also 
benefit from enhanced trust in statutory audit through better audi t reports and explanations of 
how they conduct their audits.  
                                                
 
216 It must be noted that, according to European Commi ssion (October 2011b), onl y "medium-sized" (but not 
"small" ones) undertakings would be subject to the obligation to have their accounts audited. The medium-
sized undertakings (with limited liability) subject to the audit obligation are a minority of SMEs. 
 
EN 59   EN v) Non-Big Four audit firms . In addition to the emergence of new players, a large number of 
internationally operating non-Big Four audit firm networks will be given a real possibility to 
compete for audit engagements of large PIEs due to the requirement for the mandatory rotation of audit firms and the tendering procedures. To mitigate the companies' bias towards Big Four audit firms, the market participants will be prov ided more with information on audit quality and 
audit firms, confirming that non-Big Four audi t firms have the capacity to perform audits of 
PIEs. The incentives to apply joint audits by all PI Es could also be benefi cial for the building up 
of reputation for non-Big Four audit firms. Like the Big Four audit firms, theese firms will also 
benefit from the measures to facilitate the cro ss-border recognition of aud itors' and audit firms' 
competence. 
vi) Small and medium size practitioners (SMPs)
. SMPs are occasionally present in the market for 
the audit of listed companies and other PIEs (the y are more present in France, where they may be 
the small partner in an audit c onsortium), so the impact of mo st of the proposals on them is 
limited. In any case, account of their size has be en taken for the more demanding measures, such 
as the coversion into pure audit firm s which would not be required for SMPs217. See also Annex 
16. They will also benefit from the reduction of administrative burden resulting from the removal 
of cross border obstacles and the introduction of common standards within the Union (see 
below).  
vii) Audit regulators . Audit regulators will benefit from the clarification of their mandate and the 
increase of their supervisory powers. Due to th e ban on the provision of  non-audit services, the 
oversight and enforcement of independence rule s would become easier and less costly. When 
performing inspections of PIEs a udits, adequate coordination woul d be needed to ensure that 
audits throughtout the Union are conducted in compliance with  auditing standards and other 
applicable rules. The clear c ooperation mechanism within ESMA should facilitate cooperation at 
the level of the Union. 
8.3. Other impacts 
(i) Social impacts . There will be no direct social impact at a macro level, such as on the national 
employment levels, of the prefer red options. Indirectly, however, al l the measures would lead to 
a more efficient functioning of the market, which in turn may enhance confidence, foster more 
investment and thus postively aff ect the level of employment.  
Discussions at the EESC have highlighted the im portance of robust financial information with 
regard to the solidity of the entity from the perspective of employees. It is important for 
employees and their representatives to receive an audit report that is more meaningful; equally, it 
is critical for them to know if there are any immediate risks to the continuation of activity and any threat to their employer's ability to meet its obligations towards its staff. 
(ii) Environment
. Although robust audits do not have a di rect environmental impact they are 
extremely useful in providing assurance that an y liabilities related to environmental remedial 
work or claims have been adequately identifie d as well as quantified. The quantification of 
environmental claims against BP as a result of th e oil spill in the Gulf of  Mexico is a noteworthy 
example. 
                                                 
217 The imposition of the pure audit requirement with resp ect to audits of PIEs would, however, make the 
entrance of SMPs into this market more difficult. In this regard, a derogation for SMPs would be required 
to avoid perverse effects when SMPs would have to decide whether to join larger audit firms or to quit this 
segment of the audit market. This derogation would cease to apply should the SMP grow sufficiently. 
 
EN 60   EN (iii) Administrative burden . Only some of the proposed meas ures would result in additional 
administrative burden to either audited entities  or audit firms/statutory auditors. Annex 20  
presents a table with a description of these bur dens. On the other hand, the removal of cross 
border obstacles and the introduction of common standards within the Union will reduce existing 
admistrative burdens for the provision of audit se rvices in other Member States. Administrative 
burden at the level of SMEs will also be reduce d, not least because Member States will have to 
adapt audit standards to the size of the audited entity and ensure a proportionate and simplified 
audit for SMEs. 
(iv) Impacts on third Countries . The proposed measures are rather  neutral regarding their effects 
on third countries: (1) there is no  change regarding the scope of application of Union audit rules 
or the possibility for third country nationals to b ecome statutory auditors in the EU; (2) there are 
marginal improvements regarding the audit of c onsolidated accounts (i .e. with a view to 
facilitating the audit of consol idated financial statements when either an EU company has 
subsidiaries in third countries or a third country company has subsidiaries in the EU); (3) 
supervisory cooperation with third country aut horities is encouraged, but the rules on such 
cooperation (e.g. transfer of audi t working papers) remain largely untouched. See Annex 17 for  
further detail.  
v) Other impacts . There will be a positive impact on providers of non-audit services, including 
SMEs, since audit firms will no longer be able to provide those services to their audit clients. 
The providers of NAS would no long er have to compete with firms with captive audit clients.  
8.4. Transposition and compliance aspects 
Some of the policy choices envisaged require the adoption of national transposition measures218. 
Other policy options would be dire ctly applicable (i.e. those cont aining obligations for PIEs and 
for auditors of PIEs), but a vacatio legis  period should be establishe d, matching the transposition 
period (2 years) so as to ensure effective supervision. Additionally, it is anticipated that 
compliance with some of the proposed measures may not be easy in the short term. Firstly, the 
conversion of audit firms into pure audit firms ma y require the granting of a specific transitional 
period to guarantee that existing firms are able to appropriately prepare such conversion: i.e. 3 
years after the adoption of the le gislative measure. Secondly, the rules on tendering and rotation 
should be introduced in a way that  would ensure that all changes of auditors do no t occur at the 
same time. Also, account needs to be taken of the contracts for audit services which are effective 
at the moment of the entry into force of the legislative measures. See Annex 21 on transposition 
issues . Thirdly, beyond empowering competent authori ties in national law, the challenge is to 
ensure that national competent authorities and ESMA will be provided with sufficient resources 
within a relatively short time (see Section 9 ).  
In terms of compliance with the rules, the pref erred policy options imply a reinforcement of the 
national supervisory authorities. This should f acilitate the monitoring of compliance with the 
rules by the statutory auditors/aud it firms and also the audited en tities. Consider ing, however, the 
level of detail of the preferred policy options th at apply specifically to the audit of PIEs and 
which would be set out in a direc tly applicable legal instrument, it appears appropriate to provide 
for a clear and specific sanctioning regi me as regards those specific measures219. Such a regime 
                                                 
218 i.e. the requirements regarding access to audit markets in  different Member States; the audit standards to be 
used, including when auditing SMEs; and the supervisory issues. 
219 This would be consistent with European Commission (December 2010).  
 
EN 61   EN would include rules on: the identification of th e key infringements, the minimum level of the 
maximum amount of the administrative fines, th e publication of sanctions and minimum powers 
for competent authorities on supervisory measures. See Annex 22  for further detail.  
9. MONITORING AND EVALUATION  
The monitoring and evaluation of th e preferred policy options will be  carried out in 3 steps (see 
Annex 23  for further details on this issue): (1) a transposition/transitional period plan , in 
cooperation with ESMA, preparing for the application of the rule s; (2) the regular monitoring 
activity by the Commission , as guardian of the Treaty (focus ing on the empowerment of national 
supervisors) and the national authorities  (on quality assurance review s of auditors/firms; market 
monitoring, in particular of ma rket concentration levels; and threats to the continuity of 
operations of audit firms). ESMA would prepar e a report on supervisor y issues; and (3) the 
evaluation of the policy.   
-2
Entry into force0
End of transposition
/transitional period+2
years+4
years+5
years+10
yearsTransposition/transitional period Plan:-Commission: transposition workshops
-ESMA: 
--cooperation group within ESMA--stakeholder group (within ESMA)
--working group on data needsESMA: Report
National supervisorypowers and 
resourcesESMA: 
PreliminaryEvaluationCommission: Interim
ReportCommission 
& ESMA:Evaluation
Monitoring (by Commission):
-Transposition (guardian of Treaty) 
-Powers and resources of national authoritiesMonitoring (by national authorities):-Regular Quality Assurance Reviews
-Market developments: market concentration levels
-Threats to continuity of operations of large audit firms
-2
Entry into force0
End of transposition
/transitional period+2
years+4
years+5
years+10
yearsTransposition/transitional period Plan:-Commission: transposition workshops
-ESMA: 
--cooperation group within ESMA--stakeholder group (within ESMA)
--working group on data needsESMA: Report
National supervisorypowers and 
resourcesESMA: 
PreliminaryEvaluationCommission: Interim
ReportCommission 
& ESMA:Evaluation
Monitoring (by Commission):
-Transposition (guardian of Treaty) 
-Powers and resources of national authoritiesMonitoring (by national authorities):-Regular Quality Assurance Reviews
-Market developments: market concentration levels
-Threats to continuity of operations of large audit firms
 
Figure 23 
A full evaluation of the effects of the policy ch oices could, however, only  be undertaken in the 
longer term. Some of the important policy choi ces will take time to have any impact e.g. 
conversion of audit firms into pure audit firms, mandatory rotation of audit firms after 9 years; 
joint audits etc.). It would be necessary therefor e to carry out such evaluation in two steps: (i) 
first a preliminary examination by ESMA (po ssibly followed by an interim report by the 
Commission), on selected i ssues: e.g. changes in audit market structure; changes in the patterns 
of cross-border activity; interim assessment of the improvement in audit quality; impact of the changes regarding audit of SMEs; (ii) the full evaluation, 10 years after the end of the 
transposition/transitional peri od (to measure the effects of mandatory rotation). The full 
evaluation could be undertaken by  ESMA or conducted externally. This choice could be made 
after the results of the first step (the  preliminary examination) are known.  
 
EN 62   EN ANNEX 1. SUMMARY OF RESPONSES TO THE GREEN PAPER "AUDIT POLICY : LESSONS FROM 
THE CRISIS " 
This annex reproduces the summary of responses to the Green Paper "Audit Policy: Lessons 
from the Crisis" published220 the 4 February 2011 by the Commission services at: 
http://ec.europa.eu/intern al_market/consultations/ 2010/green_paper_audit_en.htm   
The summary presents the following structure – Background 
– General Views 
– 1. Role of the Auditor 
– 2. International Standards on Auditing (ISAs) 
– 3. Governance and independence of audit firms 
– 4. Supervision 
– 5. Concentration and market structure 
– 6. Creation of a European Market 
– 7. Simplification: small and medium-s ized enterprises and practitioners 
– 8. International Co-operation  
                                                
 
220 Individual responses are also published on the same website. 
 
EN 63   EN Background 
The Commission published a Green Paper on the 13th of October 2010 seeking views from 
stakeholders and the broader public on a range of i ssues related to the stat utory audit ('audit'). 
The consultation closed on the 8th of December although certain responses came in after the 
deadline. 
In all, almost 700 responses were received. Th is is the highest level of responses of any 
consultation in the Internal Market and Services area sinc e the completion of the public 
consultation on Solvency II in February 2008 and is  certainly the widest consultation response 
coming out of the financial crisis. The responses  have come from various stakeholders; these 
include members of the profession, supervisors, investors, academics, companies, government 
authorities, professional bodies and individuals. Although the majo rity of the responses are 
from within the European Union, there have be en a number of responses from third countries. 
This summary has been prepared to provide a qu alitative synthesis of the analyses carried out 
of the various responses. Alt hough there are some very detailed responses, not all respondents 
have replied to all the questions. In fact, ther e are certain responses that are very short and 
some that make a statement without responding to any particular question. 
Through this summary, our endeavour is to provide an accurate depiction of the broad 
spectrum of responses. As for any public cons ultation, there are some responses at the 
extremes of the opinion spectrum with outright rejection of almost everything on the one hand 
and unflinching support for most ideas at the other.  We have tried to provide an idea of the 
different levels of support a nd rejection as well as the st akeholder groups concerned. The 
stakeholder groupings used throughout the summary  emanate from the procedures used by us 
to process all the replies; they are not intended to 'club' any pa rticular respondent in a category 
as there may well be instances where the resp ondent could have been  included in another 
category. In any case, in order to facilitate a trail back to the indivi dual responses, the latter 
will be published using the same categories as those appearing in this summary. For ease of 
reference back to the Green Paper we have also  used the same section headings as in the 
Green Paper. 
It is worth noting that the four  biggest audit networks ('Big Four') have each submitted one 
response on behalf of the whole network. The summary often refers to the Big Four and 
endeavours to represent a 'collective' positi on although there are nuances and differences on 
certain issues; to get a clearer detailed view of their response we would refer the reader to the 
individual responses that have been  published along with this summary. 
It is also important to highlight that 42% of all  responses have originated in Germany. A 
noteworthy aspect of the respons es is the substantial intere st expressed by the small and 
medium sized audit practitioners from Germany as well as other Member States. 
In various instances, for the purposes of accuracy as well as in recognition of the clarity of 
certain messages, we have reproduced the text provided in the response. The variation in the 
length of the various sections is a reflection of the number of questions posed in the Green 
Paper as well as the level of in terest elicited amongst respondents. 
 
EN 64   EN Stakeholders 
87% of replies (from the total of 688 replie s) were received from the European Union 
Member States (see figure 1). The consultati on attracted groups representing either pan 
European (19 replies) or worldwide (22 rep lies) interests. Responde nts representing world-
wide interests included internationally operating audit firm networks and associations. Among 
the EU wide stakeholders ( 19 replies), these were primarily European associations 
representing the interest of companies (preparers). There was also considerable interest in the consultation from non-EU countries (49 replies). 
Individual EU 
Member States; 
599Non-EU countries; 
48
EU-wide interests; 
19World-wide 
interests; 22
 
Figure 1. Geographical distribution of th e replies to the Green Paper 
There were 599 replies received fr om individual EU Member States (see figure 2). The replies 
from Germany, UK, France and Spain made up more than ⅔ of all replies received from 
individual Member States. The replies from the international audit firm networks have not 
been included under replie s from member states. 
65
45
29
18
15141312 1210 10987775344322211
0102030405060708090100
DE UK FR ES NL BE AT IE PL SE DK FI SK EL IT LT PT LU CZ HU RO CY LV MT SI BG EE
Member StatesReplies to the Green Paper
 
Figure 2. Distribution of replies by a Me mber State [DE: 291 replies] 
 
EN 65   EN Figure 3 presents more detailed information on the replies received from other non-EU 
countries. Almost half of the non-EU replies have been received from the United States. 
20
6
44
222221111
0510152025
USA
AustraliaCanada
South Africa
Brazil
China (Hong-Kong)
JapanNorway
Switzerland
Republic of AzerbaijanRepublic of Moldova
Singapour
Republic of Korea
Non-EU countryReplies to the Green Paper
 
Figure 3. Responses from non-EU countries 
In terms of the in terest groups, a majority of  responses represented th e interests of the audit 
profession – 59% of the total number of responses  (see figure 4). It s hould however be noted 
here that there were more than 200 replies iden tical in their content; these were all received 
from the German audit profession. The second biggest group of respondents were the preparers of the accounts and businesses in genera l (21% of the total number of responses). 
There has also been good repres entation of public aut horities and users, respectively 57 and 
22 responses. The remaining replies included academia (28 replies), audit committees (9 replies) and other replies (20 replies), of  which the majority came from private persons. 
Preparers 
(companies); 145Audit profession; 
407Public authorities; 
57Audit committees; 
9
Users; 22Other; 20Academia; 28
 
 
EN 66   EN Figure 4. Responses by interest groups 
Among the representatives from the audit profe ssion, sole practitioners and other small audit 
firms were the most responsive amounting to 2 86 replies (see figure 5) with German small 
and medium practitioners bein g particularly active. There were 94 replies from the 
professional associations. The Big Four networks  provided their replies on behalf of all their 
respective members. Other internat ional networks, a vast majority  of which form part of the 
European Group of International Audit Firms (E GIAN) or/and of the Forum of Firms, were 
also well represented. 
Big Four network 
firms; 4
Mid-tier firms; 23Professional 
associations; 94
Small and 
medium size 
practices; 286
 
Figure 5. Responses representing the inte rests of the audit profession 
The interests of the preparers of  financial statements have been  represented well by various 
business associations – 49 replies out of 145 (s ee figure 6). The financ ial industry has been 
the most responsive economic sector (20 replie s). There were only two companies identified 
as SMEs, though their views were also refl ected by some professional associations. 
Associations of 
companies; 49
Financial services 
provider; 20
SMEs; 2Other companies ; 60Other business 
representatives; 14
 
 
EN 67   EN Figure 6. Responses representing the interests of  preparers of the audited financial 
accounts 
When it comes to the user stakeholder group, most  of them represented investors (figure 7), 
but there were also replies representing the in terests of employees a nd analysts, respectively 
3 and 1 replies. 
Investors; 18Trade 
unions/employees ; 
3Analyst; 1
 
Figure 7. Responses representing the interests of the users of audited financial 
accounts 
GENERAL VIEWS 
There is general acceptance of the Green Pape r. The issues raised, despite having been 
discussed before, are of particular interest in light of the recent fina ncial crisis – a crisis that is 
still affecting the econo mies of many nations. 
There persists an expectation ga p between the actual scope of audit and th e public perception 
of what audits are intended for. It is thus  important to improve transparency on the conduct 
and outcome of the audit to narrow that expectation gap. It is equally important to 'adjust' the work carried out in function of the re quirements of the main stakeholders. 
It has been indicated that the societal role of  auditors is clear, but clarification or better 
articulation could be helpful. 
Academics suggest that there is a need to align the role of aud itor more with expectations of 
the general public by enha ncing audit reporting and disclosure to add more value to the audit. 
The current legal framework is not sufficient to  safeguard auditor independence and structural 
changes are needed. Inspections in some countries show that 'big' is not equal to 'high quality'. 
Although, the majority of individual business prepar ers do not see a real need to redefine the 
scope or role of auditors, some of them also  agree that improvement s could be achieved by 
redefining the role of audit re garding the veracity of financial statements as well as an 
increase in the quality of audit. Some responde nts find audit too focused on tax issues rather 
than on a true and fair view of the financial statements. 
 
EN 68   EN 1. ROLE OF THE AUDITOR 
The Profession 
Professional bodies and associat ions linked to the profession 
The majority reply that reporting on the financia l health is not the pu rpose of an audit and 
that, currently, audits are not fit for this purpose. The current ro le is to expre ss an opinion on 
the financial information provided by management  i.e. to give reasonable assurance on the 
true and fair view of the financial statements.  
The respondents generally confirmed that mo re information could be provided but many 
maintain that the expectation gap is unlikely to be closed. Nonetheless, what an audit does and 
does not do should be clearly spelt out especi ally with more disclosures on the work 
conducted on key areas of judgement, the major queries raised and management explanations 
thereto, issues of material concern and models/techniques used for valuation, etc. Some 
suggested more disclosures on risk, judgements and estimates. Another suggestion was to ask 
the users what information they would require. 
The vast majority of respondents do not consider  that more substantive testing or 'going back 
to basics' will automatically result in higher assurance. 
The majority of respondents repl ied that qualifications should remain 'negative'; they should 
not be graded as they are binary in nature. Although some did suggest that qualified opinions 
could be better explained in the audit report. 
There were also suggestions that the audit co mmittees could report more on discussions with 
auditors, e.g. key areas of judge ments and audit issues in the fi nancial statements. Some also 
suggested strengthening the independence of the audit committee and internal audit. 
The replies were mixed as regards the role for an auditor in CSR. Caution was urged as key 
aspects of this area require furt her clarification and now may not be the right time to introduce 
CSR requirements. In any case, a prohibiti on on non-audit services  could affect CSR. 
The majority of respondents think that the time gap between the year end and the date of the 
audit report cannot be shortened without da maging audit quality. A few suggested more 
interim reporting. 
Suggestions to enhance audit quality include enhancing auditor involv ement with the front 
end of the annual report, pr oviding greater assurance ou tside the report and improving 
communication between audito rs, regulators & company. 
Quite a number of respondents feel that the ro le of the auditor could be expanded if those 
charged with governance were to provide more information in the annual report (e.g. assumptions underlying going concer n and the key risks associated  with the entities' business 
model) and the auditor could then pr ovide assurance on this information. 
One respondent proposed an explicit provision in EU Regulation that EU auditors act in the 
public interest when perf orming statutory audits. 
 
EN 69   EN The majority of respondents believe there is a n eed to better set out th e role, purpose, scope 
and limitations of audits. The in teraction of audit with othe r functions in the corporate 
governance framework should be be tter understood and awareness of concepts such as going 
concern and emphasis of matter should be e nhanced. Moreover, audit oversight has an 
important role in audit quality. 
Big Four 
On the specific questions, the Big Four are of the opinion that although  some measures may 
be helpful in strengthening the role of aud it, several topics run the risk of negatively 
impacting audit quality, imposing dispropo rtionate costs on business and affecting 
shareholder's rights. They also alert the Commission on the global im plications, including 
potential unintended consequences of a ny EU proposals. The Big Four remind the 
Commission that the auditor's mandate is to issue an opinion as to whether the financial 
statements give a true and fair view in acco rdance with the releva nt reporting framework. 
Mid Tier Firms and Small and Medi um Sized Practitioners (SMPs) 
The non Big Four believe that audit quality is  not an 'absolute' but  rather a state of 
incremental attainment at any given time. A vi ew has been expressed that 'audit quality' may 
be adversely affected by the pressure, in many countries, to reduce audit fees. 
German replies draw the attention to the point that the German "Lagebericht" (management 
report), which has to be audited as well, al ready includes forward looking information. In 
order to enhance the value of audits, it is propos ed that the German long form report could be 
a basis to provide further information. 
Some SMPs point out that the standardisation of  the auditors' report has deprived the auditor's 
opinion of any meaningful content. 
Investors 
Most investors believed that auditors should also provide comfort regarding the financial 
health of companies, but only within their current remit and without any extension of the 
auditors' role. Specifically, investors under line the importance of the going concern 
assumption, both in terms of its disclosures by the company and its validation by auditors, as 
well as the correct valu ation of assets. Moreover, investor s suggested that auditors should 
improve their reporting by explaining wh at they have done during an audit. 
All investor representatives agre e that professional scepticism should be reinforced. Investors 
would like to see audit firms ensuring a stronger and more visible "tone from the top" as well 
as the consistency of key judgments across c lients. Mentoring, j unior staff training, 
continuing education, reducing the amount of junior staff per audi t partner should also be seen 
as crucial to developing and reinforcing scep ticism. The promotion system should also be 
well adapted to support the us e of professional scepticism. Investors also think that 
independent inspections should focus more on the use of professional scep ticism and in this 
regard it is important that review notes ar e retained by auditors. An audit committee should 
also be in a position to assess the professiona l scepticism applied by auditors. Fair value 
valuation and going concern validat ions are specific areas where investors believe the use of 
professional scepticism should be improved. 
 
EN 70   EN Most investors were of a view that audit re ports should be more qua litative and the negative 
perception towards audit qualifications should be reconsidered. As a solution, investors 
propose more informative auditor opinions, more  frequent use of the "emphasis of matter" 
statements or even the review of the audi t terminology used in a udit reports, such as 
"emphasis of matter", "true and fair override". Some investors pointed out that if the audit 
report gave an indication on the quality of financial statements , i.e. how far the company is 
pushing the boundaries of accounting standards,  it would provide much more useful 
information to investors, and would dissuade companies from taking an  aggressive stance. 
The audit profession needs to more actively cons ider the 'true and fair override' such that 
auditors do not sign off simply because statements comply with accounting standards. The 'true and fair override' is required under accoun ting standards, but seems never to be applied 
in practice. 
While few thought audit firms could be in a positi on to also audit CSR, others believed that 
non-audit firms may be better specialised to provide assurance on such matters. 
Public Authorities 
Most respondents argue that th e current role of an auditor is an assurance concerning 
historical information, not forward looking info rmation. Auditors should not replace the role 
of rating agencies and analysts, nor of those entrusted with governance. Still, there were some 
public authorities that were more open to an analysis of the benefits of such a change in the current role of the auditor. 
Most respondents agreed that it is important to bridge the expecta tion gap, to the extent 
possible, by explaining the methodol ogy used by auditors to users.  More detailed suggestions 
on the matter included: the auditor should expl ain the purpose of perf orming risk assessment 
procedures and of obtaining an understanding of the entity, the entity's environment and 
internal controls, as well as the purpose of evaluating the design of t hose controls. Auditors 
could also explain how they have arrived at certain judgments, evaluations and decisions. It 
was also suggested that an "extended" audit re port, which contains further description of the 
methodology applied and which is made availa ble to the audited entity and relevant 
supervisory authority, could be help ful to reduce the expectation gap. 
Most respondents agree that professi onal scepticism should be reinforced. 
Some respondents proposed greater transparen cy by audit committees on the outcome of the 
audit together with improved engagement with  investors; this should help minimise the 
shortcomings in a binary audit opinion and the implementation of a “graduated ladder” of 
reporting options which would help auditors express their views regarding the company's 
finances more specifically (rather than just  having the sole option of 'qualification'). 
Most respondents agreed that there should be  more regular communication by the auditor to 
the stakeholder but that the time  gap between the year end and the issue of the audit opinion 
should not be reduced. Reducing the time available for the auditor to gath er and analyse audit 
evidence would present a risk to audit quality. It was also argued by some that it is vital that 
any changes to audit regulation at EU or Memb er State levels are evidenced by an assessment 
of the economic impacts that demonstrates that the benefits exceed the costs. 
 
EN 71   EN CESR, CEIOPS and CEBS do not think that the role of the auditor should be extended to 
provide comfort on the financial health of companies. Auditors are not (and should not 
become) credit rating agencies predicting or a ssessing the future solvency of companies. 
However, they support improving the communicatio n of the auditor towards stakeholders on 
this issue: further discussi on on improving the explanatory notes to the going concern 
assessment would be welcomed. 
There could be benefits in a uditors better explaining audit me thodology to users, but this may 
not necessarily reduce the expectations gap. They agree that there is room for improvement on 
professional scepticism. CEIOPS would encourag e experts to start a debate on whether 
different categories of qualifications in audit reports could be feasible. 
They agree that there is a need for better co mmunication between auditors, audit committees 
and external stakeholders. Improved communicati on, inside or outside the audit report, would 
be beneficial and might help diminish the expectations gap of stakeholders. 
Academics 
Apart from adding reasonable assurance and protect ion with respect to the reliability of the 
accounts, academics who responded to the consultation generally think that the substantive 
added value of audit reports is very li mited. Form dominates over substance. 
More transparency is needed  on audit quality, a nd the reporting of it by regulators and 
oversight bodies. Expanding the content of the a uditor's report is critical not only to reduce 
the expectations gap but also to provide great er incentives for high quality audits. A qualified 
audit report should send a clear a nd important message to the market  place; this is  not the case 
at the moment. Fraud detection s hould be indispensibl e as it's invariably linked to the major 
disappointments with the present system. 
Additional information should give more promin ence and visibility on work performed by the 
auditor (also linked to the expectation gap), co nsider the use made of the annual report by 
stakeholders and where additional information can  help, avoid an information overload (as is 
already the case in annual reports) and have  more explicit and informed professional 
judgements explained in the financial statements. 
Professional scepticism can be achieved through rotation after fixed (8 year) periods as the 
auditor would be sure in this case that another audit firm will be engaged and that the incoming auditor will review th e previous auditor's work. 
The Green Paper does not sufficiently analyse the position of the auditor in a company: 
"giving credibility to the accounts that are presented by the management and the board as these would not be considered reliable without the external, e xpert and independent opinion 
of the auditor". In reality, auditors are nominated and their remuneration is fixed by 
management. To give power back to sharehol ders, a shareholder committee as tested in 
Sweden should be considered. There is a need  to align the role of auditor more with 
expectations of the general pub lic by enhancing audit reporting and disclosure on audit. The 
current legal framework is not sufficient to sa feguard auditor independence and structural 
changes are needed. Inspections in some countri es show that 'big' does not necessarily equal 
'high quality'.  
 
EN 72   EN Society would benefit if it were to view and treat the auditor as a potential whistleblower, 
accompanied by appropriate rewards and incentives . Especially as the ov erall incidence rate 
of fraud was recently estimated to be in the 7%-13% range of all publicly held organisations, 
i.e. detected fraud could well be the proverbial tip of the iceberg. 
Preparers, businesses and organisations of companies  
There is strong support from business respondents that audits should ne ver be considered to 
provide comfort on the financia l health of companies since this would transform audit 
opinions into credit ratings. Th ere is also strong support fo r enhancing the communication 
between auditors and supervisors (specifically  in the banking sector), while lifting any 
restrictions on auditors to share client-specific information with the supervisors. 
Auditor's role should be to give assurance on th e financial statements ba sed on historical data. 
If users require more information, they would be  able to form their opinion on the health of 
the company, based on the financial statements, possibly guided by rating agencies or other 
professionals in assessmen t (e.g. equity analysts). 
Over the past years, one can see a shift in the fo cus of audit. Typically auditors want to secure 
completeness, correctness and timeliness of the financial data (balance sheet, P&L, cash flow overview and notes) of a company. Respondents ha ve noticed a shift from this focus to 
examining compliance with IFRS. 
With regard to the ideas of the Commission to co me back to a more basic and substantive test 
of the balance sheet, they can only support them in relation to th e audit of small entities for 
which a system-based approach does not make sense (too limited number of staff). In contrast, respondents are not in fa vour of this idea for medium-si zed, larger entities and large 
groups. A 'risk based approach' (i.e. an approach  based on the risks of material misstatements 
in the financial statements) is more efficient. It should be maintained with possibly extensive 
feedback on effectiveness of in ternal controls. However, even with a risk based approach, it 
might be useful to limit the focus of the audit to financial data and not  broaden its scope to 
auxiliary areas and reports. 
Although, the majority of individual business prepar ers do not see a real need to redefine the 
scope or role of auditors work, some of them agree that some improvements could be envisaged by redefining the role of audit with re gard to the veracity of financial statements as 
well as improving quality. These discussions should  be on a level of materiality and scope of 
audit programmes; this in turn  would help closing the exp ectations gap. Some respondents 
also find audit too focused on tax issues rather than on a true and fair view of the financial 
statements. 
On the specific questions, business respondent s are of the opinion that although some 
measures may be helpful in stre ngthening the role of audit, se veral topics run the risk of 
negatively impacting aud it quality, imposing disproportionate  costs on business and affecting 
shareholder's rights. The role of the regulators should also be revisite d because many auditors 
have increased their focus on checklists in orde r to meet the demand of audit inspection units. 
This situation can distort the quality because it has led to a 'perceived degeneration' of an 
audit into a review on IFRS compliance inst ead of providing a pr ofessional judgment. 
 
EN 73   EN On the audit methodology issue, all respondent s admitted that the audit methodology should 
be better explained to the publ ic and the users but this expl anation should not  be included 
within the audit opinion. 
On the audit report, the preparers seem to agr ee that their language s hould be revisited (very 
defensive and difficult to understand). The opini on should clearly state the responsibility of 
the auditor and the work performed. Auditors  should provide more de tailed information as 
well as more information on key judgments. They can also justify their opinion as is currently 
the case in France. 
Finally, regarding the qualified audit report, there is a general belief that its current form is 
satisfactory but it might be be neficial to look into further explanations on the reasons for 
qualification. If the signal is changed to for example “nearly qualified” the value of audit might decrease as a mixed sign al does not make sense. Convers ely, if the auditor fails to 
qualify his opinion when it should have been qu alified, audit regulators or inspectors should 
be able to file law suits or impose disciplin ary sanctions. A potential  solution could be the 
introduction of several categories of opinions. 
Finally on the question to know whether a short or long report should be put in place, the 
respondents do not seem very concerned as most  people do not read the audit report as such. 
They only focus on the ‘qualification’ status or ‘emphasis of matter’ paragraphs. But what 
should really matter in the report is how the au ditor has planned and co nducted the audit (i.e. 
the audit methodology). 
To reinforce professional scepticism, audit regulators should be able to refer the auditor to a 
disciplinary tribunal. 
Nobody believes that the auditor should play a role  in the field of CSR. The objective is not to 
give new markets to auditors. Moreover, auditors often do not have the skills to understand CSR reports (often qualitative information). Co mpanies should use specific experts if they 
seek some sort of assurance in this field. 
2. INTERNATIONAL STANDARD S ON AUDITING (ISAS) 
Views are mixed on the possible adoption of ISAs in the EU. 
The Profession 
Professional bodies and associat ions linked to the profession 
There is very broad support for binding ISA adoption. Some professional bodies, however, 
suggested that Member States should be allo wed to introduce modifications to ISAs which 
would be needed because of national legislat ion/practice (e.g. compan y law). It was also 
suggested that ISAs should in clude the internati onal standards on quality control (ISQC1), 
widely applied by firms. Concerning the role  of the IAASB, professional bodies also 
explained that currently auditors are not  sufficiently represented in the IAASB. 
Big Four, Mid Tier Firms and SMPs 
There is broad support for the adoption of ISAs in the EU as binding instruments and without 
any further adaptation for SMEs and SMPs; the la tter are catered for already in the standards 
 
EN 74   EN themselves as well as the gui dance provided. Howeve r, there are a number of responses from 
SMPs requesting sensitivity to the additional administrative burden.  
Investors 
Most investors supported appli cation of consistent auditing st andards not only in the EU, but 
also globally. Most respondents rather support a flexible non- binding approach, such as a 
recommendation, which could also be subject to a form of review in order that the 
Commission and other relevant st akeholders can reasonably satisfy  themselves that standards 
are proving to be 'fit for purpose'. It was beli eved that the non-binding  approach would not 
reduce an impetus to higher audit quality by making auditors more focused on the overall 
purpose of the audit to ensure a 'true and fair  view' rather than following compliance-focused 
audits. 
Some investors also raised an issue on the gove rnance of the auditing st andard setter IAASB. 
This body may be potentially conflicted as it is part of IFAC which is funded by the professional associations and large audit firms. In  this respect, investors asked for a review of 
the IAASB governance so that a broader constituen cy including investors are involved in the 
development of ISAs. 
Public Authorities 
There is broad support for ISAs albeit not always for a binding approach. CESR, CEIOPS and 
CEBS support the adoption of ISAs in the EU as binding instruments ( by Regulation, through 
comitology). CEBS would be opposed to adaptations and carve outs, but could accept national additions. CESR suggests, however, that it would be benefi cial to retain an ability to 
amend standards prior to endorsement, should th e European public in terest so require. 
Academics 
There is support for ISAs in the EU through re gulatory binding standa rds. The risk of non-
application of ISAs by the US s hould, however, be taken into account. 
Preparers, businesses and organisations of companies 
Companies, nevertheless, expres sed less enthusiasm for ISAs. Companies are not opposed to 
the application of ISAs by EU binding instru ments for medium, large and listed entities 
provided that their reservations are addressed. These reservations relate firstly to the need to 
reinforce the governance and due process of I AASB with participati on of all interested 
parties. At the moment the composition of the board is unbalanced (mainly accountants) 
which may lead to conflicts of interest. Secondl y, these reservations relate to the need to put 
in place a specific assessment and adoption appr oach in the EU with appropriate guarantees: 
– The approach should not be similar to the one existing for enforcement of IFRS. The 
new approach should be more flexible es pecially in a context where ISAs were 
drawn up by a body which is not account able to European institutions. 
– Explicitly allow amendment of standa rds that would include requirements on 
companies. 
– The adoption procedure should be in dire ct cooperation with stakeholders (in 
particular companies) to make sure that ISAs do not set up new corporate 
 
EN 75   EN responsibilities. The ISAs should remain 'leg al environment-neutral' to facilitate the 
international convergence of extern al auditing standards towards ISAs. 
– The adoption procedure of the ISA should not limit the responsib ility of auditors. 
Some companies have also expressed their concer n about the risk of ISAs pushing the core of 
audit into being even more "compliance-driv en" as opposed to focusing on the veracity of 
financial statements. ISAs, as they stand now, would inappropriately de scribe the role of 
auditors and not take sufficiently  into account the diversity of the audit model in Europe. In 
addition, there would be an important cost di mension associated to the adoption of ISAs. 
For SMEs and SMPs, there is a willingness to furt her explore this area. Some of the replies 
express concerns that ISAs should be furthe r developed to be better suited for SMPs and 
SMEs. 
3. GOVERNANCE AND INDEPE NDENCE OF AUDIT FIRMS 
3.1. Appointment of auditors (Q.16/17) 
Profession 
Professional bodies and associat ions linked to the profession 
Although most respondents replied that the Code of Ethics and/or effective audit committees 
are sufficient to addre ss any potential independence risk, ot hers acknowledge the conflict in 
the current status quo. Although the vast majority rejects appoint ment by third parties, some 
did state that in very exceptional cases (systemi cally important entities) there could be some 
third party involvement e.g. the right of a superv isor to veto the appoint ment of the auditor, 
governmental involvement where companies are in receipt of public funding or where an 
entity has no auditor or refuses to appoint one. 
Big Four 
There is strong endorsement of the fundamental  premise that 'independence should be the 
unshakeable bedrock of the audit environment.' 
On the appointment of auditors the Big Four do not believe there is a conflict and believe that 
the current system works well, in particular relying on the existence of an effective audit 
committee. The Big Four believe that appoin tment by a third party would disenfranchise 
shareholders and audit committees . Some believe that there may be certain instances where a 
regulator could be involved in the appointment of auditors; one Big Four, however, limits this 
to specific circumstances where a prudential supervisor or stock market regulator may need to 
appoint an audit firm to perf orm specific procedures in rela tion to the audited entity. The 
same network also explains that such an a rrangement would expose such regulator (third 
party) to a much greater level of risk because they would be held accountable by shareholders 
for every perceived audit failure. 
It has also been suggested that where the pr evious auditor has resi gned due to disagreement 
with the entity then there may be some just ification for third party appointment of the 
replacement auditor. 
 
EN 76   EN The Commission has also been requested to in vestigate the possibility  of establishing an 
independent body to work with Audit Committe es in reviewing their audit appointment 
procedures, with an explicit agenda for en suring: regular and open tendering, independence 
from management in setting audit remuneration and reductio n in market concentration. 
Mid Tier Firms and SMPs  
The non Big Four believe that the main conflict to be avoided is that of management having a 
role in the appointment of the auditor. There is a submission that in the case of large banks 
which benefit from the 'too big to fail' public  guarantee there may be a case for regulatory 
appointment of the auditors. 
Mid tier firms are of the opinion  that the role of the audit committees s hould be strengthened 
with regard to the appointmen t of auditors. There is also strong support for regular tendering 
through a fair process. Mid tier networks do not support a prohibition of non audit services. 
On the other hand, some SMPs point out that it is critical that the auditor is appointed and 
remunerated by the audited entity. Therefore, they  call for a fixed scale of fees. Moreover, this 
group is of the opinion that in the segmen t of listed companies a third party, maybe a 
regulator integrated within a European supervisory body, could a ppoint the auditor at least as 
long as a sufficient number of SMPs have  access to the listed company segment. The 
appointment and remuneration by a third party in th e sector of SMEs is not seen as justifiable 
mainly due to the administrative burden. 
Investors 
Most investors agree that there is an inherent potential conflict of interest where the auditor is 
appointed by the audited entity, but believed th at a number of measures already exist to 
mitigate that risk and that further m easures could be invoked if necessary. 
Most investors oppose "a scenario where the aud it role is one of stat utory inspection wherein 
the appointment, remuneration and duration of the engagement would be the responsibility of 
a third party, perhaps a regulator, rather than the company itself" as referenced in the Green Paper. In the view of investors, such a scen ario would seriously undermine the accountability 
of auditors and their relationship with sharehol ders. However, some investors noted that in 
some specific cases the interventi on of a third party, such as a supervisory authority, in the 
appointment of a new auditor might be necessar y, such as in the situ ation where the auditor 
report and the financial statements are found to be misleading by a group of shareholders or 
the supervisory authorities. 
As possible ways to deal w ith these conflicts, the followi ng measures were pointed out: 
(a) Shareholders should always approve the audi tor. Specifically, the appointment or re-
election of the auditor should always be subject to annual approval by the 
shareholders, whereas appointment should be made by the independent members of 
the audit committee. As a reappointment of the auditor often hinge s on the quality of 
their long-term relationship with the manage ment board, the responsibility to decide 
on the auditor's (re)appointment should no longe r, formally, or in practice, be with 
the management board. 
(b) The Commission should take steps to empower  shareholders and to make the auditor 
more accountable, whereas an independent audit committee must be independent and 
 
EN 77   EN fully engaged in the audit process. It s hould provide a check and balance not only to 
prevent the conflict being abus ed, but also to improve thei r reporting to shareholders. 
(c) There should be minimum standards of transparency regarding the relationship 
between the company and its auditors. This will ensure that shareholders make appropriately informed voting decisions. Such disclosures might, for example, 
include the amounts paid to th e auditor in respect of aud it and non-audit fees for, say, 
the last three years, the lengt h of tenure of the audit firm, the date the audit was last 
put out to tender, and the company specifi c reasons why the Boar d is recommending 
election/re-appointment. 
(d) There should be more transparency regardi ng the change in aud itor and the views of 
the out-going auditor, which is a major weakness in European corporate governance. Too often, companies and the out-going auditor cite reasons of confidentiality as justification for not disclosing the reason s for the change such that there is no 
meaningful transparency, which is most uns atisfactory. This is a governance-critical 
change on which there should be effective accountability. Changes in auditors should 
be better explained and that auditors and companies should not be able to use commercial confidentiality as a reason to opt  out of a more meaningful statement. 
Shareholders need to be assu red that there are no releva nt matters that they should 
take into account when assessing the ch ange and voting on the appointment of the 
new auditor. 
(e) The remuneration of employees and partners  in audit firms should be more aligned 
with ensuring high quality audits, rather than their contributions to turnover and 
profit. 
(f) An independent regulator should have a power to disagree on the entity's selection of 
an auditor and consequently the enti ty should appoint another auditor. 
Public Authorities 
The majority of respondents agreed that there is  an inherent conflict of interest, which arises 
due to the fact that auditors are appointed a nd remunerated by the same entity. While Public 
Authorities were reluctant to suggest that a unified approach should be adopted, prohibiting 
the appointment and remuneration of auditors by the audited entity in every case, they did 
suggest that in certain situations, it should be forbidden. As an alternative to the current 
situation they suggested the following: 
• auditors should be appointed and remunera ted by the audit committee of the audited 
entity, as this committee is independent  from the executive of the entity; 
• appointment of the auditor by a third party could be justified in  the case of certain 
public interest entities. It is already a practice in some Member States that a 
regulatory authority has the "rig ht of veto", which is regard ed as an efficient way to 
control the procedure of auditor's appointment. 
Academics 
The company's audit committee should consist en tirely of independent directors. The audit 
committee should be responsible for setting the auditor's remuneration. Some competition on 
 
EN 78   EN fees should exist, but one should avoid other se rvices being used to make up for lower audit 
fees. A floor for fees, checked by supervision c ould be a way forward; the fees in the public 
sector are sometimes ridiculously low. 
The appointment of the auditor by the company is usually influenced by management. This 
can lead to "lowballing" (a low price for a udit in order to have profitable consulting 
assignments) but lowballing can be addressed by more transparency on fees paid, limited non-
audit services, fixed period a ppointment of auditors and ap proval of non-audit services by 
shareholders or non-executive directors or s upervisory boards. If non-audit services were 
limited, this would no longer be the case. 
Preparers, businesses and organisations of companies   
Many businesses think the appoint ment by a third party is not feasible and should be limited 
to very rare cases (e.g. co-operatives ' practices in some Member States221) but in general the 
designation should remain the task of the gene ral assembly. They nevertheless believe that 
there may be certain instances where a regulat or could require the company to elect a new 
auditor in the case that the cu rrent auditor was proved to be unable to perform any audits. 
3.2 Rotation (Q18) 
Profession 
Professional bodies and associatio ns linked to the profession  
There is a general rejection of mandatory firm  rotation. A few respondent s consider that there 
should be a limitation of engagement for Public Interest Entities (PIEs)  (a 10 year limitation 
was suggested). 
Big Four 
The Big Four oppose limitation of continuous enga gement of audit firms. They claim that 
studies have proven that mandatory rotation of firms harms audit quality and in any case such 
ideas are premature as the statutory audit direct ive is still being implemented with regard to 
partner (as opposed to firm) rotation. 
Mid Tier Firms and SMPs 
Mainly, mid tier firms do not support mandatory rota tion explaining that it will increase costs, 
impair audit quality without any certainty on being able to address concentration.  
Investors 
With respect to limitation in  time of the continuous engagement of an audit firm and 
mandatory rotation, investors had divergent view s. Some investors di d not support mandatory 
rotation, but supported mandatory re-tendering after a specific period of time. Investors 
                                                 
221 As regards auditing practices in some co-operatives , one respondent recalls th at in Austria, Germany 
and Italy for cooperative banks, wh ich are members of a national/regi onal cooperative a ssociation, the 
auditor may be appointed by this association and not  by the audit cooperative. According to their 
members, this appointment model preser ves the independence of the auditor. 
 
EN 79   EN believed that more transparency from companie s and audit committees on  audit appointments, 
re-tendering and other information is needed, with the greater involvement of shareholders. 
Public Authorities 
Many public authorities did not s upport the introducti on of mandatory rotation. Others stated, 
however, that such a measure would be benefici al, some suggesting that the audit firm should 
rotate at the same time as an audit partner. One of the recommendations  concerning the issue 
was to allow the audit committee to decide whethe r the firm needs to be rotated, as this would 
enable committee members to apply their minds to  real threats to independence, instead of 
applying rotation of firms in compliance with a rigid rule. 
Academics 
On rotation, there is support from some. A possible way forward may be a maximum period 
together with a period of overlap between th e old and new firms so that information and 
knowledge can be transmitted from the previous a uditor to the new auditor. If all auditors 
were to be submitted to the same discipline, there would be no losers as in principle all 
candidates would be able to find other mandates.  It would also enlarge the expertise in the 
firms. 
There could be a combination of internal and ex ternal rotation. The cost of rotation should be 
examined in the context of the period as well as in terms of the (societal) costs caused by lack 
of trust in audited accounts due  to impaired auditor independe nce. Rotation combined with 
fixed period appointment would decrease any bias in the a uditor's judgement to please 
management/shareholders to assu re reappointment. Also, as the incumbent auditor knows that 
a new audit firm would come into the company, there would be more pressure to do 'proper' 
audits. Mere internal rotation does not contribute to independe nce; it's surprising that this 
route was chosen in the Directive. 
Auditor appointment for a fixed 5-7 year period , with mandatory rotatio n of both audit firm 
and auditor after that period combined with lim iting the dismissal of an auditor to cases of 
material reasons and with the approval of Cour ts will reinforce the independence of auditors. 
This should at least be obtained for PIEs such  as banks and insurance companies (systemic). 
Theoretical and experimental research suggest s that mandatory audit firm rotation may be 
beneficial but only under very specific circumst ances, e.g., when the cost  to changing auditors 
is low, the market for audit services is not competitive, and reputation has limited effect on 
auditor performance. Other rese arch has indicated that audit failures are likely to occur in 
short tenure cases as well as long tenure cases , although the causes may differ, i.e., when an 
auditor’s tenure is short they are less likely to  detect fraud but when an auditors’ tenure is 
long they are more susceptible to forces th at motivate management to manage earnings. 
3.3 Non-Audit services (Q.19) 
Profession 
Professional bodies and associatio ns linked to the profession  
 
EN 80   EN The vast majority also say no to the prohibi tion of non-audit services. A few respondents 
indicated that perhaps there could be some re strictions for PIEs. In any case, the audit 
committee should have more input in  the area of non-audit services. 
Big Four  
The Big Four generally oppose a prohibition on  non audit services although there is some 
appreciation for considering / restricting non aud it services to audit clients. Moreover, the Big 
Four believe that any such provision would weaken the ge neral economic independence of 
audit firms and the range of skills they can of fer; they also believe that adding new limits 
would run against the grain of the Commission's aims to rem ove administrative and legal 
burdens to encourage the service sector, a growth area for Eur ope. It has also been argued that 
the provision of services to a non audit client has no impact on the statut ory audit of a totally 
unrelated entity. 
The Big Four believe that there are already rigorous requirements on independence while non 
Big Four support more disclosure from, in e ffect, the Big Four. The Big Four support EU 
adoption of the International Standard on Qu ality Control 1. Another measure could be a 
requirement for audit committee approval for non audit services. It has also been suggested 
that there may be a public intere st in having stricter  rules in the case of systemic financial 
institutions in order to enhance general confid ence in the audit of such companies. One view 
is: 'Accordingly, we would support a review of th e position in respect of 'systemic companies' 
as part of a comprehensive set of measures  addressing this segm ent of the market." 
Disciplinary sanctions have also  been raised in the context of  a firm providing services that 
are proven to conflict with inde pendence standards. Moreover, it is considered that audit 
committees should ensure that fees for non audi t services do not contai n a hidden subsidy for 
a low audit fee and there is a call for greater transparency fro m the audit committees on fees 
and on appointment decisions. 
Mid Tier Firms and SMPs  
The prohibition of non-audit servic es by audit firms is consider ed an important measure to 
maintain independence by some SMPs. However,  they state that such  prohibition should only 
be applied to PIEs and that systemic financial institution should be included in any prohibition any case. This group, however, appeals for "s afe harbours" regarding the prohibition of non-
audit services for there 'smaller' clients; they point out that especially for SMPs it is important to perform such services otherwise their existence could be threatened. 
Investors 
On the basis of the majority of the replies, the following could be noted: 
Those non-audit services which have no natu ral connection with the audit must be 
discouraged or even forbidden as they are the ma in source of conflicts of interest and provide 
the audit firm with a competitive advantage which is unwarranted. 
(g) There should be requirements to establis h appropriate protections to mitigate the 
risks of some non-audit services. 
(h) There should be much better disclosure of the non-audit services carried out by the 
auditor so that shareholders can raise con cerns with auditors and audit committees on 
 
EN 81   EN the basis of useful and relevant inform ation. Companies should provide enhanced 
disclosure about the quantity and type of services provided. Audit committees should 
also play a role in the assessment of  non-audit services and the reporting to 
shareholders. 
Some investors requested more  clarity and consistency on what non-audit services are and 
suggest developing a list of non-audit services th at are allowed and thos e that are prohibited. 
As regards specific examples of non-audit services , investors referred to internal audits where 
they noted with concern that "the provision of both internal and external audit services by the 
same firm has obvious implications for audit inde pendence in that the ex ternal audit firm will 
in effect audit its own work and may be ta king on management functions. Some investors 
noted the importance of uniformly implemen ting the independence re quirements throughout 
the EU. 
Public Authorities 
It was argued that the provision of non-audit serv ices increases the auditor's knowledge of the 
company and thus also increa ses audit quality. The provision of non-audit services should 
thus not be prohibited for all clients. It is an issue that needs to be judged on a case by case basis. It was, however, noted th at agreeing on the lis t of prohibited non-audit services could 
be a way forward. 
In the case of listed companies, PIEs and fina ncial institutions it w ould be appropriate to 
allow the audit committee to take responsib ility for taking the decision regarding the 
provision of non-audit services for a company that  is already an audit client. Their decision 
should be based on known facts and not n ecessarily by applying a specific rule. 
Academics 
There is broad support for either a full cessation  of non-audit services, as the best guarantee 
for independence, or the prohibition of non-audit services to audit clie nts. The latter would 
allow the audit firm to keep the necessary expertise without losi ng appearance of being 
biased. 
In any case, audit and non-audit services should be pre-approved by the audit committee. A 
ban on the provision of non-audit services by audit firms would no doubt have a positive 
effect on third parties' percepti on of auditor independence. Res earch shows, however, that not 
all non-audit services have a negative effect on the perception of independence.  
For certain non-audit services, how ever, a ban appears inevitable . Knowledge spillovers from 
consulting services are not used to increase audi t quality but to reduce audit costs. Consulting 
services may be beneficial to the auditor a nd client, but the ensuing lack of independence 
harms the interests of external stakeholders. A lack of independence ca n neither be justified 
by efficiency arguments nor by the chance of  increased effectiveness in the auditing and 
consulting areas. 
Auditor independence should be monitored and violations should be published. The provision 
of non-audit services impairs i ndependence in appearance. The re cipient of financial reports 
(such as investors) must believe in the au ditor's independence, i.e. independence in 
appearance is required. For most advisory services, but not all,  a significant impairment of 
 
EN 82   EN perceived auditor's independence was found. In ternal separation of  audit and non-audit 
services within an audit firm does no t increase the perceived independence. 
The maximum percentage of non-audit services accep table to investors is 25% of fees paid by 
the audited company to its aud itor. There is also broad su pport for the US Securities and 
Exchange Commission's principle based approach: (1) an auditor should not audit his or her 
own work; (2) an auditor should not function in the role of management and (3) an auditor 
should not serve in an advocacy role for his or her client. 
The prohibition of all or many non-a udit services to an audit client  would lead to a decrease of 
the total remuneration received by an audit firm from a single customer. This side effect is 
seen positively. 
Providers of non-audit services 
Competitors such as lawyers and tax advisors do  not believe that auditors should be providing 
non audit services. 
Preparers, businesses and organisations of companies  
They cannot support an EU-wide prohibition of non-audit services; from the perspective of 
audit quality, it appears important to maintain th e diversity of skills (multidisciplinary) in 
audit firms. Some, however, suggest exploring prohibition on the combination of audit and 
non-audit services to the same clients. 
3.4. Maximum level for fees (Q.20) 
Profession 
Both Big Four and non Big Four support a lim it on the fees from any one client as a 
percentage of the total fees . They also support transparency although not necessarily new 
rules. 
Academics 
The maximum limits for remuneration from an y one client (in Denmark 20%, in Germany 30 
or 20%) are not enough to exclude the risk of economic dependenc e. The loss of such a large 
client could threaten the ex istence of the audit firm seriously, and thus undermine 
independence significantly. For this reason, a limit of 10% is consid ered adequate. In 
addition, it has been pointed ou t that the risk of economic de pendence not only exists at the 
level of the audit firm, but also at the level of the local office or even the partner concerned. In 
this respect it is also propos ed that the Commission addre sses the question of whether 
maximum compensation limits need to be  introduced at these lower levels. 
3.5. Transparency, governance and structure of audit firms (Q.21, 22, 23) 
Profession Professional bodies and associatio ns linked to the profession  
Many respondents consider that alternative stru ctures could be explored but the independence 
of auditors should be safeguarded and auditors ' liability regimes woul d need to be revised. 
 
EN 83   EN Big Four  
Both Big Four and Mid Tier Firms support the exploration of altern ative structures on a 
voluntary basis. On alternative structures, especially with re gard to access to third party 
capital there is recognition th at the capital would flow to the dominant firms. One non Big 
Four firm suggests a radical review of rules relating to the ownershi p and funding of audit 
firms, with a view to encouraging new invest ment in audit firms outside of the Big Four. 
Mid Tier Firms and SMPs  
A vast majority of SMPs, especi ally those in Germany, speak out  against allowi ng audit firms 
to raise capital from external resources; external  interests could threaten the independence of 
auditors. 
Investors 
A vast majority of investors agre ed that it is in the public interest, particul arly for larger audit 
firms and irrespective of their ownership ar rangements, to have audit firms' financial 
information available to the public. Among ot her things, financial information, including 
information on legal claims, should help to eval uate the soundness of the financial position of 
a given audit firm, which might have implications  on the audit quality. Some also believe that 
the improved transparency should help to disa ggregate "audit and other assurance business 
and the performance and the capital devoted to the auditing business". Moreover, publication 
of financial statements would make companies and investors better in formed and thus would 
help them to 'distinguish between audit firms and not necessarily prefer one from the Big 
Four'. 
All investors shared the view that the governance of audit firms could be further improved. 
A vast majority of investors supported a review of  the ownership structures  that limit external 
capital investment in the business. The replie s noted that changes in ownership structures 
might facilitate greater competition and choice in the market. 
Academics 
Essential information, regarding internal quali ty review procedures, partner remuneration, 
promotions is often missing from transparency  reports. There should be transparency 
regarding the composition of audit networks, ow nership in networks and legal structures. 
3.6 Group auditors (Q.24) 
Profession 
Big Four. They also support the access to documents  of Group auditors. One Big Four firm 
points out that joint audits and mandatory rotation would ha ve a fundamental (negative) 
impact on the ability of the gr oup auditor to manage the group audit on a coordinated basis. 
Investors 
Investors supported Commission views and sugges tions regarding group audits that would 
make sure that there are no barriers or constr aints for the group auditor for the purpose of a 
group audit to have access to the information of  auditors of subsidiaries. However, some 
 
EN 84   EN emphasized that "it needs to be handled carefu lly to avoid further entrenching the position of 
the Big 4". 
Academics 
Group auditors should have acce ss to the reports and other docum entation of all auditors of 
components of the group. 
 
EN 85   EN 4. SUPERVISION 
The Profession  
Professional bodies and associat ions linked to the profession 
The vast majority of those who commented on the future structure of the EGAOB favoured a 
level three authority. 
There should be appropriate enforcement of EU requirements for auditors of financial 
institutions to alert authorities if they become  aware of certain issues; this has also been 
suggested for all PIEs; increa sed communication is favoured es pecially for banks and large 
financial institutions. 
Big Four 
There is support for EU wide co-ordination of audit oversight bodies  although the Big Four 
do not support integrating them into the new Eu ropean Supervisory Authorities as this could 
lead to divisions within the audit professi on and variation in ov ersight practices and 
ultimately audits. 
There is also support on strong two way comm unication between audito rs and regulators for 
the audit of systemically important financial institutions. There is a suggestion that auditors could contribute to discussions at the newl y created European Systemic Risk Board. 
Mid-Tier Firms and SMPs 
There is support for EU wide co-ordination. Some SMPs welcom e the approach of creating a 
European Supervisory Authority. 
Investors 
There was wide support that the supervision of audit firms in the EU should be performed on 
a more integrated basis. To increase consulta tion and communication between the auditors of 
large listed companies and the re gulators, the dialogue should be  a two-way process so that 
supervisors also alert auditors rega rding particular areas of concern. 
Public Authorities 
There should be agreements with  third countries to share information, subject to adequate 
confidentiality requirements, and reliance on co untries’ inspections proc esses, formation of a 
college of regulators, and the transformation of  EGAOB into a level three authority for audit 
supervision. 
Academics 
One could follow the scheme developed for th e new European Supervisory Authorities, 
except that the European body should have insp ection powers on the national supervisors and 
if needed also on the firms supervised by the la tter. For multistate auditing firms, a system of 
supervisory colleges could usefully be developed to  especially deal with the cross border links 
in auditor networks. 
 
EN 86   EN For international purposes the European body w ould be the direct interlocutor for non-EU 
supervisory bodies, and would ch annel their questions and coor dinate the answers of the 
national supervisors. 
One member of audit committee should be nominated by a regulator. 
Preparers, businesses and organisations of companies   
There is support for EU wide co-o rdination of audit oversight bodies. 
5. CONCENTRATION AND MARKET STRUCTURE  
5.1 Systemic risk? (Q.27) The Profession  Professional bodies and associatio ns linked to the profession  
The majority of respondents consider that there is no systemic risk. The market could cope in 
the event of a collapse of a Big Four. A number  suggest that addressing the liability issue 
would reduce the risk of a collapse. A small number, however, consider that the current 
configuration presents a systemic risk.  
Big Four  
They believe that failure of one or more of the largest firms could under rare circumstances 
cause a temporary disruption in capital markets a nd although the risk is not similar to that 
presented by banks there is risk, in such an instance, to the con tinuity of audit services and to 
the choice of auditor in the market. The Big F our believe that this risk emanates from the 
litigation environment coupled w ith the lack of effective liab ility limitations for statutory 
audit work, in the UK and the US.  
Mid Tier Firms and SMPs  
They consider that the current configuration of the audit mark et poses a systemic risk to 
market stability. They go on to say that the ch oice is often even less than four as a company 
may not wish to appoint its competitor's audito r. Also, another audito r may be providing non 
audit services and may thus not be eligible to provide audit se rvices. Should one of the four 
dominant networks leave the market for any reason, there is a real  likelihood of severe 
disruption in the audit and capital markets resulting in some of the largest companies being unable to find a suitable auditor in the short te rm, with a consequent adverse effect on the 
capital markets. It is likely that such effect would be greater than pr evious withdrawals from 
the market. 
They also highlight the problems associated  with the 'too big to fail' moral hazard. 
On top of the risks indicated in  the actual 'oligopoly' structure, there is an additional risk of 
undue influence by this 'oligopoly' on regulat ors, be it national or international. 
Investors 
 
EN 87   EN The degree of concentration in the audit market and the Big F our dominance of the audits of 
most international companies are not good for comp etition and choice. If the Big Four were to 
be reduced to the Big Three th is could undermine financial stab ility and market confidence, 
though not necessarily cause an economic crisis. Investors considered that a more open and 
vibrant audit market would se rve the public interest better.  The Commission was urged to 
move with a greater sense of urgency and 'provi de bold leadership in order to make serious 
headway towards a sustainable audit market, wh ich would be consistent with maintaining 
financial stability and stre ngthening market confidence.' 
Public Authorities 
Most of the Public Authorities agreed that the current market configuration does present a 
systemic risk. Those against structural measures  explained that there is the possibility of 
increased cost and the objective of raising the profile of the small and medium firms does not 
necessarily mean that the ‘big four’ firms shoul d be ‘diluted’. Among the positive side of joint 
audits, there would be benefits to non big four firms such as: 
• Obtaining necessary experience for audi t of public interest entities, large 
corporations, audits in specific areas, etc. 
• Getting the opportunity to prove competence for audit of public interest entities, 
large corporations, audits in specific areas, etc. 
• Getting the opportunity to gain the trust of  the biggest audits clients, financial 
institutions, etc. 
• Reducing negative result s in the case of "systemic firm” collapse. 
A competition authority  explains that the limited choice of auditors and existing competition 
problems in the market mean that if one of the Big Four audit firms were to exit the market for auditing large companies, existing comp etition problems in the market could be 
exacerbated. High barriers to expansion might make  it difficult for smaller firms to step up to 
replace it. There might also be a short-term ri sk of some companies being unable to purchase 
audit services, leading to a loss of confidence in the financial status of large listed companies and/or high-risk companies an d possibly among investors more generally. Thus the existing 
high barriers to entry, leading to high market con centration, can be seen as contributing to the 
risk of wider, systemic failure whereby the failure of a network co uld have substantial 
negative effects on the wider economy. 
An independent regulator  believes that the degree of con centration represents a systemic 
risk to capital markets. It suggests that publ ic and investor confid ence would be undermined 
and equity, bond and lending markets would fall si gnificantly as a result: 'In the longer term, 
existing problems around lack of choice would be  exacerbated Additionall y, if the event were 
audit-related, the remaining firms may become  reluctant to audit companies in high risk 
industries and may even begin to withdraw from certain sectors of the market. At a minimum, 
a market with three or fewer large firms capable of auditing the largest and most complex 
clients is likely to require a significantly more intrusive regulatory environment and therefore 
cost.' 
CESR, CEIOPS and CEBS agree that the current level of concentration in the audit market 
presents risks for financial markets, as a failure  of one of the largest audit firms could cause 
 
EN 88   EN severe market disruption. Howeve r, they do not see such risk s as being the same as those 
posed by the banking sector during the fina ncial crisis. When identifying appropriate 
measures to mitigate the risks posed by the structure of the audit market, the distinctive characteristics of the audit sector need to be  taken into account. Any act ion in this area should 
be taken at the international level. 
Academics 
Concentration is a risk, though wh ether or not systemic is open  for discussion. But regardless 
of this, the concentration issue has to be dealt with also for reasons of adequate competition, 
diversity of practices and opinions and the eff ectiveness of supervisor y action (a supervisor 
confronted with unacceptable beha viour by a major audit firm woul d be very hesitant to take 
action against that firm if that action coul d trigger a crisis, possibly with systemic 
consequences). This might also create "m oral hazard" on behalf of audit firms. 
Preparers, businesses and organisations of companies   
There is no clear consensus that the failure of one or more of the largest firms could present a 
systemic risk but they all recognise that the s ituation might create serious difficulties for the 
certification of the annual account of multinational lis ted entities (three global networks is not 
enough). Amongst the reasons pinpointed is that th e firms cannot themselves be considered as 
systemic but they recognise that the situatio n can contribute to dysfunctions of systemic 
importance. According to some of them, the current configuration does not present insurmountable difficulties which cannot be handled. Preventive actions should include 
‘contingency plans’. 
5.2 Audit firm consortia (Q.28) 
The Profession  Professional bodies and associatio ns linked to the profession  
On joint audits, there are mixed responses. A leading body feels that this could dynamise the 
audit market but very rigorous tests regarding audit quality, costs and liability issues should 
be undertaken before making it mandatory. Ther e should also be objective research on the 
experience in France. 
Big Four 
On mandatory joint audits and consortia, the Big Four are negative as they believe it will 
impair audit quality and will cause co-ordinatio n problems. They also believe that such an 
artificial attribution to smalle r firms of a share in the market for larger audits could risk 
becoming a disincentive to them to grow. 
Mid Tier Firms and SMPs  
Mid tier firms and SMPs strongly support joint audit and consortia where at least one non-
systemic firm is included. They also highlight th at joint audits are tried and tested and have 
worked in keeping concentration lower in Fran ce than in other Member States; they explain 
that in France there is currently an additional firm at the top end of the market. There have 
been other players but they were acquired by the Big Four. They also indicate that 
concentration is also lower in France at the ne xt level of the market than in other Member 
 
EN 89   EN States. Some believe that the participation of mo re networks and audit firms in the larger as 
well as public interest audits will enhance competition and can potentially raise quality. 
It has been submitted that consortia should not be fixed between any specific firms but should 
be put together on a case by case basis. 
It has also been submitted that the main benef it of consortia is that more firms are able to 
directly demonstrate high quality in a range of services to a wider range of companies which in turn bolsters the firms' credibility. Great er understanding of more firms delivering high 
quality services becomes a virtuous circle lead ing over time to more firms with a meaningful 
share of a larger company audit market; in spit e of the requirement for compulsory joint audit 
in Denmark being lifted five years ago, 16 of Denmark's 64 largest public companies still use 
joint audit voluntarily. One majo r non Big Four firm claims to have gained important joint 
audit assignments in France, Denmark, Cypr us and Belgium where it believes it would 
otherwise have had limited chance of winning the sole audit. 
Investors 
There are divergent views among investors rega rding the mandatory formation of consortia 
with the inclusion of at least one smaller, non systemic audit firm. Many investors did not 
support this proposal, mainly f earing an increase of costs of audits, the dilution of 
responsibility or the lack  of beneficial effects. Other invest or representatives however did "not 
fear the use of audit firm consortiums on a mo re formal basis, provided that the company 
audit committees properly own the relationships and offer appropriate and effective challenge to the auditors such that the firms in the consortium each delive r a quality audit and challenge 
each other to improve their approach". 
Public Authorities 
If joints audit were introduced  in the EU, the Commission s hould establish clear lines of 
responsibility for the joint aud it opinion as well as to cons ider a resolution mechanism for 
differences in opinion between consortium members. 
For CESR and CEIOPS, joint aud its should not be c onsidered as a means for dealing with 
audit market concentration or making the mark et more dynamic. Joint audits might pose a 
number of issues in terms of responsibilities, differences in the level of workload and audit 
approach. In addition to this, th e issues might be more complex when referring to joint audits 
between Big Four and mid-tier or  small audit firms (e.g. this will only lead to the audit work 
being performed by the big audit firm, which can rely on its network and workforce to look at 
the firm as a whole, especially for cross-border  activities; in such circumstances, this would 
reduce the benefit of having a joint audit). 
Academics 
Making joint audits mandatory seems excessive, but as an optional solution it should be 
welcomed. In general, radical remedies should be avoided in favour of gradual improvement. 
Preparers, businesses and organisations of companies  
On the joint audit concept, preparers are not opposed to its principle if it is well balanced, 
well-framed and with very strict requirement s. Whilst some companies consider that the 
appointment of more than one auditor has some benefits (e.g . collusion with the management 
 
EN 90   EN would be more difficult), for a majority of companies, the benefits do not outweigh its 
disadvantages (e.g. costs incurre d 15-20% higher than for conve ntional audit, overlapping of 
audit parts, etc.). 
The pros of the French joint aud it are that they enhance audit quality: four eyes are better than 
two. The negatives relate to the 'burdensome na ture' of the process. The French model works 
well because the joint audit is balanced and profitable. If the Commission goes for the French model, it should apply only to listed companie s, as the additional costs would be hardly 
'bearable' for smaller entities. In any case, comp anies always have the choice of two auditors. 
5.3 Mandatory rotation and retendering (Q.29) 
The Profession  Professional bodies and associatio ns linked to the profession  
There is strong rejectio n of mandatory rotation but suppo rt for tendering on a regular basis 
(e.g. every 3 or 5 years mentioned) or even mandatory tendering; the audit committee should 
review appointment on a regular basis and s hould have a policy for re-tendering and clear 
criteria for selection, more transparency on reappointment. 
Big Four  
The Big Four oppose limitation of continuous enga gement of audit firms. They claim that 
studies have proven that mandatory rotation of firms harms audit quality and in any case such 
ideas are premature as the statutory audit direct ive is still being implemented with regard to 
partner (as opposed to firm) rotation. 
Mid Tier Firms and SMPs  
Mainly, mid tier firms do not support mandatory rota tion explaining that it will increase costs, 
impair audit quality without any certainty on be ing able to address concentration. On 
tendering they are more supportiv e, provided such tendering is  not mandatory. They are open 
to the possibility of at least one  non Big Four firm being able to participate in  a transparent 
tendering process in which quality  should be a key crite rion. It has also been suggested that 
tendering could be mandatory for listed companie s every 5 to 7 years. Some SMPs, however, 
are of the opinion that mandatory rotation will increase competition amongst auditors and is 
an important tool to strengthen independence. Six years is to be considered as an appropriate 
period of time. However, this group  also states that this should  be considered in any case for 
all public interest entities. 
There is also support for regular and fair te ndering suggesting a two stage short listing and 
full proposal process, drawing on the practice in the public sector. There is a submission that 
shareholder involvement in the process is cri tical because the current practice of seeking 
shareholder approval at the AGM  is usually too late to ha ve sufficient influence on the 
decision. An example of the UK public sect or audit market has been provided where 
independent bodies representing th e 'owners' monitor audit appoi ntments, audit quality, value 
for money and tenders. 
Public Authorities 
 
EN 91   EN Mandatory rotation of audit firm s may have the opposite effect to  saving cost and enhancing 
audit quality. It might also increase the probab ility of collusion among a udit firms in order to 
coordinate acquisition of clients. However, there were some who supported mandatory audit 
firm rotation, suggesting that the maximum period of engagement should be the same as for 
audit partners. 
There is broad support for mandatory re-tendering. None of CESR, CEIOPS and CE BS see mandatory rotation of audit firms as a significant 
measure that would substantially open up the audit market, although they see value in 
debating its possible contribution to auditor's independence.  
Academics 
A key instrument has not been worked out in the Green Paper: the nomination procedure for 
the auditor, apart from involving shareholder co mmittees, should include strict internal rules 
(call for candidates, inde pendent selection, objective compara tive analysis, selection on stated 
reasons submitted to shareholders). 
Preparers, businesses and organisations of companies  
On rotation, preparers cannot support the mandato ry rotation of audit firms. Regarding the 
tendering process, they are in general in favour but insist that the company should decide in 
certain circumstances to keep the same auditor if benefits of continuity are demonstrable. The 
selection criteria should be defined ahead of the tendering process in  order to justify the 
decision and this information should be communicat ed to make sure that some of potential 
candidates are not discriminated against. Finally, audit fee s hould not be decisive in the 
choice of auditors. Selection criteria should also include a mix of parameters that are 
individually decided from compa ny to company: for example, e xpertise in a specific domain, 
the geographical coverage, strong foothold in so me regional markets, the network, size of 
specific audit team and audit fees. Re-tendering s hould also be a matter of vigilance by strong, 
independent Audit Committees who monitor the performance, quality, independence and 
objectivity of their auditors. Last but not least,  a mandatory rotation of firms is incompatible 
with a joint audit regime at the mome nt as the offer is not sufficient. 
5.4 "Big Four bias" (Q.30) 
The Profession  Professional bodies and associat ions linked to the profession 
There is support for ideas such  as the prohibition of Big Four clauses, publication of 
inspection reports, open tendering procedures, transparent selection and (re)appointment 
criteria. 
Big Four, Mid Tier Firms and SMPs 
Firms believe that 'Big Four only' clauses sh ould be discouraged or  prohibited and non Big 
Four firms believe that such clauses should be  eliminated. The Big Four point out, however, 
that reputation is built-up ove r a long period of time, thr ough consistent high quality 
performance, which implies huge investment s in human resources and enabling technology 
and lack of circumstances that endanger a reputation. 
 
EN 92   EN There is support for some sort of  European certification of quality. 
Investors 
Most investors believed that greater transparen cy was needed to address the issue of a Big 
Four bias: 
(i) companies and their audit committees shoul d report their policy approach towards 
audit tendering; 
(j) audit committees and/or the board should ma ke themselves available to explain to 
major investors any changes of auditor. This should provide a useful ‘check and 
balance’ in the process and assist in  ensuring a mutual understanding of the 
circumstances and the process outcome. Any covenants restricting a company's 
choice of auditor shou ld be disclosed. 
Public Authorities 
CESR explained that greater tr ansparency on audit qu ality, both by aud itor oversight bodies 
and from the audit firms themselves, could he lp to address the Commission’s question about 
whether the perceived extra le vel of comfort in appointing a Big Four firm is due to 
“perceptions” rather than “merit”. CEIOPS sees va lue in the European quality certificate but 
warns about the possible creation of entry barriers for smaller firms. 
Academics 
Audit quality for the Big Four an d mid-tier is comparable, but in vestors perceive the Big Four 
as providers of better quality. However, one po ssible reason for investor s trusting Big Four 
more could be that Big Four would have  "deeper pockets" should something go wrong. 
Preparers, businesses and organisations of companies   
Whilst preparers recognise that th e use of Big 4 only clauses can constitute a barrier to entry, 
one of the reasons of this bias is the use of the IFRS as only the Big Four firms today may be 
able to maintain sufficient knowledge of these standards although even in these networks the 
local offices sometimes struggle to maintain sufficient knowledge. 
5.5 Contingency plans (Q.31) 
The Profession  Professional bodies and associatio ns linked to the profession.  
Many respondents agreed that regulators could pr epare contingency plans.  There is no support 
for living wills. 
Big Four  
The Big Four do not all support living wills along the lines of banks because of the non-
systemic risk posed. The ones that do support such  considerations are of  the view that audit 
firms may work with their regulators to devel op contingency plans to address concerns of a 
disorderly failure. 
 
EN 93   EN Investors  
Most investors agreed that it would be sensib le for audit firms or regulatory authorities to 
develop contingency plans, includi ng living wills, to help address the impact of a firm failure 
on the audit market. Some suggested that such plans should be made public, in order that 
shareholders and other parties can study them. It  was conceivable that the contingency plans 
might be included in the annual financ ial statements of the audit firm. 
Public Authorities 
Most of the Public Authorities agreed that contingency plans would be key in the future. 
It has been submitted that: 'Contingency plans sh ould be developed that, as a minimum, seek 
to: 
• reduce the risk of a firm leavi ng the market without good reason; 
• reduce uncertainty and disruption in the event of a firm leaving the market; 
• ensure that, in the event of a firm failure, the future audit market is not dominated by 
three or fewer firms. 
In order to accomplish these objectives, th e contingency plan will need to include: 
• A mechanism whereby firms inform regulat ors of any emerging issues which could 
threaten a national firm and/or its network. 
• Arrangements aimed at stabilising the fi rm and preventing immediate collapse 
through the exodus of clients and staff while an inves tigation is carried out. 
• An objective incident assessment to unders tand the root cause of the incident, 
whether the issue is systemic to the firm a nd/or network and whether the firm in part 
or in whole is worth saving. The assessment should be independent of any subsequent regulatory or disciplinary action. 
• A response plan, which would include a deci sion on whether the relevant regulator(s) 
felt able to provide continued support to the firm a nd on what terms. If continued 
support was considered inappropriate, or if  it was clear that the firm would not 
survive because of the actions of clients a nd other market participants, then the plan 
would need to include provision for an orderl y transition of clients and staff to one or 
more other firms.' 
CESR, CEIOPS and CEBS agree that contingenc y planning should be developed to mitigate 
these risks. CESR suggests th at planning should be done at sector level and by individual 
audit firms and audited companies. As the la rgest audit firms are part of international 
networks international co-ord ination might be necessary. 
5.6 Rationale for consolidation (Q.32) 
The Profession Professional bodies and associat ions linked to the profession 
 
EN 94   EN A few comments were made on possible actions that could be taken instead of seeking a 
reversal of the past consolidati on; promote growth of mid-tier fi rms, confine consolidations in 
the future. 
Big Four 
On the consolidation over the past two decades, th e Big Four believe that the rationale is still 
valid and point to the fact th at the 1998 merger between Price Waterhouse and Coopers and 
Lybrand and the 2002 takeover by Deloitte and Ernst and Young of certain  Andersen partners 
and activities were approved by the European Commission. 
Mid Tier Firms and SMPs 
They do not believe that the consolidation wa s necessary. Although a break up is considered 
complex and difficult, there is a suggestion that the Big Four should not be allowed to further 
acquire significant firms e.g. in Brazil the largest non Big Four fi rm was recently acquired by 
a Big Four firm. 
It is pointed out that that it is difficult to imagine a situation where any member of the Big 
Four would voluntarily re structure itself into two or more  smaller entities, or where the 
directors of large entities a nd advisers would turn away fr om the Big Four and appoint 
smaller firms in the current configuration. 
There is a radical suggestion to impose rest rictions on market share: a monitoring group 
comprised primarily of investors, and possibl y regulators, could place tapered limits on the 
absolute number of audits that any one firm ca n carry out for defined sectors e.g. largest 100 
companies ranked by market capitalisa tion over say a five year period.  
Investors 
Some investors contest the decision allowing  certain mergers of audit networks. Most 
investors did not, however, agree that there shoul d be a reversal or a forced break up of the 
Big Four, which in itself could disrupt th e market and cause additional problems. 
Nevertheless, some investors claimed that market forces failed to deliver meaningful solutions 
and thus radical measures should be sought . They believed that there should be an 
"unambiguous encouragement to the larger au dit firms to restructure their operations - 
possibly by demerger or other strategic comb inations. This should be combined with an 
undertaking by the Commission to conduct a further review of the audit market structure in, 
say, 2-3 years time with terms of reference that w ill require it to mandate structural changes to 
the firms if it is not satisfied that the structural  issues have been addressed. This approach of 
an “iron fist in a velvet glove” would rightly  give the audit firms the opportunity to shape 
their own destiny within a reasonable time peri od whilst at the same time provide clarity of 
intent on the part of the Commission to intervene if the major audit firms fail to respond constructively to its in itiative. One should not be prescr iptive as to how many firms and 
networks there should be but eight or more feel s like a sensible benchmark to use. To achieve 
this objective the Commission shou ld co-ordinate its efforts w ith its global counterparts." 
Some respondents also suggested  creating "pure" audit firms by the splitting up of audit and 
non-audit services. 
 
EN 95   EN It has been submitted that investors and regula tors have consistently identified the risks 
associated with concentration in  the large corporate audit market . They seek a larger pool of 
quality providers with a meaningful share of th e large corporate audit market to address the 
issues of concentration risk, market stability and innovation. 
Public Authorities 
On the consolidation over the past two decades, CESR believes that it may be appropriate for 
national competition authorities to consider whether measures might be taken to address market structure in specific ju risdictions, taking into account th e specificities of  each national 
market and industry sector. CEBS outlines that it  has no view on optimal market structure, but 
that any proposal on this issue should be carefully assessed to ensure that neither the quality nor the efficiency or the availability  of statutory audit work is reduced. 
6. CREATION OF A EUROPEAN MARKET 
Profession 
A number of respondents cautioned that from a pr actical perspective audi tors must know local 
tax and legal requirements as well as languag e. Responses are generally quite 8positive to a 
European passport if more harmonisation is achievable. However, even those who favour 
'maximum harmonisation' see difficulties in this area. Time is needed to assess 
implementation of the directive; moreover, ed ucation, qualifications and training should be 
harmonised. Those in favour of the European pass port state that differences in national laws, 
tax rules and language remain problematic. This  could, however, be a long term project. 
There is broad support for closer alignment of  examination and training requirements and 
maximum harmonisation across the EU. 
Investors 
While some investors supported a single European market for the provision of audit services, 
others believed that a European passport woul d be detrimental to audit quality, where cross-
border liability issues may also arise. Some inve stors were sure that the cross-border mobility 
is not an issue for Big Four audit firms but c ould be increased for the others by encouraging 
auditors to gain competence in one or more other languages. Finally, most investors supported 
harmonisation of qualification and training re quirements, whilst "avoiding a rush to the 
bottom". 
Public Authorities 
Many respondents stated that co-operation between professional bodies on auditor 
qualifications should be encour aged. On the issue of the European Passport many Public 
Authorities were reluctant to embrace this proposal as they argued that such a measure might harm quality and would be difficult to implement. Still, many respondents argued that maximum harmonisation is a measure that will he lp the audit market as  long as quality is 
preserved. 
CEBS believes that a European market for auditors would require harmonised auditing and 
independence standards across the EU, including a code of ethics. However, one would also 
need to take into account the differences in national legal systems which are relevant for auditors (e.g. company law etc), which co uld make it hard to  move to maximum 
 
EN 96   EN harmonisation in the short term. CEBS also questioned whether a large EU market would 
benefit SMPs; most of the benefits of a more integrated audit market would accrue to larger firms only. CEIOPS underlined that a European quality certificate (r ecognising aptitude to 
perform audits of large listed companies) could be of interest , but the requirements should be 
designed to avoid the crea tion of entry barriers. 
Academics 
Harmonisation has an important role but Memb er State differences should not be overlooked. 
Preparers, businesses and organisations of companies  
Although some support the idea of a single pass port, they do not believe a single passport 
could be put in place because they find it difficult to remove the aptitude test as it focuses on 
national legislations (national corporate law, social, taxation,  civil law, national accounting 
principles, language, etc.). When auditors issue an opinion, it is important  to make sure that 
they are familiar with the domestic laws. 
7. SIMPLIFICATION: SMALL AND ME DIUM SIZED ENTERPRISES AND 
PRACTITIONERS 
The Profession Professional bodies and associat ions linked to the profession 
A majority do not support a limited audit. 'An audit is an audit' and should not be diluted. 
Exempted companies should be free to choose  a statutory review on a voluntary basis. 
Confusion should be avoided when mentioning 'limited' audits. 
Big Four 
The Big Four do not support the de velopment of less stringent ru les of internal control and 
suggest that the oversight of firms could be provided by local pr ofessional bodies. The non 
Big Four believe that the rules and oversight could be less stringent. Amongst this Group of 
respondents, one large firm is, however, more cl osely aligned with the Big Four with regards 
to this section. 
Mid Tier Firms and SMPs 
Some SMPs feel that they are surrounded by an  ever growing regulated environment which 
may not necessarily suit their practice or the imme diate needs of their SME clients. To ensure 
appropriate conditions for the development of su ch firms, the "limited audit" or "statutory 
review" referred to above could be accompanied by proportionate rules on quality control and 
oversight by audit regulators. This would allo w SMPs to reduce their administrative costs 
while helping them to service their clients better. 
Others support exemption thresholds but remain re served about a second tier audit, especially 
if any alternative assurance implies a de f acto audit, albeit under another name. On the 
question of a 'safe harbour' there are mixed view s as independence should remain the pillar of 
all audits, big or small. 
Investors 
 
EN 97   EN Among those who responded, there was a general unde rstanding that "an audit is an audit" 
and that there is no value for investors in havi ng a 'less than true and fair view' audit for 
SMEs. Some also raised doubts if limited audit would be able to provide the necessary assurance for the purposes of compiling the parent's (non-SME) a udited consolidated 
accounts. Nevertheless, some investors thought th at a limited review could be possible for 
SMEs. There was no appetite among investors to s upport "safe harbours" or less strict internal 
quality control or oversight rules. 
Professional bodies and associations linked to the profession 
A majority do not support a limited audit. 'An a udit is an audit' and should not be diluted. In 
any case, ISAs are scaleable. Exempted compan ies should be free to choose a statutory review 
on a voluntary basis – it should not be regulated at EU level.  Confusion should be avoided 
when mentioning 'limited' audits. 
A few respondents stated that if the EC were to prohi bit non audit services , SMPs should have 
a "safe harbour". Very few supported a less bur densome quality contro l/oversight although 
one replied that it should be less burdensome and could be done by the local professional 
body.  
CESR believes that internationa l cooperation with audit oversight  bodies in third countries is 
fundamental to addressing the is sues arising from the superv ision of large groups which 
operate in multiple jurisdictions and from the supervision of global audit networks. CEBS supports discussion with internat ional partners and s uggests that an inte rnational solution 
could be the most appropriate to address many of the issues  raised by the Green Paper. 
CEIOPS made no comments. 
Public Authorities 
The views of the public authorities on this is sue were split between those in favour of a 
limited audit and those arguing that a limited a udit is unnecessary and might cause confusion 
amongst the stakeholders. Most respondents agre ed that the  provision of non-a udit services to 
SME audit clients poses less of a risk than for larger public interest entities, and might be 
beneficial to SMEs from a cost and time perspective. Thus, they  did not object to auditors of 
such companies being permitted to provide a wi der range of non-audit se rvices than may be 
provided to listed companies, pr ovided that the degree of the auditor’s objectivity is clear. 
The more general view of the majority of re spondents was that all audits should be conducted 
using the same auditing standards (for the avoidance of confusion). Some also argued that it might be good to exempt from audit a wider group of entities than is cu rrently the case. It 
was, however, noted that internal control rules shoul d stay the same. 
CEBS noted that audited financial statements are currently used by banks as  part of the credit 
granting process. Any proposal to reduce the level of assurance given on SMEs financial 
information could have unintended consequences  for the availability of credit for such 
business. CESR and CEIOPS made no comments. 
Academics 
There is no real reason to require  a statutory audit fo r all corporations. Mo st SMEs don't need 
one. For private entities, the users (banks, lender s, other users) should decide what type of 
service is needed. 
 
EN 98   EN Preparers, businesses and organisations of companies   
SMPs feel that they are surr ounded by an ever growing regula ted environment which may not 
necessarily suit their practice or the immediate needs of th eir SME clients. To ensure 
appropriate conditions for the development of su ch firms, the "limited audit" or "statutory 
review" referred to above could be accompanied by proportionate rules on quality control and 
oversight by audit regulators. This would allo w SMPs to reduce their administrative costs 
while helping them in servicing their clients better. 
Some preparers think that audits adapted to the needs of SMEs would decrease the cost of 
audits, but at the same they have  concerns related to the fear that such adapted audit formats 
would not be taken seriously by banks for example thus losing credibility. 
8. INTERNATIONAL CO-OPERATION 
Profession 
There is broad support for continuing efforts on mutual recognition and more co-operation 
and information exchange. 
Investors 
The Commission should make a clear commitment  and secure political support at the highest 
possible level to enhancing the quality of global audit oversight. This could involve 
championing the commitment at G8 and G20 levels as well as securing the support of relevant 
bodies entrusted with financia l stability re sponsibilities. 
Professional bodies and associations linked to the profession 
There should be enhanced mutual reliance (re cognition) at both EU & global level; more 
convergence in standards, ethics  and public oversight practices. 
Public Authorities 
There was support for agreements with third countries in respect of information sharing and 
international collaboration. 
Academics 
There should be international co-operation 
Preparers, businesses and organisations of companies  
Preparers fully support any initiatives that woul d lead to increase inte rnational cooperation 
between audit regulators as this is obviously the only efficient way to conduct audit inspections of large networks. Ho wever, they recognise the difficulty of the task as it concerns 
the flow of sensitive bus iness and commercial data. 
 
EN 99   EN ANNEX 2. EXISTING EUROPEAN UNION LEGAL FRAMEWORK ON STATUTORY AUDITS  
This annex describes the existing European Union legal framework on statutory audits: 
• (1) Directive 2006/43/EC of the European Pa rliament and of the Council of 17 May 
2006 on statutory audits of annual accounts and consolidated accounts222. Directive 
2006/43/EC is the most important piece of EU legislation rega rding the conduct of 
statutory audits in the EU.  
• (2) the EU legal texts that require a st atutory audit. Directive 2006/43/EC does not 
establish when the statutory audit of a nnual and consolidated accounts should be 
undertaken.  
(1) Directive 2006/43/EC  
This Directive establishes a minimum level of harmonisation concer ning: (a) rules on the 
approval, continuing education, mu tual recognition and registrati on of statutory auditors and 
audit firms; (b) the professional ethics principles to be applie d by statutory auditors and audit 
firms to guarantee their objectiv ity and independence; (c) the a udit standards to be applied 
and the reporting obligations; (d) principles of oversight of stat utory auditors and audit firms' 
compliance with their obligations ; (e) the rules on the appointment  of auditors; (f) the special 
provisions for the statutory audits of public-i nterest entities and (g) relations with third 
countries. Finally (h), this Directive is complemented by two important Commission 
Recommendations on external qualit y assurance and civil liability.  
(a) Approval, continuing education, mutual recognition and registration of statutory 
auditors and audit firms 
The Directive establishes that a statutory audit may only be car ried out by statutory auditors 
or audit firms which are approved by the Me mber State requiring the statutory audit. 
– Statutory auditor : a natural person  who is approved in accordance with the 
Directive by the competent authorities of  a Member State to carry out statutory 
audits. 
– Audit firm : a legal person or any other entity, regardless of its legal form, that 
is approved in accordance with the Direct ive by the competent authorities of a 
Member State to carry out statutory audits. The auditors carrying out the 
statutory audit on behalf of the audit firm should be "statutory  auditors" 
approved in the Member State concerned.  
It also sets some conditions regarding good reput e and educational qualifications for statutory 
auditors and on ownership restrictions for audit firms. 
The Directive contains rules on the type of  educational qualifications and professional 
training auditors must follow. An auditor may be approved to carry out a statutory audit only 
after having attained university entrance or e quivalent level, following which he or she has 
                                                 
222 OJ L 157, 9.6.2006, p. 87. 
 
EN 100   EN completed a course of theoretical instruc tion, undergone practical training and passed an 
examination of their professional competence. 
A statutory auditor approved in  one Member State may follow a specific procedure to obtain 
approval in another Member State. This procedur e requires passing an ap titude test which is 
subject to some conditions. It must be conducted in one of the languages permitted by the language rules applicable in the Member Stat e concerned and must c over only the statutory 
auditor's knowledge of the laws and regulations of that Member State in so far as they are 
relevant to statutory audits.  
The Member States must ensure that all appr oved statutory auditors and audit firms are 
recorded in a register which is accessible to  the public and which c ontains certain minimim 
information concerning the statutory auditors a nd audit firms. They must also ensure that 
statutory auditors and audit fi rms notify the competent authorities in charge of the public 
register without undue delay of any change of information cont ained in the public register. 
(b) Professional ethics principles to be app lied by statutory audito rs and audit firms to 
guarantee their objectivity and independence 
The Directive sets out some ge neral principles concerning pr ofessional ethics, independence, 
objectivity, confidentiality and professional secrecy. 
All statutory auditors and audit firms are subject to principles of professional ethics, covering 
at least their public-interest f unction, their integrity  and objectivity and their professional 
competence and due care. 
Member States must ensure that, when carrying out a statutory audit, the statutory auditor 
and/or the audit firm is independent of the a udited entity and is not involved in the decision-
taking of that entity. A statutory auditor or an au dit firm must not carry out a statutory audit if 
there is any direct or indirect financial, bu siness, employment or ot her relationship between 
the statutory auditor, audit firm or network and the audited entity. 
All information and documents to which a stat utory auditor or audit firm has access when 
carrying out a statutory audit must be protected by adequate rules on confidentiality and professional secrecy. 
Audit fees should not be influenced or determ ined by the provision of additional services to 
the audited entity or based on any form of contingency. 
(c) Auditing standards and reporting obligations 
The Directive does not directly prescribe the a uditing standards to be applied by statutory 
auditors or audit firms when carrying out a statutory audit.  It empowers the Commission to 
decide on the applicability of international au diting standards within the EU. However, the 
Commission has not yet taken a deci sion on this issue. As a result,  at present, Member States 
are free to determine the applicable audit st andards; these may be international auditing 
standards or other.  
The outcome of the audit process is the audit report prepared by the st atutory auditor or the 
audit firm. Where an audit firm carries out a stat utory audit, the audit report must be signed at 
 
EN 101   EN least by the statutory auditor ca rrying out the audit on  behalf of the audit firm. This report 
shall contain the following information223: 
– (a) an introduction, which shall at least identify the annual accounts that are the 
subject of the statutory audit, together with the financial reporting framework that 
has been applied in their preparation; 
– (b) a description of the scope of the statut ory audit which shall at least identify the 
auditing standards in accordance with wh ich the statutory audit was conducted; 
– (c) an audit opinion, which shal l state clearly the opinion of the statutory auditors as 
to whether the annual accounts give a true  and fair view in accordance with the 
relevant financial reporting framework a nd, where appropriate, whether the annual 
accounts comply with statutory requirement s; the audit opinion shall be either 
unqualified, qualified, an adverse opinion or, if the statutory audi tors are unable to 
express an audit opinion, a disclaimer of opinion; 
– (d) a reference to any matters to which th e statutory auditors draw attention by way 
of emphasis without qualifying the audit opinion; 
– (e) an opinion concerning the consistency or  otherwise of the a nnual report with the 
annual accounts for the same financial year.  
(d) Principles of oversight of statutory audi tors and audit firms' compliance with their 
obligations;  
The Directive establishes some obligations regard ing the supervision of statutory auditors and 
audit firms.  
Concerning quality assurance, Member States ar e obliged to organise a system of quality 
assurance for statutory audits that must meet the criteria laid down in the Directive. This 
system shall have sufficient funding and reso urces and be independent from the reviewed 
auditors and firms. The scope of the quality assurance review, supported by adequate testing 
of selected audit files, shall include an asse ssment of compliance with applicable auditing 
standards and independence requir ements, of the quantity and quali ty of resources spent, of 
the audit fees charged and of the internal qual ity control system of the audit firm. Quality 
assurance reviews shall take pl ace at least every 6 years.  
Also, effective systems of investigations and pena lties must be put in pl ace in order to detect, 
correct and prevent inadequate execution of statutory audits. 
In addition, Member States must organise an e ffective system of public oversight for statutory 
auditors and audit firms, governed by non-practi tioners who are knowledgeable in the area of 
statutory audit. The system of public oversight shall have the ultimate responsibility for the 
oversight of: (a) the approval a nd registration of stat utory auditors and a udit firms; (b) the 
adoption of standards on professional ethics, in ternal quality contro l of audit firms and 
                                                 
223 The content of the audit report is governed by Article 51a of Directive 78/660/EEC (Fourth Council 
Directive of 25 July 1978  based on Article 54 (3) (g) of the Tr eaty on the annual accounts of certain 
types of companies) 
 
EN 102   EN auditing, and (c) continuing education, quality a ssurance and investigative and disciplinary 
systems. 
National competent authorities are re quired to cooperate at EU level. 
Supervision is based on the principle of home-country regulation and oversight by the 
Member State in which the statutory auditor or audit firm is approved and the audited entity has its registered office. 
(e) Rules on the appointment of auditors  
The Directive requires that the general meeting of shareholders appoints  the auditor and that 
statutory auditors and audit firms are di smissed only where there are proper grounds. 
(f) Special provisions for the statutory audits of public-interest entities  
Each public-interest entity must have an audit committee responsible for,  among other things,: 
(a) monitoring the financial reporting process; (b) monitoring the effectiveness of the company's internal control, internal audit where applicable, and risk management systems; (c) monitoring the statutory audit of the annual a nd consolidated accounts; and (d) reviewing and 
monitoring the independence of th e statutory auditor or audit firm, and in particular the 
provision of additional services to the audi ted entity. This committee shall also make a 
recommendation to the board of the company on the choice of auditor. 
Statutory auditors and audit firms of public-inter est entities are required to publish an annual 
transparency report. They are also subject to stricter independence requirements, including the 
obligation to rotate the key audit partner responsible for the audit of a particul ar entity every 7 
years. The quality assurance reviews must place at least every 3 years.  
(g) Relations with third countries  
The competent authorities of a Member Stat e may approve a third- country auditor as a 
statutory auditor if that person has furnished pr oof that he or she complies with requirements 
equivalent to those laid down in the Directive.  
The Directive also establishes rules concerni ng the cooperation betw een national competent 
authorities and authoritie s of third countries concerning the s upervision of auditors and firms, 
notably regarding the transfer  of audit working papers.  
(h) Commission Recommendations. 
Commission Recommendation of 6 May 2008 on external quality assurance for statutory 
auditors and audit firms auditing public interest entities
224 provides guidance to Member 
States on establishing an indepe ndent and effective system of inspections on the basis of the 
Directive on Statutory Audit. In essence, th is Recommendation gives mo re responsibilities to 
the public oversight bodies, st rengthens the independence of inspection teams and enhances 
the transparency of the results of in spections of individual audit firms. 
                                                 
224 OJ L 120, 7.5.2008, p. 20. 
 
EN 103   EN The main purpose of the Commission Reco mmendation of 5 June 2008, concerning the 
limitation of the civil liability of statutory auditors and audit firms225, is to encourage the 
growth of non-Big Four audit firms assuming that  auditor liability is a major barrier to entry 
into the markets for audits of large and listed  companies. This Recommendation leaves it to 
Member States to decide on the appropriate method for limiting liability, and introduces a set 
of key principles to ensure that any limitation is fair for auditors, the audited companies, investors and other stakeholders. 
(2) EU legal texts establishing the obligation to have a statutory audit
 
The obligation to have a statutory audits is esta blished in different legal texts. A first group of 
texts requires certain types of legal entities (depending of their legal form) to have their 
accounts audited. A second group of texts addre ss public-interest entiti es depending on their 
activity: i.e. financial institution or listed company. These legal texts are briefly described in the following table (figure
 A2.1).  
Figure A2.1 – Existing legal framework  
Existing legal framework  Main features  
Companies required to have their a ccounts audited under EU legislation 
 
1. General requirements according to the le gal form (harmonisati on of company law)  
4th Company Law Directive 
(78/660/EEC) on the annual accounts of certain types of companies
 Requires the audit of annual acco unts of limited liability companies 
(approx 7.3 million). Member States may exempt small companies from statutory audit requirement. There is no harmonised threshold 
for exemption from audit.
 
7th Company Law Directive 
(83/349/EEC) on consolidated accounts  Requires the audit of 'consolidat ed accounts' of limited liability 
companies (approx 150,000).  
Council Regulation 1435/2003 on the 
Statute for a European Cooperative Society (SCE)
 Requires the drawing-up, auditing and disclosure of the annual accounts, and the consolidated accounts if any, of the SCE, subject to 
the law of the State in which it has its  registered office, giving effect 
to the EU legislation in force.
 
Council Regulation 2157/2001 on the 
Statute for a European company (SE)  
 Requires the preparation of the annual and, where appropriate, 
consolidated accounts including the accompanying annual report and the auditing and publication of the accounts of the SE, subject to the 
rules applicable to public limited-liability companies, under the law of 
the Member State in which its regist ered office is situ ated (exceptions 
when the SE is an insurance undertaking or credit or financial 
institution)
 
11th Council Directive 89/666/EEC 
concerning disclosure requirements in 
respect of branches opened in a Member 
State by certain types of company 
governed by the law of another State  The branch no longer n eeds to publish branch accounts but it must 
publish the annual accounts and annual report of the company as 
audited and published in accordance with the law of the Member State 
by which the company is governed , in accordance with Directives 
78/660/EEC, 83/349/EEC and 84/253/EEC. 
                                                 
225 OJ L 162, 21.6.2008, p. 39. 
 
EN 104   EN Existing legal framework  Main features  
 
2. Specific Requirements for public-interest entities  
2.1. Listed companies  
Directive 2004/109/EC on the 
harmonisation of transparency requirements in relation to information 
about issuers whos e securities are 
admitted to trading on a regulated market
 Requires the audit of the annual financial statements and of the consolidated accounts of issuers whose tran sferable securities 
(including any class of shares and debt) are admitted to trading on a 
regulated market and whose home state is a Member State of the EU.
 
Directive 2003/71/EC on the prospectus to be published when securities are 
offered to the public or admitted to trading and Commission Regulation 
(EC) No 809/2004 implementing 
Directive 2003/71/EC as regards information contained in prospectuses 
as well as the format, incorporation by 
reference and publication of such prospectuses and dissemination of 
advertisements
 Requires the audit of the financial statements that form part of the prospectus published when issuing securities.
 
2.2. Insurance undertakings  
Directive 2009/138/EC on the taking-up 
and pursuit of the business of Insurance and Reinsurance (Solvency II)
 Requires the audit of annual and co nsolidated accounts of direct life 
and non-life insurance and reinsurance undertakings. Some undertakings are excluded from the scope due to their size or type of 
operation or activity of the undertaking. 
 
Directive 2005/68/EC on reinsurance  Requires the audit of annual and consolidated accounts of reinsurance undertakings. The Directive will be applicable until 
31/10/2012, as it has been repealed by Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance 
(Solvency II). 
 
Directive 2002/83/EC concerning life 
assurance  Requires the audit of annual and consolidated accounts of life assurance undertakings. The Directive will be applicable until 31/10/2012, as it has been repealed by Directive 2009/138/EC on the 
taking-up and pursuit of the business of Insurance and Reinsurance 
(Solvency II). 
 
Council Directive 92/96/EEC on the coordination of laws, regulations and 
administrative provisions relating to 
direct life assurance
 Partially repealed by Directive 2002/83/EC.  
Council Directive 91/674/EEC on the annual accounts and consolidated 
accounts of insurance undertakings
 Adapts the 4th and 7th Company Law Directives  to the annual and 
consolidated accounts of  insurance undertakings.  
 
2.3. Credit institutions  
 
EN 105   EN Existing legal framework  Main features  
Directive 2006/48/EC relating to the 
taking up and pursuit of the business of 
credit institutions  Requires the audit of annual and consolidated accounts of business of 
credit institutions. Excluded from the scope of the Directive are the 
central banks of Member States and some specific credit institutions in 
a number of Member States.  
Council Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial 
institutions
 Adapts the 4th and 7th Company Law Directiv es on the annual and 
consolidated accounts of banks and other financial institutions.  
Possibility for Member States not to require statutory audit of public 
savings banks where the statutory audit of the documents of those 
undertakings is undertaken by an existing supervisory body for those 
savings banks at the time of the entry into force of this Directive and 
where the person responsible comp lies at least with the minimum 
conditions set out in the Statutory Audit Directive.  
2.4. Other financial institutions: investment firms, payment institutio ns, UCITS and e-money institutions  
Directive 2004/39/EC on markets in 
financial instruments  Requires the audit of annual and co nsolidated accounts of investment 
firms.  
Directive 2007/64/EC on payment services in the internal market 
 
 Unless exempted under Directive 78/ 660/EEC and, where applicable, 
Directives 83/349/EEC and 86/635 /EEC, the annual accounts and 
consolidated accounts of payment institutions shall be audited by 
statutory auditors or audit firms within the meaning of Directive 
2006/43/EC.  
Directive 2009/65/EC on the coordination of laws, regulations and 
administrative provisions relating to undertakings for collective investment 
in transferable securities (UCITS)
 Requires the audit of annual and consolidated accounts of 
undertakings for collective investment in transferable securities 
(UCITS). Exclused from the scope of the Directive are several forms 
of collective investment undertakings.  
Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money 
institutions 
 Article 3(1), by references to Directive 2007/64/EC, requires the audit 
of accounts of e-money institutions.  
 
 
EN 106   EN ANNEX 3. APPROVED STATUTORY AUDITORS AND AUDIT FIRMS  
This annex presents an estimation of the nu mber of statutory auditors and audit firms 
approved in EU Member States.  
Figure A3.1 
Member State Statutory Auditors Audit Firms Source of data Date 
Belgium 1044 513 Belgian public oversight 
authority April 2010 
Bulgaria 636 94 Bulgarian Commission for 
public oversight of statutory auditors (CPOSA) . June 2011 
Czech Republic 1338 357 Minist ry of Finance June 2011 
Germany 13866 2631 WPK January 2011 
Denmark 4479 1835 Danish Commerce and 
Companies Agency June 2011 
Estonia 344 200 Estonian Auditors Activities 
Register 
http://www.audiitortegevus.e  March 2010 
Greece 977 
(4 operating as sole 
practitioners) 24 Greek oversight body June 2011 
Ireland see below UK for combined figures   
Spain 5655 1354 Spanish Registry December 
2010 
France 14500 4500 CNCC June 2011 
Hungary 3324 2000 Chamber of auditors 2011 
Italy 140000 21 audit firms 
registered with 
Consob (for PIEs). 
Approximately 300 
audit firms registered 
with CCRC. CNDCEC (for auditors) 
CONSOB May 2011 
 
June 2011 
Cyprus 450 250 FEE July 2006 
Latvia 173 160 LACA 2011 
Lithuania 397 189 Chamber of auditors (LCA) 2011 
Luxembourg 421 100 CSSF 2011 
Malta 967 36 Ministry of Finance March 2011 
Netherlands 15 audit firms registered with AFM for 
audits of PIEs 
466 auditors or firms registered with AFM AFM June 2011 
Austria 156 378 QKB June 2011 
Poland 3529 (practicing) 1804 Ministry of Finance March 2011 
Portugal 1159 189 CMVM & Ordem dos 
Revisores Oficiais de Contas December 
2010 
 
EN 107   EN Romania 3241 851 Chamber of auditors December 
2009 
Slovak Republic 818 237 FEE 
 
Udva.sk June 2006 
(auditors) 
June 2011 
(firms) 
Slovenia 219 52 Anr.si December 
2009 
Finland 1448 74 AB3C January 2011 
(auditors) 
August 2009 
(firms) 
Sweden 4100 125 Supervisory Board of public 
accountants June 2011 
United Kingdom 27050 7843 Auditregister.org.uk 
Joint register IE/UK June 2011 
 
 
EN 108   EN ANNEX 4. OVERVIEW OF RECENT IN SPECTION REPORTS OF AUDITOR OVERSIGHT BODIES  
This annex presents an overview of recent in spection reports of Aud itor Oversight Bodies 
from 5 of the 6 biggest EU economies226; France, Germany, Italy, the Netherlands and the 
UK. These reports show that aud it quality is not a given and th at it must be considerably 
improved. 
(1) France  
The inspections carried out  by the French Public Oversight Body in 2009, " Haut Conseil du 
Commissariat aux Comptes " (H3C), revealed deficiencies in the way statut ory audits are 
currently carried out in the French market fo r audit services. As a general point, the H3C 
noted that there is a lack of formalisation a nd documentation in the pe rformance of statutory 
audit:  
"Ce défaut est patent en ce qui concer ne l’analyse des risques d’audit, leur 
évaluation ainsi que les réponses qui sont apportées en termes de procédures d’audit 
mises en œuvre. Dans une moindre mesure , il a été noté que la détermination du 
seuil de signification n’était pas suffisamment explicitée, formalisée, voire 
pertinente."227 
During the inspections carried out in 2009, 272 a udit engagements for PIEs were examined 
and for more than 12% (35 audit engagements fo r listed companies and financial institutions) 
concerns were raised regarding the lack of sufficient informati on to support the audit opinion, 
the incoherence of the audit opinion itself and errors in the financial information of the audited entity that were not detected by the statutory audi tor or audit firm: 
"Tout d'abord, le secrétaire général a rel evé pour 54 mandats, dont quatre relatif 
aux sociétés cotées, que les diligences réalisées par le signataire du rapport d’audit 
n’étaient pas suffisantes pour étayer l’opinion émise et que seul l’accomplissement 
d’un nouvel audit aurait permis aux contrôle urs de conclure sur la pertinence de 
l’opinion délivrée, ce qui n’ entre pas dans leur mission. Il  a été constaté pour trois 
mandats concernant des sociétés cotées de s insuffisances dans la documentation 
fournie et la démarche d’audit telle qu’ elles ressortaient du dossier contrôlé. 
Concernant quatre mandats, le commissaire aux comptes n’a pas relevé lors de 
l’exécution de sa mission légale des erreu rs dans l’informati on financière fournie 
par l’entité et n’en a pas tiré les conséque nces quant à l’opinion ém ise. Enfin il a été 
noté pour six mandats dont deux concernant de s sociétés cotées que l’opinion émise 
n’était pas, au vu des diligences mises en œuvre par les commissaires aux comptes, 
cohérente avec les éléments relevés par ces derniers". 228 
The H3C insisted that in order to improve the quality of the audits and to reinforce the audit 
of the financial statements of the audited entities , it is important that the audit firms keep more 
records and information about the way the a udit is performed. Thus, the recommendations 
                                                 
226 Concerning Spain, there is no publicly available information concerning the findings of the Spanish 
oversight body. 
227 Haut Conseil du Commissariat aux Comptes (2009), p. 54. 
228 Ibid. p. 56. 
 
EN 109   EN directed at those audit firms with systemic deficiencies in the quality of their audits, were 
focused, among others, on the respect of the rule s on independence, on the need to develop a 
better methodology to audit the consolidated accounts and on the transparency report. 
(2) Germany  
The German Auditor Oversight Commission ( AbschlussPrüferAufsichtsKommission ) 
published a report in 2010 presenting the results of the inspections carried out for the years 
2007-2010229. In this three year inspection cycle, at least one inspection of all auditors and 
audit firms subject to the procedure had been carried out. In general, " the inspection findings 
in this report show that there is still room for improvement in terms of audit quality ."230  
The report presents findings regard ing (i) the system of  quality control, (ii) the performance of 
audit engagements in the context of the financia l markets and economic crisis as well as (iii) 
other findings.   
The main relevant findings are presented below. 
i). Findings on the system of quality control  
Concerning client acceptance procedure and independence , the following findings 
(objections), were made231.  
• "conclusive assessment of th e client and engagement risk only after submission of 
the offer to the company to be audited or  only after the firm was chosen as annual 
auditor at the shareholders meeting of the company to be audited; 
• dispatch of the engagement confirmation le tter to the chairman of the supervisory 
board of the company to be audited only after the start of the audit process; 
• the completeness and up-to-datedness of th e ownership structure of the company 
to be audited recorded in the systems of the firm, which are necessary in the case 
of complex group structures to check th e independence and to identify possible 
conflicts of interest, are not consistently guaranteed. 
• breach of internal firm policies on th e possession and disclosure of securities 
investments and on maintaining data in  the systems set up to record 
corresponding transactions through individual employees; 
• completeness and correctness of the in formation in the databases set up for 
monitoring the obligations fo r internal rotati ons not guaranteed for all clients and 
professionals subject to rotation requirements. "232 
                                                 
229 Abschlussprüferaufsichtskommission (2010). 
230 Ibid., p.3. 
231 The assessment of the risks associ ated with the engagement during the client acceptance and continuing 
process as well as the measures and systems to ensure the independence of the firm and the personnel 
entrusted with performing an engagement are chec ked during allinspections because of their special 
significance for the publi's trust in the auditor’ s work. Large firms must maintain comprehensive 
systems and internal controls due to the size and international network of their organisations in order to 
ensure the adherence to national and international requirements in relation to client acceptance and 
independence. 
 
EN 110   EN Concerning  partner evaluation and remuneration, it was observed, in i ndividual cases, that 
"the partner appointment, assessment and rem uneration systems did not provide for any 
sufficient performance incentives to secure the audit quality.  Instead, economic and 
acquisition aspects were put to the foreground. There was also, partly, a lack of consistent 
sanctioning of revealed quality defects ."233 
Concerning  engagement quality control review, it was repeatedly observed that the required 
engagement quality control review was not made at suitable points in time during the engagement process or did not include all a udit steps. Furthermore, there were some 
indications that the engagement quality cont rol review was not always carried out with 
sufficient professional due care. In individual ca ses, the engagement quality control review 
was also carried out by persons who were th emselves involved in conducting the audit. 
ii) Findings on the performance of audit engagements in the context of the financial market 
and economic crisis  
Concerning the assessment of the risks of breaches and irregularities (fraud) , it was 
frequently observed that the necessary interviews with the management, the supervisory bodies and other persons regarding the risk of errors and fraud were either not documented by 
the auditor or it was apparent from the documentation that merely a formulaic interview 
which was not tailored to the company’s indivi dual circumstances had taken place. In many 
cases, the risk that the management may suspe nd control measures that appear effective was 
not counteracted with suit able audit procedures.  
Concerning the audit of the Going Concern assumption , repeatedly, a lack of sufficient and 
appropriate audit procedures was recognisable w ith regard to the asse ssment of the forecast 
procedure and the underlying assumptions which th e management had made as a basis for its 
positive going concern assumption, although the c lient’s economic situation would clearly 
have required this. 
Concerning the audit of the measurement of goodwill and othe r assets as well as the review of 
accounting estimates , it was observed, in many cases, that " the auditor had not performed a 
sufficient evaluation of the measurement me thods applied by the audited company and the 
underlying significant assumptions and data or at least had not documented their evaluation 
comprehensibly in the working papers "
234. When checking the recoverable amount of 
goodwill, it was frequently observed that th e business plans had not been recognisably 
assessed in terms of its plausibility. Furthermor e, there was often a lack of a comprehensible 
assessment of the used discount rate. 
iii) Other findings  
The German Audit Oversight Commission found, with  regard to the impl ementation of a risk-
based audit approach, that in some cases there wa s a lack of appropriate risk assessment at the 
beginning of the audit, making it im possible to plan the audit properly. 
Other findings referred to the assessment of the company’s internal control system. In a series 
of audits, no assessment of the design of contro l activities which were relevant for the audit 
                                                                                                                                                         
232 Abschlussprüferaufsichtskommission (2010), p.6. 
233 Ibid. p. 7. Emphasis added. 
234 Ibid. p. 9. 
 
EN 111   EN was performed. In other cases, insufficient unde rstanding of the cont rol measures of the 
company was gained during the assessme nt of the internal control system. 
Consequently, essential information on the c ontrols was not documented in the working 
papers. Likewise, errors occurred in the conduc t of the effectiveness test of the internal 
controls; among others, insufficient and inappr opriate evidence had been obtained for the 
implementation of the controls by the responsib le persons in the audited company, and the 
scope of random tests was not sufficient to be ab le to derive a conclusi on on the efficiency of 
the controls.  
In a series of inspected audit engagements, the connection between the risk assessment and 
the result of the audit of the internal contro l system on the one hand and the determination of 
the type, scope and timing of th e substantive audit procedures  on the other hand were not 
coherent on the basis of the audit working pa pers. This was particularly significant in 
situations where the resu lt of the audit of the internal cont rol system should have led to an 
extension of the substantive au dit procedures initially planne d.The inspection of substantive 
audit procedures repeatedly revealed findings  with regard to obtaining and evaluating 
confirmations of balances. Concerns were also ra ised on the fact that the selection, dispatch 
and response to inquiries were not under the auditor’s control, no additional a udit evidence 
was obtained in cases of a confirmation date deviating from the balance sheet date and no 
appropriate alternative audi t procedures were performe d for unanswered confirmation 
requests. 
In some cases, it was also not comprehensib le that the auditor had achieved sufficient 
appropriate audit evidence in the inspected audit area on the basis of the tests of controls and 
substantive audit procedures undertaken. 
Following these findings, the Audit Oversight Commission decided in several cases, 
depending on the circumstances of the individual case, to take measures against the owner of 
the firm or the responsible professionals to en sure the enforcement of professional standards, 
in particular disciplinary proceedings . On average, 25% of th e completed inspections 
between 2007 and 2010 led to disciplinary proceedings235.  
(3) Italy 
In Italy, Consob supervises the activity of 21 audit firms that are registered to carry out audits 
of PIEs236.  
A major part of Consob's supervision relates to the internal organisation of audit firms, in 
particular internal quality control .  
• In 2009 , the Italian supervisor, Consob, supe rvised the statutory auditors and 
audit firms of PIEs through systematic preventive quality control action and 
enforcement in specific cases. With regard to the quality controls, to verify the 
existence and correct app lication of the internal control procedures, 3 
inspections were launched in 2008. For thesefirms, Consob has already 
formulated specific recommendations on the action to be taken to remedy 
shortcomings discovered during the inspections and the related implementation 
                                                 
235 Ibid. p. 11 and seq. 
236 See Consob (2010) and Consob (2011).  
 
EN 112   EN deadlines.  
 Follow-up action was also taken in relation to a further 3 independent auditors subject to verification in 2007-2008, regard ing the assessment of organisational 
remedies adopted by the firms to correct shortcomings emerging during investigations.   In 2009 a further 8 inspections of inde pendent auditors were launched, 2 of 
which were completed during the year. The aim of the supervision concentrated on assessing the adequacy and correct appli cation of quality 
control procedures purs uant to Document no. 220, recommended by Consob, 
on "Quality control of independent auditing".
237 
• In 2010 , Consob checked, in respect of 7 a udit firms, the internal control 
procedures set out in Legislative Decree no. 39/2010 and provided the firms 
concerned with the final reports containing measures to be put in place in order to overcome the deficienci es identified. In  2010, Consob ensured the follow-up 
of the actions taken against 3 large a udit firms which were inspected in 2008-
2009. Also in 2010, five inspections were  initiated to assess audit firms' 
organisational structure and quality cont rol procedures. The aspects verified 
were the adequacy, efficiency and the effective implementation by the audit firms of their quality control procedures, and the firm's relations with their own 
international networks in order to an alyse the process of implementation of 
guidelines and standards issued by the gl obal network. For the audit firms with 
a limited scale of operations, the inspecti ons also covered the examination of 
some selected audit engagements.
238 
Consob also examined the network dimension of audit firms .  
• Thus controls in 2009 covere d relations with firms in the respective international 
networks, also with the aim of rebuildi ng the process of local implementation of 
guidelines and standards issued by the networks at global level.  
• In 2010, concerning the Big Four audit firms, Consob found it difficult in some 
cases, based on the existing legislation, to identify what consitutes a "network":  
"Rispetto alle “big four”, in alcuni ca si è emersa la difficoltà ad accertare 
l’esistenza di una “rete”, così come definita  sulla base delle disposizioni di legge e 
regolamentari, ovvero la mancanza di consapevolezza dell’appartenenza a una 
rete". This has consequences for the audito r independence as it leads to an 
under-estimation of the risk of conflict of  interest arising from the fact that the 
same audit firms that perform the audi ts provides other services to other 
entities belonging to the same network.  Therefore, Consob recommended measures 
to strengthen procedures for the verifica tion of declarations of independence. 
Consob has also identified cases of irregularities regarding audi ts of financial statements : 
                                                 
237 Consob (2010), p. 111. 
238 Consob (2011), p. 175. 
 
EN 113   EN • In 2009, letters of notice were issued to 2 auditors after c onfirmation of audit 
irregularities concerning th e 2006 and 2007 financial statemen ts of a listed issuer and 
the 2007 annual report of an issuer of wi dely-distributed fina ncial instruments. 
• In 2010, Consob sent 4 letters of complain t to three audit firms on the Special 
Register following the identification of serious irregularities related to the audits of 
the accounts of three listed companies and a broker: " Per quanto concerne l’attività 
di enforcement, nel corso de ll’anno sono state trasmesse 4 lettere di contestazioni 
nei confronti di 3 società iscritte nell’Albo Speciale, ai sensi dell’ art. 163 del Tuf, a 
seguito dell’accertamento di gravi irregolarit à sui lavori di revisione relativi ai 
bilanci di 3 emittenti quotati e di un intermediario finanziario ".239 
The allocation of work  has resulted in some problems: 
• In 2010, the proper allocation of resources to the tasks was identified as a problem in 
some cases. The persons composing the team werenot selected according to the nature and risks of the tasks. In such cas es, it was recommended that the workforce 
be supplemented with staff having the a ppropriate professional qualifications and 
experience. 
• Deficiences were identified in the pro cess for the appointment of the second or 
independent partner reviewer whose responsibility is to review the work of the team, 
before an opinion is issued: " Inoltre, sono state generalmen te riscontrate carenze nel 
processo di nomina del cosiddetto second partner reviewer  o independent reviewer  e 
nella documentazione dell’effettivo riesam e svolto da tale figura professionale 
indipendente, incaricata di riesaminar e il lavoro svolto dal team, prima 
dell’emissione dell’ opinion ."
240 
Also, Consob raised some concerns regarding the audit of accounts in the context of the 
crisis241. 
In 2009, in relation to audits of the financial statements as at 31 December 2008, 
statutory auditors were called upon to comp ly with the rules of Document no. 570 on 
“Going concern” (recommended by Consob in November 2007), which governs 
auditors assessments of going concern assu mptions and provides useful indications 
on the correct application of this principle in the specific context of the financial 
crisis.  
The financial crisis had considerable eff ects on Italian listed companies, leading to 
tension and going concern difficulties that calle d for an increase in the content of the 
accounting and financial disclosu res made by listed companies.242 
In 2009, the Italian supervisor, Consob, noted  an increase in th e number of requests 
to publish accounting disclo sures by listed companies243 compared to previous years 
                                                 
239 Ibid. (2011), p. 176. 
240 Ibid. (2011), p. 50 
241 Consob (2010), p. 112. 
242 Ibid., p. 96. 
243 Ibid., p .95. 
 
EN 114   EN when the number of requests to publish s upplements to periodic financial reports was 
6 in 2006, 1 in 2007 and 21 in 2008,. In 2009, th e number of such requests was 59244.  
(4) The Netherlands  
The Netherlands Authority for the Financial Markets (AFM) published in September 2010 a 
report on the general findings re garding the quality of audits a nd quality control monitoring at 
the four largest audit firms in the Ne therlands: Deloitte, Ernst &Young, KPMG and 
PricewaterhouseCoopers (the Big Four audit firms). In this report245, the AFM hightlighted 
the need for the fundamental improvement of audits246. 
The inspections carried out: in 2009 and 2010, the AFM carried  out regular inspections of 
audits of 2008 financial statements of compan ies and institutions in sectors particularly 
affected by the crisis, including the financial, construction/real estate and automotive sector. 
The audits reviewed by the AFM were conducted by the Big Four audit firms, which have a 
total market share of about 80 percent in terms of revenue from statutor y audits conducted in 
the Netherlands. As part of its regular insp ections, the AFM also focused on quality control 
monitoring at the Big Four audit firms, including  engagement quality control reviews, internal 
quality reviews and the compliance function. In addition to its regular inspections, the AFM 
investigated a number of incidents. 
Findings  
The AFM found positive elements  and thus: " established that quality has been given a higher 
priority by the Big 4 firms compared with th e outcome of previous inspections. Awareness has 
clearly increased, as has the readiness to take ac tion to improve quality. Partly as a result of 
the AFM’s supervision, progress ha s been made in these areas "247. 
At the same time, the AFM’s review findings highlighted systemic deficiencies in the 
quality of audits of more than one Big Four audit firm248.  
Main conclusions of the report  
The main conclusions of the report are the following:  
"The key deficiencies  identified at several Big 4 firms were as follows:  
– External auditors failing to exercise sufficient and appropr iate professional 
skepticism in the conduct of their audits. If audits are not conducted with 
professional skepticism, there is a risk of material errors in the financial statements 
going undetected and of incorrect ly issuing an unqualified aud it opinion. In the case 
                                                 
244 Ibid., p. 96. 
245 AFM (2010a). 
246 AFM (2010b). 
247 AFM (2010a). 
248 The deficiencies were not restricted to audits in  the financial sector; they  also occurred in the 
construction/real estate, automotive and public s ector (municipalities and housing corporations). The 
AFM published the results of its ear lier credit crisis inspections in December 2009, revealing that the 
quality of audits in the financial sector required improvement. The recent inspections show that the 
deficiencies are more wi despread and systemic. 
 
EN 115   EN of such uncertainties in an audit, there is insufficient assurance that the financial 
statements are free from material misstatement.  
– External auditors failing to apply, or appl y sufficiently, auditing standards in too 
many cases. The AFM identified relevant we aknesses in 29 of the 46 audits reviewed 
in the context of its regular inspections. The most important findings related to 
insufficient and inappropriate audit evi dence due to, among other things:  
 
- performing insufficient audit procedures to verify the existence and valuation of 
financial assets, work in progress, vehi cles and property in the balance sheet;  
 
- performing insufficient procedures to a ssess whether there are indications of fraud 
or other non-compliance with  laws and regulations;  
 
- performing insufficient procedures re quired when reliance is placed upon work 
carried out by another auditor, an in ternal audit department or expert;  
 
- performing insufficient procedures to  assess whether the client’s going concern 
assumption is valid;  
 
- performing insufficient procedures to  ascertain the completeness of revenue. 
– Quality control monitoring at several Big 4 firms falling short in certain respects, 
resulting in situations where there were in sufficient safeguards to ensure that audit 
opinions issued or to be issued were correct and sufficiently  and appropriately 
supported. 
– Audit firms accepting audit quality falli ng short within their own organisation, and 
failed to take appropriate action against infringements of laws and regulations by 
their staff. As a consequence, audit firms fa iled to adequately fulfil their duty of care 
regarding the quality of audits.  
– Insufficient involvement of and direction by  the external auditor in the conduct of the 
audit by the team" .249 
The AFM explained that the degr ee to which these deficiencies  occurred varied both per Big 
four audit firm and per audit. There were theref ore differences in audit quality across the audit 
firms reviewed. 
The AFM also explained that at several Big f our audit firms, the ‘tone-at-the-top’ and its 
impact on the firm’s behavior regarding qua lity could be improved (emphasis added):  
"The senior executives at the audit fir m, the audit firm’s policymakers and co-
policymakers and the external auditors in c harge of audit teams set an important 
example in this respect. They will have to take the lead in order to bring about the necessary change in behavior at th e audit firms. In this context, the AFM noted that 
the supervisory boards and audit committees of audit clients can also make a 
contribution to improving audit quality.  For example, they can draw attention to the 
                                                
 
249 AFM (2010a). See also AFM (2010b), p. 11 and seq. 
 
EN 116   EN quality of the audit by asking their own aud itor for the AFM’s inspection findings or 
by initiating a discussion on issues rais ed. The AFM is not allowed to share its 
findings with audit clients due to its duty of confidentiality"250. 
Follow up to the report  
Following the AFM’s inspection reports, severa l Big Four audit firms took or announced 
measures251.  
The AFM announced that it intends to: 
• monitor whether the measures taken or announced by audit fi rms are actually 
implemented; 
• take formal enforcement measures ag ainst one or more Big Four firms252;  
• submit one or more disciplinary complaints  to the Disciplinary Court for Auditors 
against one or more extern al auditors employed or pr eviously employed by one or 
more of the Big Four audit firms reviewed253; and 
• carry out, in the second half of 2010 and in 2011, inspections of the Big Four audit 
firms focusing on  "financial incentives and thei r impact on the quality of audits . The 
AFM will focus particularly on complian ce with independence rules and policies 
regarding appraisals, remuneration, appoint ments and sanctions at the firms. The 
AFM expects to publish its inspection fi ndings in 2011"254. 
(5) United Kingdom  
The 2009/2010 annual report of the Audit Inspec tion Unit (AUI) of the UK’s Professional 
Oversight Board (“the Oversight Board”) underlin es several instances of insufficient audit 
quality255. The AUI completed full scope inspections regarding the Big Four audit firms and a 
fifth firm for this period256 and published individual inspection reports on these 5 audit firms.  
The AUI report contained some key messages to the audit profession257 regarding audit 
quality  of major firms258 (emphasis added). 
"Audit quality: major firms 
                                                 
250 AFM (2010a).  
251 See AFM (2010b), p.19. 
252 AFM (2010b), p. 21. See also AFM (2010a). Formal  enforcement measures may include an instruction, 
an order for incremental penalty payments or an administrative penalty. 
253 AFM (2010b), p. 21.  
254 AFM (2010b), p. 22. 
255 FRC (July 2010). 
256 Deloitte, Ernst & Young, KPMG, PKF and PwC.  
257 FRC (July 2010), p. 2 and seq. 
258 Major firms in the UK are those auditing more than  ten entities within AUI' scope. There are 9 such 
firms: Baker Tilly, BDO, Deloitte, Ernst & Young,  Grant Thornton, Horwath Clark Whitehill, KPMG, 
PKF and PwC. 
 The report also contains information regarding inspections of smaller firms. 
 
EN 117   EN The AIU’s inspections in 2009/10 confir m that major firm s have policies and 
procedures in place to support audit qualit y that are generally appropriate to the 
size of the firms and the natur e of their client base. Never theless, improvements to 
these policies and procedures have been recommended at all firms. 
Notwithstanding the quality of fi rms’ policies and procedures, the number of audits 
assessed as requiring signific ant improvement at major firms (eight audits or 11 % 
of audits reviewed at major firms excl uding follow up reviews) is too high.  Firms 
are therefore not always consistently applying their policies and procedures on all 
aspects of individual audits.  
Policies and procedures however can only go so far in supporting and encouraging 
desirable behaviours to deliv er audit quality. While firms are willing to change these 
and to provide additional training to staff, su ch actions will be insufficient without 
effective behavioural change which is more difficult to achieve." 
Other key messages related to professional scepticism, quality  of audit evidence, going 
concern, use of specialists and provision of non-audit services to  audit clients were (emphasis 
added): 
"Professional scepticism 
Firms sometimes approach the audit of hi ghly judgmental balances by seeking to 
obtain evidence that corroborates rather than challenges the judgments made by 
their clients. The AIU has identified situations where differing and conflicting 
judgments are accepted by the same firm fo r clients operating in similar industries.  
Some firms have processes designed to confir m consistency of key judgments across 
their client base; these could be considered  by all firms, but they also need to be 
applied effectively. Auditors should exercise grea ter professional scepticism 
particularly when reviewing management’s judgments relating to fair values and 
the impairment of goodwill and other intangib les and future cash flows relevant to 
the consideration of going concern.  
Quality of audit evidence 
Auditing Standards recognise t hat third party evidence is generally the most reliable 
form of audit evidence and it  should be obtained wherever practicable in relation to 
important matters. Firms should revisit their audit approaches to ensure that 
appropriate consideration is given to the av ailability of such evidence, particularly 
independent confirmations of balances and that these are more frequently sought. 
Going concern 
Firms have responded positively to the challenges arising from the economic 
downturn by issuing a significant amount of guidance to audit teams to assist in their 
evaluation of going concern. The APB has al so been active in the provision of 
additional guidance to assist auditors in this area.  
Notwithstanding this, a number of shortcomings relating to the audit of going 
concern were identified at both major and smaller firms . While acknowledging that 
much of the work in this area is done we ll, audit teams need to ensure that the key 
 
EN 118   EN factors material to the going concern asse ssment in each individual case are 
appropriately considered and resolved. 
Use of specialists 
The increasing use of internal specialists,  especially by major firms, to evaluate 
valuations performed by clie nt specialists and to assist in the audit of other complex 
audit areas such as taxation and pension ba lances contributes to improving the 
quality of audit evidence obtained in these areas. Where firms make use of internal 
specialists they must ensure that this work is properly integrated with the work of the 
main audit team. In particular, it should be  clear from the audit files how the audit 
team has responded to any matters arising from the work of specialists. 
Provision of non-audit services to audit clients: Ethical Standards 
Ethical Standards require firms to identify  areas of potential risk to independence 
such as the provision of serv ices other than the audit to an audit client. Firms need to 
embrace more fully the principles unde rlying the Ethical Standards which require 
threats to be mitigated by appropriate safe guards if the work is to be undertaken.  
Firms are perhaps too ready to conclude that existing procedures, required in any 
event in the audit, provide that necessary  degree of safeguard. They must accept 
that non-audit services should not be provided where safeguards cannot 
appropriately mitigate threat s to their independence. 
Surveys of fee income show that the ratio  of non-audit fees to audit fees for audit 
clients in the UK has declined over the years. However the rate of decline has been 
small in recent years and the AIU is concerned that one major firm has embarked 
on a growth strategy where a key driver is  the development of non-audit services to 
be provided to audit clients ." 
 
EN 119   EN ANNEX 5. REVENUES FROM AUDIT AND NON -AUDIT SERVICES  
Changes in the revenues from audit and cons ultancy services betw een 2004/05 and 2009/10 
for the Big Four audit firms in Germany. 
 
Figure A5.1. Source: Calculations made on the basi s of data published in Ha ndelsblatt, "Preiskampf im Dax: Die 
Branche rangelt um Mandate mit Renomme ", 19 January 2011 
 
EN 120   EN Audit and non-audit fees in selected distre ssed banks in France, Iceland, Netherlands, 
Switzerland, UK and US. 
 
Figure A5.2. Source: Sikka (2009), Table 1: Auditors and distressed Banks. 
Notes: Data as per financial statements and st atutory filings shown on the respective company’s 
website. ‘Audit fee’ also includes ‘audit related fees’.  * Denotes that audit report draws attention to some matters already contained in the notes to financial 
statements 
 
EN 121   EN ANNEX 6. BARRIERS TO MORE COMPETITION IN THE AUDIT MARKET FOR LARGE PIE S 
There are a number of barriers preventing new a udit firms from entering the audit market for 
large and listed companies. A study in 2006 concluded that " only if the existing barriers, in 
terms of perception/reputation and low switching rates, could be reduc ed might substantial 
market entry by mid-tier firms become feasible "259.  
Barrier 1. There is asymmetric informati on related to the quality of auditors in the 
market. As a result, the selection of auditors is not based on fully informed decisions, which has made the reputation of the Big F our audit firms the mo st important factor 
for auditor choice 
A study had shown that reputation is the most important factor that determines a company's 
choice of a provider of audit services
260. Moreover, there is an inertia that perpetuates the 
effective bias towards the Big Four. This is partic ularly important in view of the fact that the 
impact on the reputation of the Big Four of the recent inspection reports that highlight 
fundamental weaknesses has still not resulted  in any tangible shif t in attitudes.  
Investors and regulators underlined the need for greater transparency on  audit quality. With 
respect to individual audits inspected, the info rmation on the quality of these audits is not 
divulged to those charged with th e governance of the audited co mpany. Only in the UK, is the 
audit committee sent a report which contains insp ection findings on audits of their company.  
Barrier 2. Contract clauses effe ctively requiring Big Four audits  
Although there is no comprehensive information on this issue, it was one of the problems 
mentioned during the discussions at the conf erence on audit organised by the Commission. 
The discussion revealed that on some occasions  (specifically when companies apply for a 
bank loan) a specific clause is imposed on the company, stipulating th at audits should be 
carried out by one of the Big Four audit firms. Furthermore, in their feed-back to the Green 
Paper, some investors expressed the view that audit committees should reveal to shareholders 
any covenants limiting the c hoice of the auditors.  
The confidential character of such contracts ha s prevented any material  evidence from being 
presented to the Commission. It is worth noting th at this issue has also been mentioned in a 
recent report ordered by the House of Lords in  the UK, while further investigation on the 
issue of restrictive bank covenants has been  requested from the Office of Fair Trading 
(OFT)261 
Barrier 3. Companies rarely change an audit firm  
                                                 
259 Oxera (April 2006), page i. 
260 Source: Study on the Economic Impact of Aud itors’ Liability Regimes (MARKT/2005/24/F); Final 
Report To EC-DG Internal Market and Services By London Economics in association with Professor 
Ralf Ewert, Goethe University, Frankfurt am Main, Germany; table 30, page 50; September 2006. 
261 Auditors: Market concentration and their role - Ec onomic Affairs Committee, Report ordered by House 
of Commons (March 2011). CHAPTER 3: Chan ges to the Legislativ e/Regulatory Framework 
Governing Audit, 
http://www.publications.parliament.uk/pa/ld2 01011/ldselect/ldeconaf/119/11906.htm#a6 
 
EN 122   EN From the demand side, the rarity of instances where auditors are changed is one of the most 
critical deterrents to other potential market partic ipants to enter the market for audits of listed 
and large companies262. The available empirical evidence pr oves a very low level of auditor 
switching among Union companies. 31% of EU su rveyed companies indica ted that their audit 
firm had served them for more than 15 years263. 
In relation to the UK, a recent report also show s that a FTSE 100 auditor remains in place for 
about 48 years on average; for the FTSE 250 the average is  36 years. Nearly all these 
companies have Big Four auditors. For example,  Barclays has used Pw C or its predecessors 
since 1896 and since 1978 as sole auditor264. 
No or low level of switching leads to market  stagnation (see figure A6.1). Even if other 
measures are taken to increase competition, a ny possible structural changes in the audit 
market would be delayed due to the low rate of switching.  
24% 23%22% 23%19% 19%18%17%4%4%3%3%3% 3%2% 3%2% 2%2% 3%
0%10%20%30%40%50%60%70%80%90%100%
2004 2009Baker Tilly International
Horwath International
Praxity (Mazars; Moores Rowland
International)
RSM International
Grant Thornton International
BDO International
KPMG International
Ernst & Young Global
Deloitte Touche Tohmatsu
PricewaterhouseCoopers
International
 
Figure A6.1. Developments in the relative market shar e of largest audit firm networks in terms of total 
world-wide revenues 
Currently, there is no requirement at EU level for the rotation of audit firms. Article 42 of 
Directive 2006/43/EC requires Member States to " ensure that the k ey audit partner(s) 
responsible for statutory audit rotate(s) from  the audit engagement within a maximum period 
of seven years from th e date of appointment ". Some Member States however go further 
requiring the mandatory audit firm rotation. It is currently present in Italy with respect to 
                                                 
262 Source: Study on the Economic Impact of Aud itors’ Liability Regimes (MARKT/2005/24/F); Final 
Report To EC-DG Internal Market and Services By London Economics in association with Professor 
Ralf Ewert, Goethe University, Frankfurt am Main, Germany; table 19, page 41; September 2006 
263 Study by London Economics on the Economic Impact of Auditors’ Liability Regimes; September 2006, 
table 22, pages 43. http://ec.europa.eu/internal_market/auditing/liability/index_en.htm 
264 Economic Affairs Committee - Second Report Audito rs: Market concentration and their role (report 
ordered by the House of Lords 15 March 2011); 
http://www.publications.parliament.uk/pa/ld2 01011/ldselect/ldeconaf/119/11905.htm#a3 
 
EN 123   EN audits of listed companies (audit firm should ch ange after 9 years) and in Poland with respect 
to audits of insurance companies (after ma ximum 5 years with a cooling off period of 3 
years). The auditor oversight authorities from both countries have not reported any difficulties 
with implementing this provision. 
This lack of change of audit firms perpetuates and even aggravates the risk of over familiarity 
between auditor and 'audit ee'; this is turn impairs professi onal scepticism, the sine quo non of 
an adequate audit opinion.  
As regards the reasons for rare switching, co mpanies that responded to the Green Paper 
expressed satisfaction with their audit firm and were unwilling to  change their auditors. They 
justify their unwillingness by citi ng high costs in organising a te nder or spending management 
time to become familiar with new auditors. Wh en citing such 'difficulties', little or no 
consideration is given to the fact  that such tenders w ould not be annual but pe riodic. It is also 
important to consider whether the management should have an opinion at all in terms of 
expressing satisfaction with their auditors or wh ether it should be a demonstrably independent 
body that should express an opinion on the performance of the auditor. 
The information below (figure A6.2) provide s more accurate information on the factors 
discouraging audit committee chairs from changing the company's auditor265. The time 
required from management in the event of switc hing auditor appears to be the most significant 
barrier.  
 
Figure A6.2. Significance attached by audit committee chairs to factors that might discourage 
switching (number of respondents; base: 50 respondents)  
Barrier 4. Restrictive ownership rules  
The Directive requires that the majority of the voting rights in a firm be held by those 
permitted to undertake statutory audits. The rationale for this rule is that if an audit firm were 
publicly owned, a danger would exist that its shareholders could include persons affiliated 
with the firm’s audit clients, creating conflicts  of interest and damaging the independence of 
audit. 
                                                 
265 Competition and choice in the UK audit market, prepared by Oxera for Department of Trade and 
Industry and Financial Reporting Council, April 2006, figure 3.12, page 48. 
 
EN 124   EN The restrictive ownership rules however have le d to distortions and asymmetry in the markets 
for statutory audit and other se rvices. Audit firms instead of focusing mainly on audit – the 
very purpose of the restrictiv e ownership rules – have instead  expanded to a plethora of non-
audit services: 
Example of services from PWC's website_ http://www.pwc.com/gx/en/global-business-services  
Audit and assurance: Actuarial insurance services, Assistance with  capital market transactions, Corporate 
reporting improvement, Financial accounting, Financial statement audit , Sustainability reporting, IFRS 
reporting, Independent controls & systems process assurance, Internal audit, Regulatory compliance and 
reporting, Sarbanes -Oxley compliance  
Consulting: Strategy, Finance, Technology, Governance, risk and compliance, Operations, People & change, 
Revenue growth, Shared services and outsourcing, Su stainability, Delivering deal value, Investigations  
Deals: Business recovery services, Corporat e finance, Delivering deal value, Post deal services, Structuring 
services, Financial due diligence, Strategy, Valuations  and economics, Valuation consulting, Tax valuations, 
Economics, Independent expert opinions, Accounting valuations, Modelling and business planning, Post deal 
services, Structuring services  
Human resources: International assignments, Reward, HR management  
Legal: Asset management, Corporate and co mmercial, Corporate s ecretarial, Dispute re solution, Employment, 
Financial services, Immigration, Public law, R eal estate, Middle market and private companies  
Tax: Global compliance services, Indirect taxes, International tax services, Mergers & acquisitions, 
Sustainability & climate change tax,  Tax accounting services , Tax function effectiven ess, Transfer pricing  
Despite different reporting styles used by in ternational audit firm networks, it could be 
estimated that around 40 – 50% of their revenues come from statutory audit and audit related 
services. The rest includes main ly advisory and tax-related se rvices (see figure A6.3). Figures 
on Big Four audit firms in the UK show that au dit and other related se rvices represented only 
33% of total revenues266.  
Additionally, the restrictive ownership rules create  de facto barriers to the growth of smaller 
audit firms. While the provision of statutory audit services is not a capital intensive business 
activity, organic growth through ca pital injections by partners does not ensure, on its own, 
that small and medium-sized audit firms will have enough financial means to grow. 
This contributes to protecting large audit firm s from competition from medium-sized firms. 
                                                 
266 Accountancy Magazine, January 2011 
 
EN 125   EN 
 
Figure A6.3. Source: audit firms' annual reports 
By being able to provide both audit and NAS , audit firms (mainly the Big Four) have a 
competitive advantage over other providers. Audit firm capacities to cross-subsidise audit or 
non-audit services are an additional deterren t to enter the market  for listed and large 
companies. For example, this practice creates  significant market di stortion by preventing 
other potential service providers of non-audit services from serv ing clients, to whom the Big 
Four are providing statutory audit, but also ma y deter the entry of non-Big Four firms that 
have less developed NAS into the statutory audit market.  
 
EN 126   EN ANNEX 7. MARKET CONCENTRATION  
(1) History of market concentration 
The past two decades have seen a process of ma rket consolidation of large firms into even 
larger firms. In the late 1980s there were ei ght major audit firms but since 2003 there have 
been only four firms that audit the majority of large public compan ies and that derive 
significant income from non-auditin g services. The consolidation also allows big audit firms 
to take advantage of economies of scale, e xpand industry-specific kno wledge and technical 
expertise, and potentially increase the capital base in order to spread risk.267  
Significant mergers of the 1980s and 1990s  
 
Figure A7.1. Source: US GAO (2008), p.9.  
                                                 
267 OECD (2009).  
 
EN 127   EN (2) Comparison between audit and law firms 
In comparison with legal services, the audit market appears more concentrated. The figure 
below shows that the five largest audit firm ne tworks represent 75% of the total revenues of 
the top 24 global audit firms whereas the five largest global law firms have only 19% of the 
total revenues (of the global law firms)268. 
19%75%28%20%
53%5%
0%25%50%75%100%
TOP 50 global LAW
firms (2010)Top 24 global AUDIT
firms (2009)The rest
Next biggest 5
Biggest 5
 
Figure A7.2 - Comparison between the revenue shares of five biggest market players among audit 
firms and among law firms269. 
                                                 
268 The data is available for 24 global audit firms and 50 global law firms. Even if the data were available 
for the 50 biggest audit firms, the figure would change only slightly due to the very small size of the 
remaining audit firms: the revenue share of the smallest audit firm within the 24 global audit firm 
networks is less than 0,3% of the total revenues. 
269 Source: Data on legal firms: TheCityUK, report on Legal Services 2011, page 5, chart 7 Concentration 
of legal services: http://www.thecityuk.com/what-we -do/reports/articles/2011/february/legal-services-
2011.aspx; Data on audit firms: Accountancy Magazine, January 2011 
 
EN 128   EN (3) Market concentration 
For the majority of EU Member States, the mark et share of the Big Four audit firms exceeds 
85% as regards the audit of  large listed companies (F TSE 350 equivalent market 
capitalisation).  
Big Four audit firms' market share in different Member States (in terms of 
mandates) in 2010 among listed companies with FTSE 350 equivalent 
market cap
100% 100%97%97%96%94%91%90%89%89%87%86%
82%79%
71%
64%
58%55%
40%
33%33%
0% 0% 0%
0%10%20%30%40%50%60%70%80%90%100%
Czech Republic
Estonia
Hungary
Netherlands
Slovak Republic
UK
Italy
Portugal
Sweden
Ireland
Finland
Denmark
Slovenia
Spain
Austria
Germany
Belgium
Poland
Luxembourg
France
Greece
Cyprus
Lithuania
Malta
Bulgaria (no info)
Latvia (no info)
Romania (no info) 
Figure A7.3 – Source: data extracted from Huber (May 2011).  
This market share relates to the number of audit engagements. It may be different if audit fees 
are considered instead. For instance, if one looks at the French market, the market share of the 
Big Four firms is signficantly higher when aud it fees (90% in 2009) ra ther than number of 
audit engagements (73% in 2009)270 are compared: figures  A7.4 and A7.5 comparing data 
from the largest 120 listed companies in France. 
                                                 
270 It should be noted that in figure  A7.3, data for France concerns 468 audit engagements, therefore 
including more firms than figure  A7.4. 
 
EN 129   EN 
 
Figure A7.4 – Source: Billard et al. (2011), p. 12; table 2: number of audit missions and market 
concentration (2004 to 2009); data collected from the annual financial information of SBF120 
companies. 
 
Figure A7.5 – Source: Billard et al. (2011), p.12; ta ble 3: market share and concentration in terms of 
audit fees from 2004 to 2009; data collected from the annual financial information of SBF120 
companies. 
The EU27 average (excluding 3 Member States fo r which no data is available) of the Big 
Four market share for the audit of those large listed companies is 83% (see figure  A7.6). This 
market share diminishes when the audited listed  company is of smaller size. If all companies 
with a market capitalisation above £50M are c onsidered, the combined market share of Big 
Four firms goes down to 63%. 
 
EN 130   EN Big Four audit firms' market share in the Union (in terms of mandates) in 2010
79%
63%83%
0%10%20%30%40%50%60%70%80%90%
listed companies with FTSE 350
equivalent market caplisted companies with market cap
greater than £100mlisted companies with market cap
over £50m 
Figure A7.6 - Source: data extracted from Huber (May 2011).  
When compared to the main international trading partners, it can be noted  that the trends are 
similar regarding the US and the combined G8  countries. However, the position of Big Four 
audit firms in China is significantly weaker: they audit only 14% of the listed companies 
considered. Their position in India, Russia and so me other G20 countries is not as strong as in 
western economies, which explains the lowe r figures for the combined G20 countries.  
Big Four audit firms' market share in different countries (in terms of 
mandates) in 2010
84%
68%83%85%
14%80%
66%79%81%
14%75%
63% 63%75%
14%
0%10%20%30%40%50%60%70%80%90%
G8 G20 EU27 US Chinawith FTSE
350
equivalentmarket cap
market capgreater than
£100m
market cap
over £50m
 
Figure A7.7 - Source: data extracted from Huber (May 2011).  
 
EN 131   EN ANNEX 8. DETAILED POLICY OPTIONS  
(1) OBJECTIVE 1: POLICY OPTIONS TO DEAL WITH THE CLARIFICATION AND 
DEFINITION OF THE ROLE OF THE STAT UTORY AUDITORS GENERALLY AS WELL 
AS WITH SPECIFIC REGARD TO PIES 
Objective 1.1: Sub-policy options to improve bu siness preparers/market understanding of the 
scope of audit generally  
Baseline scenario . The existing EU rules do not clearly de fine what the scope of the statutory 
audit is. The requirements on the mi nimum content of the audit report271 act as proxy to the 
scope of the audit. Indeed, auditors are requ ested to provide, in the audit report, a " description of 
the scope of the statutory audit which shall at least identify the auditing standards in accordance 
with which the statutory audit was conducted " as well as " an audit opinion which shall state 
clearly the opinion of the statutory auditors as to whether the annual accounts give a true and 
fair view in accordance with the relevant  financial reporting framework […] ". When reporting 
that the accounts give a true and fair view in accordance with the relevant repor ting framework, 
auditors provide "reasonable assurance" that the financial statements as a whole are free from 
material misstatements, whether due to fraud or e rror. The fact that the companies' accounts are 
audited does not mean that there is an obligati on on the auditor to ensure that the audited 
accounts are entirely free from mi sstatements, but this is not clear ly explained in the EU rules. 
Additionally, EU rules do not  require that the audit opinion will gi ve assurance as to  the future of 
the audited company, but the requirement on the a uditor to provide an opinion on the audited 
company as a "going concern" creates some confus ion about the scope of this assessment, which 
helps to explain the expectations crea ted among shareholders on this issue. 
EU rules do not explain either how the auditor is expected to carry out his/her tasks in relation to 
the statutory audit. For instance, there is no require ment in the legislation that the auditor applies 
professional scepticism when carry ing out the statutory audit work272. The requirements on the 
minimum content of the audit report do not provide an indication of the scope of the audit nor the 
tasks carried out. This is "delegated" to the prof essional standards that auditors generally apply 
on the performance of the audit work.  
Option 1: Clarify and specify the scope of st atutory audit to reduce  the expectation gap . This 
option consists in (a) clarifying the scope of the a udit of PIEs in the EU rules, without enlarging 
it; and (b) specifying the role of the audito r by requiring that audito rs/firms apply their 
professional scepticism throughou t the performance of the audi t and establish requirements 
regarding the important audit work tasks (e.g. or ganisation of the work, market integrity, group 
auditors and internal quality control). 
(a) Clarifying the scope of st atutory audit in the EU rules . This clarificati on would consist in 
explicitly stating that  
– (i) the role of the auditor is to provide  an opinion on whether historical financial 
information is misstated and whether th e going concern basis is valid; and  
                                                 
271 Cf. Article 51a of Directive 1978/660/EEC and 37(2) of Directive 1983/349/EEC. 
272 With the exception of some requirements for group auditors. Cf. Article 27 of the Statutory Audit 
Directive. 
 
EN 132   EN – (ii) such scope does not include the assurance as to the future viability of the audited 
entity (beyond the assessment  conducted to establish the validity of the going concern 
basis273), nor the efficiency or effectiveness with which the management has conducted 
or will conduct the affair s of the audited entity. 
(b) Specifying the role of the aud itor in connection with that scope . This would consist in 
explicitly requiring that auditors apply professional sceptici sm throughout the performance of the 
audit274. Professional scepticism refers to " an attitude that includes a questioning mind, being 
alert to conditions which may indicate possibl e misstatements due to error or fraud and a 
critical assessment of audit evidence "275. The auditor would be required to, in particular, 
maintain professional scepticism when reviewing management values relating to fair values and 
to the impairment of goodwill and other intangible assets and future cash flows relevant to the 
consideration of the going concern.  
Specifying the role of the audito r would also include a descrip tion of important tasks to be 
undertaken when performing the statutory audit work. The following requirements form part of 
this option:  
– requirements on the the appointment of adequa te staff – including a key audit partner – 
and sufficient resources to carry out the work;  
– requirements on the organisation of a client account record and the composition of the 
audit file;  
– requirements in relation to mark et integrity and fraud prevention276 with a view to 
preventing the involvement of the auditor/firm  and his/her/its employees in any criminal 
offence or breach of the law that would be detrimental to public confidence in statutory 
audit or financial markets. Those requiremen ts include procedures for the transmission 
of relevant information to competent authorities;  
– requirements in relation to the responsibility of group auditors when auditing 
consolidated accounts. These requirements e xpand those of Article 27 of the Statutory 
Audit Directive;  
– requirements in relation to the internal qua lity control review to be conducted by the 
audit firm before issuing the audit report; or  
– requirements in relation to record keeping. 
                                                 
273 As such, there is no change in the going concern examination. 
274 See generally FRC (August 2010) explaining that the application of an appropriate degree of professional 
scepticism is a crucial skill for the auditor, outlining the importance of scepticism in practice and providing 
some ideas on what can be done to promote auditor scepticism. The FRC paper contains a review of academic research (essentially of US-related studies) on the characteristics unde rlying auditor scepticism 
and the degree to which it is likely to be exhibited in practice.  
275 Definition of the International Auditing Standards. According to FRC (August 2010), this definition 
suggests that " scepticism influences the scope of the work, helps the auditor evaluate audit findings and 
ultimately conclude whether sufficient appropriate audit evidence has been obtained to enable a 'true and fair view' opinion to be expressed on an entity's financial statements ".  
276 A recent survey places honesty and integrity of financial reporting generally as a key ethical issue for the 
integrity of global markets in 2011. See CFA (January 2011). 
 
EN 133   EN Option 1 should be read in conne ction with option 1 regarding obj ective 1.2 on the content of the 
audit report. The requirement on the content of the audit report will  continue to act as a proxy to 
the scope of audit. 
Option 2: Redefine the scope of statutory audit to fill the expectation gap . Auditors would be 
required to assess forward looking information provided by the company, and given privileged 
access to key information, provide an economic  and financial outlook of the company beyond 
the context of the examination of the "going concern".  
Objective 1.2: Sub-policy options to improve the information that the auditor provides to users 
and audited entities (PIEs) 
Baseline Scenario . Under the existing EU requirements, a uditors only communicate a short (one 
or two pages) audit report to the public , which often contains standard language277. In the case of 
PIEs, the standard report does no t reflect the complexity of the audit work carried out or the 
methodology used. Concerning the communicatio n between the audito rs and the audited 
company, there are no specific requirements for the provision of additional information to the 
audited entities; the practice is that auditors do not share their audit working papers with them. 
Concerning the relationship with the audit committee, the current rules empower the audit committee to " monitor the statutory audit of th e annual and consolidated accounts "
278, but the 
rules do not specify how such monitoring shall be conducted. As a result, the practice differs 
from company to company. Auditors are not requi red to engage in regu lar communication and 
discussion with the audit committee. Nor are they required by law to provide a more detailed report on the audit work to the audi t committee or the audited company
279. 
The audit committee (article 41 of the Statutory Audit Directive) 
Each PIE (with some exceptions) must have an audit committee.  
In PIEs which are SMEs, Member States may permit the functions assigned to the audit 
committee to be performed by the administra tive or supervisory body as a whole, 
provided at least that when the chairman of  such a body is an executive member, he or 
she is not the chairman  of the audit committee 
Member States may also allow or decide that the requirement to have an audit 
committee do not apply to PIEs having a body performing equivalent functions to an 
audit committee, established and functioni ng according to provisions in place in the 
Member State in which the entity to be aud ited is registered. In such a case the entity 
shall disclose which body carries out th ese functions and how it is composed. 
Composition of the audit committee  
                                                 
277 In France, the audit report is gene rally longer because auditors are requ ired to publicly ju stify their audit 
opinion. This includes their apprecia tion of a company's choices or use of accounting methods, of material 
or sensitive accounting estimates, and also, if n ecessary, of elements of internal control. 
278 Cf. Article 41(2)(c) of Directive 2006/43/EC. 
279 The German legislation requires the auditor to submit a "long-form report" to the management and where 
the auditor was appointed by the supervisory board, it is submitted to it. Such a report, which is not 
available to the public, summarises in greater detail than the auditor's report the fundamental findings of the audit on the going concern assumption and associated monitoring systems, future development and risks 
facing the company, material disclosures, irregula rities encountered, accounting methods used or any 
"window dressing" transactions. 
 
EN 134   EN Member State determine whether audit committees are to be composed of non-
executive members of the admi nistrative body and/or member s of the supervisory body 
of the audited entity and/or members appoint ed by the general meeting of shareholders 
of the audited entity. At least one me mber of the audit committee shall be 
independent280 and shall have competence in accounting and/or auditing. 
Functions of the audit committee281 
Without prejudice to the re sponsibility of the member s of the administrative, 
management or supervisory bodies, or of  other members who are appointed by the 
general meeting of shareholders of the audited entity, the audit committee must, inter 
alia: 
(i) monitor the financial reporting process; 
(ii) monitor the effectiveness of the compan y's internal control, internal audit where 
applicable, and risk management systems; 
(iii) monitor the statutory audit of the annual and consolidated accounts; 
(iv) review and monitor the independence of the statutory auditor or  audit firm, and in 
particular the provision of additional services to the audited entity; 
The proposal of the administrative or s upervisory body for the appointment of a 
statutory auditor or audit firm of a PIE must be based on a recommendation made by the 
audit committee. 
The statutory auditor or audit firm must report to the audit committee on key matters 
arising from the statutory aud it, and in particular on materi al weaknesses in internal 
control in relation to the financial reporting process. 
Option 1: Improve and expand the content of the audit report disclosed the public . Under this 
option, the content of th e audit report disclose d to the public would be  expanded and improved. 
The audit report should include  the following information: 
– explanations on the methodology used (e.g. esp ecially how much of the balance sheet 
has been directly verified and how much  has been based on system and compliance 
testing; describing the levels of materiality used);  
– more qualitative information (e.g. identify key ar eas of risk of material misstatement of 
the accounts, including crit ical accounting estimates or  areas of measurement 
uncertainty, the assessment of the internal co ntrol system and to what extent the audit 
was designed to detect fraud);  
– explanations on violations of accounting rules or  violations of laws or the articles of 
incorporation, significant busin ess transactions, accounting policy decisions and other 
matters that are significant for the governance of the entity; 
                                                 
280 See European Commission (2005). 
281 See also European  Commission (2005). 
 
EN 135   EN – explanations on the variations  in the weighting of substance and compliance testing 
when compared to a previous accounting year, ev en if the statutory audit in the previous 
year was conducted by a different auditor.  
Option 2: Require the preparation of a longer an d more detailed report for the audited entity . The 
auditor would be required to prepare a longer and more detaile d report for the benefit of the 
audited entity (this is part of the internal communication" between the auditor and the audited 
entity). This additional "internal report" would provide more detailed information (and justify it) on the audit carried out. It  would in particular: 
– provide a statement on the situat ion of the audited entity or in case of the statutory audit 
of consolidated accounts of the parent co mpany and the group, especially an assessment 
of the going concern and the future development of the entity or the parent company and the group; 
– indicate and explain judgme nts about material uncertainty that may cast doubt on the 
entity's ability to continue as a going concern; 
– determine in detail whether the book-keeping, the accounting, all audited documents, 
the annual or consolidated accounts and possible additional reports show appropriateness; 
– indicate and explain all inst ances of non-compliance, including non-material instances 
as far as it is considered to be important to the audit committee in order to fulfil its tasks; 
– assess the valuation methods applied to the va rious items in the annual or consolidated 
accounts including any impact of changes of such; 
– provide full details of all gua rantees, comfort letters, undertak ings of public intervention 
and other support measures that have b een relied upon when making a going concern 
assessment; 
– confirm the attendance at stock-takes as well as other instances of  physical verification, 
in case such stock-takes or verifications took place;  
– indicate and explain the princi ples of consolidation in the case of a statutory audit of 
consolidated accounts; and  
– indicate which audit work is performed by th ird-country auditor(s), statutory auditor(s), 
third-country audit entity(ies) or audit firm(s) in case of a statutory audit of consolidated 
accounts. 
In terms of procedure, this longer report w ould be submitted by the auditor to the audit 
committee and to the management of the audited entity, but not to the public (given that the content of the additional report would contai n business secrets and po ssibly price sensitive 
information).  
Option 3: Increase the communication between the auditor and the audit committee
. This option 
articulates the relationship betw een auditors and a strengthened audit committee (part of the 
"internal communication": betwee n the auditor and the audited entity) in three steps:  
 
EN 136   EN – (i) auditors would be clearly  required to report to the audit committee on key matters 
arising from the statutory audit and in part icular on material weaknesses in internal 
control in relation to the fi nancial reporting process; 
– (ii) both parties would be required to  engage in regular  dialogue; and  
– (iii) the audit committee would be required to inform manage ment of the outcome of the 
statutory audit, how the stat utory audit contributed to th e integrity of the financial 
reporting and what was the role of th e audit committee in this process.  
It should be noted that option 1 (tendering) regardin g objective 3.1 would have an indirect 
impact on this option. The presentation of a mo re detailed methodology by the auditor in the 
tendering process should also contribute to facilitating the communication between the audit 
committee and the auditor.  
Under this option, stricter requirements woul d apply to the struct ure and the technical 
competence of the members of th e Audit Committee. Currently only at least one member has to 
have an audit qualification and be independent. Strengthening the requirements for selection of 
audit committee members would mean that at least one member has to have an audit 
qualification and at least two members have to  have competence in accounting and/or auditing. 
In addition, the committee members as a whole shoul d have experience in the sector of operation 
of the company. In terms of independence, the majority of the members should be independent 
(including the chairman). The concept of inde pendence should be understood in the "corporate 
governance" context.  
Option 4: Combination of options 1 + 2 + 3 .  
Objective 1.3: Sub-policy options to improve the communication channels between auditors 
and supervisors of PIEs 
Baseline Scenario . Auditors of most financial institutions regulated at EU level282 are already 
required under EU law to report promptly to the supervisors of those institutions any fact that is liable to bring about a material breach of the la ws, affect the ability of the audited entity as a 
going concern or lead to a qualified audit report . The real enforcement of those early warning 
obligations was not evident during the crisis; the lack of such communicati on may be attributable 
to the absence of any sanctions
283 and/or the fear of potentially infringing the professional 
secrecy principle when making a report to the au thorities. Beyond this reporting obligation, there 
is no requirement for auditors to regular ly engage with supervisors of PIEs. 
Option 1. Enabling (in law) an d recommending regular dial ogue between auditors and 
supervisors of PIEs . This option would consist in empoweri ng auditors and supervisors of PIEs 
to engage in regular dialogue. It would guarantee  that auditors do not breach their confidentiality 
rules when they engage in such dialogue. Such  dialogue would be recommended but auditors and 
supervisors would be free to organise it or not.  
                                                 
282 i.e. investment firms, credit institutions, insurance undertakings, payment institutions, e-money institutions 
or UCITS. However, auditors of alternative investme nt funds (AIF) and AIF managers as such, as well as 
auditors of issuers of securities which are not part of  the above categories are not subject to the obligation. 
283 Directive 2006/48/EC (banking directive) does not foresee any sanction of th e auditor in case of the 
infringement of Article 53. 
 
EN 137   EN Option 2. Requiring the establishmen t of regular dialogue between auditors and supervisors of 
PIEs . This option would require that such dialogue takes place effectively in all circumstances. 
The dialogue should be adapted to the size and nature of the co mpanies involved. This would be 
achieved by setting a general principle in le gislation and empoweri ng EBA and EIOPA to 
prepare guidance on how to enforce it284. Such dialogue could be associ ated with a clarified text 
on the early warning obligation to ma ke sure that there are no gaps in legislation, particularly as 
regards the sanctions for lack of compliance. 
(2) OBJECTIVE 2: POLICY OPTIONS TO REINFORCE THE INDEPENDENCE AND 
PROFESSIONAL SCEPTICISM OF STATUT ORY AUDITORS AND AUDIT FIRMS IN 
THE PROVISION OF STATUTORY AUDIT TO PIES 
Objective 2.1: Sub-policy options to prevent and mitigate any conflict of  interests due to the 
provision of non-audit services to the PIE 
Baseline Scenario: No change . Although the current EU regulatory framework establishes a 
general principle requiring Member States to ensure  the independence of auditors (cf. Article 22) 
and, in a 2002 Recommendation, the Commission se t some additional fundamental principles; 
there is no direct prohibition on the provision of non-audit services to audit clients. In this 
scenario, Member States will continue to be responsible for ensuring the independence of 
auditors, namely avoiding situa tions that may pose a threat of  self-review, se lf-interest, 
advocacy, familiarity or trust or intimidation. In  line with the Commi ssion Recommendation, the 
audit firm should neither take a ny decision, nor take part in any decision making on behalf of the 
audit client or its management while providing a non-audit service. It also suggests that even if 
not involved in the decision-making of the aud it client, the auditor should consider applying 
particular safeguards to mitigate any indepe ndence threat. Specifically, the Recommendation 
provides some examples analysing specific situations, which may give rise to ( inter alia ) a self-
review threat, in relation to: preparing account ing records and financial statements, designing 
and implementing financial information technology sy stems, valuation servic es, participation in 
the audit client's internal audit, acting for the audit client in the resolution of litigation and 
recruiting senior management. 
The current system relies on the role of the audit committee to take decisions regarding the 
provision of NAS by the statutor y auditor or audit firm. It must review and monitor the 
independence of the statutory aud itor or audit firm, and in partic ular the provision of additional 
services to the audited entity. For this, the stat utory auditor or audit firm is required to (a) 
confirm annually in writing to the audit comm ittee their independence from the audited public-
interest entity; (b) disclose annually to the a udit committee any additiona l services provided to 
the audited entity; and (c) discuss with the audi t committee the threats to their independence and 
the safeguards applied to mitigate those threats. 
However, existing disparities in the impl ementation of the Dir ective and the 2002 
Recommendation will persist. Mo reover, due to its limited te chnical resources the Audit 
Committee will not be in a position to effectively monitor the independence of the auditors once 
appointed. The system over-relies on the capacity of the audit committee to take decisions on a 
                                                 
284 For instance, a code of practice for the relationship between the external auditor and the supervisor has 
been published in draft by the FSA, supported by the Bank of England, in February 2011 for a public 
consultation period. The code provides guidance on the nature of the relationship between supervisors and 
external auditors for all UK re gulated firms. See FSA (2011). 
 
EN 138   EN case-by-case basis as to whether there are threat s to independence arising from the provision of 
NAS. 
Option 1: Prohibition of the provision of certain non-audit services to aud it 'client' (black-listing)  
Audit firms providing statutory au dit and financial audit services285 would not provide certain 
non-audit services to an audit c lient. This amounts to "black-lis ting" certain non- audit services 
namely:  
– preparing accounting records and financial statements;  
– bookkeeping services; 
– designing and implementing financial information technology systems;  
– valuation services (including appraisal or valuation services, fairness opinions or 
contribution-in-kind reports);  
– actuarial services; 
– participation in the audit client's internal  audit and the general provision of services 
related to the internal audit function;  
– design and implementation of internal control or risk management pr ocedures related to 
the preparation and/or control of financ ial information included in the financial 
statements; 
– acting for the audit client in the resolution of litigation;  
– legal services and expert servic es unrelated to the audit;  
– tax advice/consultancy services; 
– recruiting senior management a nd human resources generally;  
– broker or dealer, investment advisor,  or investment banking services;  
– risk advice; 
– due diligence services to the vendor or the buy side on potential mergers and 
acquisitions; 
– providing assurance on the aud ited entity to other parties at a financial or corporate 
transaction; 
– providing comfort letters for i nvestors in the context of th e issuance of an undertaking's 
securities; 
– general management consultancy services; and 
– any partial or total outsourcing of the above tasks.  
                                                 
285 Financial audit services include the audit of interim accounts and accounting review services. 
 
EN 139   EN It would also require adding a general catch-all clause for non- audit services modelled on the 
existing Article 22(2). 
The prohibition would be extended to the parent company of the audit client and its material 
subsidiaries. In addition, for the provision of ot her services which are not part of the audit 
mandate and are not incl uded in the black-list: 
– the audit firm should request the approval of the audit committee of the client for the 
provision of such additional service. The audit committee should approve the provision 
of the service and justify the absence of any threat to the independence of the auditor; 
– the fees for the non-audit service in question s hould not be higher than 10% of the audit 
fee; 
– shareholders should be informed of the prov ision of non-audit serv ices in the annual 
report. 
Option 2: Prohibition of the provision of any non- audit services to the audited entity (PIE)   
The second option is the prohibition of the provis ion of any non-audit services to the audited 
entity (PIE) : statutory auditors or audit firms provi ding statutory audit to a PIE would not 
provide any non-audit service to th is audited entity. However, the provision of non-audit services 
to entities which are not audited by the statutory audit or audit fi rm would not be prohibited. The 
prohibition on the to provision of services other th an audit would also be extended to the parent 
company of the audit client and at least its mate rial subsidiaries. A cooling off period of 2 years 
after the end of the audit engage ment will be envisaged before being in a position to provide 
services other than audit.  
Some services which are closely connected to st atutory audit (including other statutory duties) 
should, however, be authorised (a "white-list"). This "white-list" would in clude the following 
services: 
– review of interim financial statements;  
– assurance on corporate governance statements; 
– assurance on corporate social responsibility matters; 
– assurance on or attestation of regulatory reporting provided to regulators of financial 
institutions beyond the scope of the statutory audit and designe d to assist re gulators in 
fulfilling their role, such as on capital requ irements or specific solvency ratios 
determining how likely a company will be to continue meeting its debt obligations; 
– any other statutory duty related to audit work imposed by EU legislation. 
Option 3: Pure audit firms.  Audit firms providing statutory aud it services and related financial 
audit services would only provi de audit services and be unc onnected to firms providing non-
audit services. The obli gation would primarily c onsist in requiring that audit firms (but not 
statutory auditors practicing as natural persons : sole practitioners) providing statutory audit 
services must only provide audit services (i .e. they should only have audit clients).  
 
EN 140   EN For this obligation to be effectiv e, it should be accompanied by so me ancillary measures in order 
to make sure that the obligation is  not circumvented. In particular: 
– The audit firm should not be part of a network/group which provides "non-audit 
services" to avoid circumventing this rest riction by simply split ting the responsibility 
for the different services into two diffe rent legal entities within a network; 
– If the capital of the audit firm is open to  non-partners, no more than 5% of the voting 
rights and/or the capital is held individua lly by any firm providing non-audit services 
and firms providing non-audit services taken as a whole do not account or more than 
10% of the voting rights and/or of the capital; 
– The audit firm should not dire ctly or indirectly invest  in firms providing non-audit 
services. 
This option would be adjusted (see th e proportionality analysis in Annex 19 ) to the size and 
dimension of the activities of the audit firms. Ce rtain audit firms are essentially providing audit 
services to small PIEs and non-PIEs and are hardly present in the market for audits of large PIEs. 
Requiring their conversion into pure audit firms may lead to the creation of a barrier to growth 
and/or it may lead to their abandoning of the PI E market. Therefore, this option 3 aims at pure 
audit firms for those firms obtaining more than 50%  of their fees from large PIEs. Large PIEs are 
to be understood as those with a capitalisation (or a balance sheet, if not listed) above €1 billion. 
On pure audit firms and non-audit services, see also Annex 10 . 
Objective 2.2 Reduce and mit igate the risk of any co nflict of interest due to the existing system 
of "auditee selects and pays the auditor" 
Baseline scenario:  No change. If no measure is enforced in  this area the potenti al risk of conflict 
of interest will not be mitigated since no real independent and technically competent monitoring 
will be put in place. Currently, the audit committee presents a recommendation to the 
administrative or supervisory body on the appointme nt of a statutory aud itor or audit firm. The 
Statutory Audit Directive requires that the " proposal of the administra tive or supervisory body 
for the appointment of a statutory audito r or audit firm of a PIE shall be based  on a 
recommendation made by the audit committee ", but it is unclear whethe r managers are obliged to 
follow this recommendation. Therefore, the selecti on process and decision on the appointment of 
the statutory auditor will continue to be done de facto  by management with a formal validation 
by the Annual General Meeting of shareholders. Moreover, due to its limited technical resources 
the Audit Committee will not be in a position to effectively monitor the independence and the 
work of the auditors once appointed.  
Option 1: Stricter rules on the procedure for the a ppointment of auditors w ith an increased role 
for a strengthened Audit Committee.  Under this option, stricter re quirements woul d apply to the 
structure and the technical competence of the me mbers of the Audit Committee. Currently, only 
at least one member has to have an audit qua lification and be independent. Strengthening the 
requirements for the selection of audit committee members would mean that at least one member 
has to have an audit qualific ation and at least two members have to have competence in 
accounting and/or auditing. In addition, the committee members as a whole should have 
experience in the sector of operation of the comp any. In terms of independence, the majority of 
the members should be independent (including the chairman). The concept of independence 
should be understood in the "corporate governance" context.  
 
EN 141   EN The role of the Audit Committee in the tendering and selection of the st atutory auditor will be 
strengthened . The Audit Committ ee should be responsible for th e monitoring and validation of 
the result of the selection pr ocedure and the appointment of the statutory auditor. The 
recommendation of the Audit Committee should be transmitted to the general meeting of shareholders and, if management does not  support it, it should explain why. The 
recommendation of the Audit Committee should cont ain at least two possi ble auditors, for the 
consideration of the general meeting. 
This option takes account of the size of PIEs  (see the assessment in Annexes 16 and 19
). As is 
the case today in the Statutory Audit Directive, PIEs which are SMEs should not be obliged to have an audit committee provided that the bo ard undertakes this function under a different 
chairmanship. This option should also be extended to  small caps, understood as companies with 
reduced capitalisation (less than €100 Million). Als o, the flexibility offered to companies with a 
dual board system to entrust the supervisory board with the audit committee function is maintained in this option.  
Option 2: Appointment of auditor by a third party
. A third party would be responsible for the 
appointment of the auditor. Such third party could be the supervisor of the PIE in question. For financial institutions, this option represents an evolution from the current situation. Currently, 
some supervisors have a veto right against aud itors of important financ ial institutions (e.g. 
banks) since the choice and performance of the stat utory auditors could have a big influence on 
preserving market stability. 
Veto rights exist in at least the following countries: AT (banking supervisor), BE, BU, CZ, DE, 
FR, IE, LT, LV, MT, PT, RO and SK. A pre-appr oved list of bank auditors exists in BE.  
In EE, the authority can appeal to the courts  if unsatisfied with the auditor appointed. 
Additionally, in AT the Austrian Financial Market Authority may raise an objection to the appointment of a bank auditor if it has a substantia ted reason to suspect that  exclusion or another 
reservation is warranted. Wher e the appointment is subject to a reporting requirement the 
objection must be raised within one month. The civil courts are competent in this matter and 
must rule on the objection with due considerat ion of the reasons for exclusion. Until a legally 
effective ruling by the court has been handed down, the bank auditor may neither perform audit activities nor be provided with in formation subject to banking s ecrecy requirements by the credit 
institution.  
There is not enough public evidence on the formal us e of these rights in most of these countries. 
It appears that authorities use soft powers in this regard. 
Objective 2.3 Reduce and mitigate the risk of any conflict of interest due to a "familiarity 
threat" 
Baseline scenario
: No change. No restriction on the du ration of the aud it engagement, only a 
requirement for the rotation of the key audit partne r after 7 years. No specific requirements at EU 
level except on ethics and a prohibition of contingent audit fees. Moreover, due to its limited 
technical resources the Audit Co mmittee will not be in a position to effectively monitor the 
independence and the work of the auditors once appointed.  
Option 1: Limiting the duration of the audit enga gement and requiring rotation of an audit firm . 
The statutory auditor/audit firm would not be allowed to audit the same PIE after 9 years of 
consecutive engagement (currently, the rotation of the audit partner is  set at 7 years) and a 4 year 
 
EN 142   EN cooling off period would be estab lished (currently, the cooling off period for the audit partner is 
set at 2 years).  
On mandatory rotation of audit firms, see also  option 2 under objective 3.1. (Policy options to 
facilitate switching of an audit firm) and Annex 11 . 
Option 2. Strengthening the role of the Audit Comm ittee in overseeing the work of the statutory 
auditors . Under this option, stri cter requirements would apply to the structure and the technical 
competence of the members of the Audit Committ ee. Currently, only at least one member has to 
have an audit qualifica tion and be independent. St rengthening the requirements for the selection 
of audit committee members would mean that at  least one member has to have an audit 
qualification and at least two members have to  have competence in accounting and/or auditing. 
In addition, the committee members as a whole shoul d have experience in the sector of operation 
of the company. In terms of independence, the majority of the members should be independent 
(including the chairman). The concept of inde pendence should be understood in the "corporate 
governance" context.  
The role of the Audit Committee will be also st rengthened in the monitoring of the independence 
and work of the statutory auditor and audit firm.  
The Audit Committee should furthe rmore monitor all major outcome s of the statutory audit in 
addition to focussing specifically on internal c ontrols around the financia l reporting process. The 
Audit Committee also has the resp onsibility to inform the admini strative/ supervisory body of all 
major outcomes of the statutory audit.  
The Audit Committee will also take responsibility among others to ensure together with the 
statutory auditor that the amount of fees paid to the statutory auditor represen t less than 20% 
annually (or less than 15% for two consecutive years) of total fees rece ived by the audit firm. In 
case of a breach of these thresh olds, the Audit Committee should decide if the audit engagement 
should be subject to a quality c ontrol review by another statutory auditor prior to the issuance of 
the audit report.  
See also option 3 regarding objective 1.2 abov e and option 1 regard ing objective 2.2 on the 
Audit Committee. 
Option 3. Establishing additional requirements on the internal or ganisation and governance of 
audit firms . Under this option a statutory auditor or  an audit firm would be required to: 
– establish appropriate and eff ective organisational (including  governance of firms) and 
administrative arrangements, also with rega rd to outsourced services, to prevent, 
identify, eliminate or manage and di sclose any threats to independence; 
– establish a policy to preclude his, her or it s involvement and that of his, her or its 
employees in any criminal offence or breach of the law that would be detrimental to public confidence in the statutory audit, st atutory auditor, audit firms or financial 
markets;  
– establish appropriate and eff ective organisational and admi nistrative arrangements for 
dealing with and recording incidents which ha ve or may have serious consequences for 
the integrity of his, her or its statutory audit activities; 
 
EN 143   EN – respect the highest principles  of professional ethics and respect the national measures 
enacted pursuant to Article 21(1) of  the Statutory Audit Directive.  
(3) OBJECTIVE 3: POLICY OPTIONS TO IMPROVE MARKET CONDITIONS FOR 
AUDITS OF PIES WITH A VIEW  TO INCREASING AUDIT QUALITY 
Objective 3.1: Sub-policy options to fa cilitate switching of an audit firm 
Baseline scenario . Companies do not want to spend manage ment time to organise tenders and are 
ready to pay a premium to Big Four auditors as audit costs are very low (<0,15% of total 
turnover, see Annex 20 ) for most of PIEs. Contracts with au ditors tend to be renewed, there are 
few cases of switching and rare cases in which tende ring of audit services takes place. There are 
some exceptions, such as in France, where there is more of a tradition to tender audit services in 
the context of joint audit, Ital y where there is mandatory rotation of audit firms and Poland as 
regards insurance companies, where mandatory rotation is also applied. 
Option 1. Regular tendering . Audited entities would invite a minimum number of auditors/firms 
to participate in a tendering pr ocedure, including at least one non-Big Four firm. The tendering 
process should be organised by the Audit Committee.  The audited entity should be free to chose 
the method to contact potential bidders and the applicable selection procedure. Predefined 
evaluation criteria should be set and bi dders judged against such criteria.  
Option 2. Mandatory rota tion of an audit firm . The statutory auditor/au dit firm would not be 
allowed to audit the same PIE after 9 years of c onsecutive engagement (currently, the rotation of 
the audit partner is set at 7 years) and a 4- year cooling off period would be established 
(currently, the cooling off period for the audit pa rtner is set at 2 years). This option does not 
necessarily imply that a tendering procedure takes place. 
On mandatory rotation, see option 1 of objective 2.3 and also Annex 11 . 
Option 3. Mandatory rotation of an audit firm via tendering . This option combines options 1 and 
2.  
Objective 3.2: Sub-policy options to facilitate  the objective choice of an audit provider 
Baseline scenario . Competent authorities do not disclose the individual reports on quality 
assurance reviews of statutory auditors or au dit firms. Authorities only publish annually the 
overall results of the quality assurance reviews undertaken.  
Audit firms and statutory auditors auditing PIEs are required to publish an annual transparency 
report which should contain the following information: 
– a description of the lega l structure and ownershi p of the audit firm;  
– where the statutory auditor or audit firm belongs to a network, a description of the 
network and the legal and structural  arrangements in the network;  
– a description of the governance st ructure of the audit firm;  
– a description of the in ternal quality control system of the audit firm and a statement by 
the administrative or management body on the effectiveness of  its functioning;  
 
EN 144   EN – an indication of when the last qua lity assurance re view took place;  
– a list of public-interest entities for which the statutory auditor or a udit firm has carried 
out statutory audits during the preceding financial year; 
– a statement concerning the statutory audito r's or audit firm's independence practices 
which also confirms that an internal re view of independence compliance has been 
conducted;  
– a statement on the policy followed by the statut ory auditor or audit firm concerning the 
continuing education of statutory auditors referred to in Article 13 of Directive 
2006/43/EC;  
– financial information showing the importance of  the audit firm, such as total turnover 
divided into fees from the st atutory audit of annu al and consolidated accounts, and fees 
charged for other assurance services, tax advi sory services and ot her non-audit services; 
– information concerning the basis for the pa rtners' remuneration in audit firms.  
However, audit firms are not required by EU  law to publish their financial statements286.  
Due to lack of information and criteria to assess and compare the quality of audits, the reputation 
of Big Four audit firms remains the most important proxy of audit quality.  
Option 1. Prohibit contractual clause s limiting the choice of audit firm (e.g. clauses between the 
audited entity and a third party (such as a bank) requiring that th e statutory audit is performed by 
a "Big-Four firm” only. These clauses are ofte n referred to as "big -Four only clauses". 
Under this option, it would be made clear that any contractual clause limiting the audit firm 
choice would be null and void as it  would retrict the right of the general meeting of shareholders 
to select the auditor.  
Option 2. Increase transparency on audit quality and on audit firms . This option includes two sets 
of measures. 
(a) Competent authorities will disclose inspecti on reports on individual statutory auditors or 
audit firms following qualit y assurance reviews.  
(b) Audit firms auditing PIEs would be required to disclose their financial statements and 
statutory auditors their income statement. Fina ncial information at the level of the network 
should also be provided. This fi nancial information would be ma de available on their website, 
alongside the transpar ency report, which is disclosed purs uant to an existing obligation. In 
addition, audit firms and statutory auditors auditi ng PIEs would provide mo re information in the 
existing transparency report regarding their larg e clients, their policy on rotation of staff and 
their corporate governance policy. Audit firms a nd statutory auditors will additionally report 
information on fees to supervis ors (but not to the public).  
                                                 
286 Depending on the legal form of the audit firm, it may be required under national law to publish financial 
statements.  
 
EN 145   EN Option 3. Establish an audit quality certification . A pan-European system that would certify that 
an auditor or firm meets some quality require ments enabling them to carry out high quality 
statutory audits of PIEs. This  certification would be deliver ed by ESMA (see policy options 
regarding objective 5). The cer tification would be voluntary. 
This option would require that  secondary legislation is de veloped: ESMA would develop 
technical standards for endorsement by the Commission: 
Those technical standards would need to comply with the following principles: 
– ESMA would deliver the European quality certificate; 
– The certificate would be valid across the EU; 
– EU auditors and audit firms meeting the re levant requirements w ould be entitled to 
apply for the certificate; 
– The requirements for obtaining the European quality certificate w ould be based on audit 
quality and the experience of the national quality a ssurance reviews;  
– Specific procedural steps for the treatment of the applications would be established, 
including the participation of national competent authorities in the examination of applications;  
– ESMA could be entitled to char ge fees for delivering the European quality certificate, as 
long as they are proportiona te to the cost incurred;  
– There should be the possibility  to re-examine the granting of the certificate (and where 
appropriate withdraw it) since audit firms would be expected to respect the conditions at 
any time.  
Option 4
. Combination of options 1 to 3. 
Objective 3.3: Sub-policy options to increa se the choice of audit providers for PIEs 
Baseline scenario . PIEs would continue to face limited choice of audit firms capable of 
performing high quality statutory a udits, in particular in the segment of large and systemically 
important PIEs. 
Option 1: this option is divided in 3 sub-options. 
Sub-option 1.1. Pure audit firms . PIE audits would be performed by the firms who will be 
allowed to provide only audit se rvices (see further information in the description of option 3 
under objective 2.1; see also Annex 10 ). Audit firms, which reach the treshold of having 1/3 of 
their total audit revenues from large PIEs would have to restructure their business and become 
pure audit firms. 
Sub-option 1.2. Mandatory Joint audits (see Annex 12  for further detail on joint audit, including 
the French experience with the ma ndatory joint audit rule). Obligation for large PIEs to have 
more than one audit firm, at least one of whic h is not among the largest four audit firms (see 
Annex 19 for the proport ionality assessment). 
 
EN 146   EN Considering option 3 of objective 3.1, there would be a tendering process for the selection of 
joint auditors where the scope and responsib ility of each auditor is clearly defined. 
The 4 eyes principle would be applied in the strate gic preparation of the jo int audit as well as in 
the analysis of the findings. Both audit firms would have joint responsibility for the audit. 
Similarly to the French system, where there is a specific professional standard that takes account 
of the specificities of joint audit, this opti on would require that th e European supervisory 
authorities develop technical standards on the de tailed implementation of the joint audit rule, 
with a view to faciliat ing its smooth application. 
In terms of proportionality, this sub- option would only apply to large PIEs. 
Sub-option 1.3. Mandatory joint au dit applied only to large PI ES in the financial sector  
Sub-option 1.3. is expected to have all the descri bed caracteristics presented above with the main 
difference being that it will have a more limited scope i.e. large financial institutions (FIs) only. This option could be considered as being more proportionate to the problem as it will be applied 
to the most systemically important entities, representing a higher risk  for the whole. The 
possibility for exemptions will be allowed for certain FIs operating under a special national legal 
regime with respect to audit (e. g. cooperatives  in Austria and Germany). The enforcement of 
those exceptions will have to be coordiated with ESMA, the body in charge fo developing the 
standards for enforcement of join t audit (see also de scription of policy op tion 2 under objective 
5.2. as well as Annex 8 on ESMA). It should also be  mentioned that joint audit is currently used 
not only for French FIs but also  on a voluntary basis in some FIs in Sweden and Austria. 
Sub-options 1.4. Mandatory joint audit to all large PIEs by pure audit firms; and
 
1.5. Mandatory joint audit only to  large PIES in the financia l sector by pure audit firms  
The respective sub-options 1.1/ 1.2, 1.1/ 1.3 and 1.1/ 1.6 (sub-option s 1.4 and 1.5 and 1.7 )) 
maintains the positive impacts of both sub-options  in each case. In add ition, joint audit would 
help smaller audit firms to compete against large pure audit firms focusing on audit services only. In terms of proportionality, however, join t audit and pure audit firms would need to be 
limited to large PIEs only  in the case of sub-option 1.4 and to  large PIES in the financial sector
 
in the case of sub-option 1.5 (see Annex 19 ). 
1.6. Voluntary joint audit for all PI Es: creates incentives for audit providers and audited entities 
alike to use joint aud it on a voluntary basis.  
Sub-option 1.6  considers the introduction of joint aud it as a voluntary measure by only creating 
incentives for auditied entities  to use it as a way to incr ease audit quality and auditors' 
independence. This sub-option takes into account the existing uncer tainty among market 
operators and regulators alike about the real cost of this measure compared with its potential value-added (one of the reasons for which joint audits have been abolished in Denmark). The 
lack of sufficient and comprehens ive data on the cost side of the joint audit does not provide 
sufficiently strong arguments justifying its mandato ry introduction, since it could result in an 
excessive cost burden for certain PIEs. Therefore, also considering that jo int audit is used by 
PIEs in the finacial sector on a voluntary basis in certain count ries like Austria and Sweden, it 
could be considered more economically prudent a nd proportionate to test the viability of this 
measure by only creating incentives for its use on a voluntary basis, while leaving to the discretion to PIEs to test  it and decide about its us e on an individual basis. 
 
EN 147   EN Option 2. Lift restriction on ownership of audit firms . This option would imply allowing any 
investor to buy shares and invest in audit firms, without limitation. 
This option implies requiring that holders of voti ng rights in an audit fi rm shall be independent 
of the audited entity and not be involved in the decision- taking of the audited entity. 
However, this option does not imply removing restri ctions on the management of audit firms. As 
a result, statutory auditors would continue to direct audit firms through the control of the boards. 
Option 3. Establish a market share ceil ing for large audit service providers . No audit firm would 
be allowed to have more than 20% of the market  share regarding the statutory audit of (large) 
PIEs. 
(4) OBJECTIVE 4: POLICY OPTIONS TO AVOID UNNECESSARY ADDITIONAL 
COMPLIANCE COSTS FOR AUDITED SMES AS  WELL AS FOR AUDIT PROVIDERS IN 
A CROSS-BORDER CONTEXT 
Objective 4.1: Sub-policy options to facilitate the cross-border recognition of audit providers' 
competence 
Baseline scenario . Auditors and audit firms should be approved in all Member States in which 
they want to carry out statutory audit. For an audit firm such approval may entail a bureaucratic 
process; the conditions for approva l should be the same in the diffe rent Member States, with the 
exception that the aud itors carrying out the statut ory audit on behalf of the audit firm should be 
approved in the Member State concerned. For st atutory auditors, the ap proval procedure also 
requires passing an aptitude test. This test is limited by the c onditions of Directive 2006/43/EC: 
the aptitude test must be conducted in one of  the languages permitted by the language rules 
applicable in the Member State concerned and mu st cover only the statutory auditor's adequate 
knowledge of the laws and regulati ons of that Member State in so  far as relevant to statutory 
audits287. While there is certain convergence in th e educational qualifications of auditors288 and 
the test of theoretic al knowledge in the Directive incl udes many common themes with no 
national connection (e.g. internat ional accounting standards, ri sk management and internal 
control, financial analysis etc)289, the scope of statutory audit s till requires from the statutory 
auditor the knowledge of and familiarity with some national requirements (e.g. company law, tax law, civil and commercial law etc.). The test ma y differ from Member Stat e to Member State and 
there is no requirement in Directiv e 2006/43/EC to make it predictable. 
Option 1: Mutual recognition of audit firms
. Under this option, an audit firm approved in one 
Member State would automatically be approved to carry out statutory audits in all Member 
States. However, the condition that the key aud it partner leading the audit is approved as an 
auditor in the concerned Member State is ma intained. Under this option, the organisational 
requirements of the firm would not be checked by all Member States: indeed, the statutory 
auditors who direct a firm and/or  set its internal policies and pro cedures would not necessarily be 
statutory auditors approved in the Member States  in which the firm operates. This option would 
result in changes to the superv isory environment since a supervis or could be led to inspect the 
statutory audit of an entity located in its territory  but carried out by a firm registered in a another 
                                                 
287 Cf. Article 14. 
288 See for instance the Common Content Project, www.commoncontent.com  
289 Cf. Article 8.  
 
EN 148   EN Member State. A simple registra tion procedure, similar to the one  for third country audit firms, 
could be necessary to fac ilitate supervisory tasks. 
Option 2: Mutual recogniti on of statutory auditors . Under this option, a statutory auditor 
approved in one Member State would automatical ly be approved in all Member States. This 
option would no longer require a st atutory auditor to pass an ap titude test (or a different 
procedure) to be approved in a different Memb er State (although registration may be required). 
Similar considerations as for option 1 would apply regard ing supervision. 
This option has two different dimensions: the mutu al recognition of auditors in the context of a 
free (cross-border) provision of aud it services and the mutual recogni tion of auditors in the case 
of establishment in a host Member State. 
Option 3: Introduction of an adaptation period sche me and increased convergence, transparency 
and predictability in the aptitude test . This option would allow st atutory auditors to choose 
between two methods to obtain his/her approval in  another Member State, which is the general 
principle governing the rules on prof essional qualifications at EU level290: 
– (a) an adaptation period scheme under the supervision of a loca l auditor. Under the 
adaptation period, statutory auditors approved in one Member State would be allowed to 
work in another Member State after a mi nimum probation period has elapsed without 
having to pass an aptitude test. Such mini mum period could be three years, as for 
lawyers291. During the adaptation period, the appli cant auditor would re gister with the 
competent authority in the host Member Stat e, comply with the applicable standards 
(including ethical ones) in the host Member Stat es and be supervised by a local auditor.  
– (b) an (improved) aptitude test. Member  States would be required to be more 
transparent and predictable with  the requirements of the test, as well as to converge with 
other Member States both regarding the requirements of the aptitude test and the national educational standards.  
Objective 4.2: Sub-policy options to stream line and harmonise audit standards on audit 
practice, independence and internal co ntrol of audit firms across the EU 
Baseline scenario:
 Under the existing Statutor y Audit Directive, Member States continue to be 
free to require an audit in accordance with the national auditing standards but may additionally comply with the clarified ISAs  in the conduct of an audit
292. At present, most EU jurisdictions 
apply national auditing standards which are larg ely based on the current ISAs, but often with 
amendments to comply with national legi slation and quality aspects of the audits293. As a result, 
there are, to a large extent, divergences in auditing standards betwee n jurisdictions which, 
according to preparers represent additional audit costs which could be passed on to companies. 
                                                 
290 See Directive 2005/36/EC, Article 14.  
291 See Directive 98/5/EC. 
292 In principle, the adoption of the International Standa rds on Auditing (hereafter "ISAs") of the International 
Auditing and Assurance Standards Board (IAASB, vwww.ifac.org/IAASB/ ) for statutory audits required by 
Union law is possible on the basis of Article 26 of the Statutory Audit Directive. Article 26 empowers the 
European Commission to make such adoption under certain conditions. However, the Commission has not 
taken any steps towards the adoption of the ISAs.  
293 Currently, the following Member States apply ISAs: BE, BG, CY, CZ, EE, EL, HU, IE, LV, KT, LU, MT; 
NL, RO, SE, SI, SK and UK. Several other Member States apply national standards which follow the most 
important principles of ISAs. 
 
EN 149   EN In addition, maintaining distinct sets of aud iting standards at Member State level could prove 
burdensome to regulators, standard setters and pract itioners, not only at juri sdiction level but also 
in cross border activities.  
Option 1 : Introduction of clarified ISAs294 in the EU through their endorsement by Member 
States, who would be allowed to impose  additional requirements (add-ons).  
The International Standards on Auditing (ISAs) are professional standards for the 
performance of financial audit of historical  financial information. These standards are 
issued by the International Fe deration of Accountants (IFAC ) through its International 
Auditing and Assurance Standards Board (IAASB). The ISAs cover, inter alia , (i) 
objective and general principles  governing an audit of fina ncial statements (ISA 200); 
(ii) terms of audit engagements (ISA 210); (iii ) quality Control for Audits of Historical 
Financial Information (ISA 220) ; (iv) audit evidence (ISA 500); (v) going concern (ISA 
570); (vi) forming an opinion and reporting on financial statements (ISA 570) and other 
areas of the financial audit. 
ISAs are written in the context of an audit of financial statements by an independent 
auditor. They are to be adapted as necessary in the circumstances when applied to audits 
of other historical financial informa tion. In March 2009, the IAASB announced the 
completion of the so-called " Clarity project ", whose purpose was to review in a 
comprehensive manner all the ISAs in order to improve their clarity.295 Following 
completion of the programme, auditors worldwide have access to 36 updated and 
clarified ISAs. These standards are de signed to enhance the understanding and 
implementation of the ISAs, as well as to facilitate translation. The clarified standards 
are effective for audits of financial st atements for periods beginning on or after 
December 15, 2009. The final set of clarified standards comprises 36 ISAs and ISQC, including:  
– One new standard, addressing communication of  deficiencies in internal control; 
– 16 standards containing new a nd revised requirements (these have been referred to 
as "revised and redr afted ISAs"); and  
– 20 standards that have been redrafted to  apply the new conventions and reflect 
matters of general clarity only (these have been referred to as "redrafted ISAs and 
redrafted ISQC"). 
Option 2:
 The introduction of clarifie d ISAs in the EU through th eir endorsement by Member 
States, with the possibility for Member States to  adapt and modify (carve -out) the international 
auditing standards to the specifi cities and the requirements of  individual jurisdictions.  
Objective 4.3: Sub-policy options to ensure th at statutory audit is adapted to SMEs needs 
Baseline scenario . In the absence of legisla tive measures, it could be po ssible that some Member 
States would voluntarily follow the example of France in adapting th e audit standards to the size 
and dimension of activity of SMEs or provide fo r a “limited review” instead of statutory audit 
                                                 
294 See FEE (September 2011). 
295 In addition to the ISAs, the "Clarity project" deals with  the review of the International Standards on Quality 
Control (ISQC).  
 
EN 150   EN for small companies, which is mandatory in Est onia and voluntary in other Member States. It 
could also be possible that indi vidual auditors or firms would take the initiative to apply the 
auditng standards in a pr oportionate manner to the audit of small companies296. However, this is 
unlikely to have a substantial impact across the EU for SMEs.  
Option 1: Adapt audit standards to the size and complexity of the business of the audited entity . 
This option would consist in requiring Member States to ensure that the applicable audit 
standards are applied in a pr oportionate and simplified manner to SMEs. Audit standards, 
including international auditing st andards, are scalable to size297. In order to maintain the unicity 
of auditing standards (see the pol icy options regarding the objective 4.2), th is option would not 
require the enactment of other st andards that would derogate fr om the ISAs. It would rather 
consist in: (a) ensuring that the audit oversight bodies accept  such proportiona te and simplified 
audits as a valid application of the auditing standards and (b ) requiring national professional 
bodies to provide audito rs with guidance on how the auditing standards should be applied in a 
proportionate and simplified manner.  
Option 2: Introduce limited reviews fo r SMEs instead of statutory audit . This option would 
consist in requiring Member States to introduce a different type of assurance service providing a 
lower level of assurance than statutory audit fo r small companies (e.g. “limited review”), as an 
alternative option to statutory audit,  whether simplified audit or not.  
Option 3: Combination of options 1 and 2 .  
(5) OBJECTIVE 5: POLICY OPTIONS TO IMPROVE THE EFFECTIVENESS, 
INDEPENDENCE AND EU-WIDE CONSISTENCY OF THE REGULATION AND SUPERVISION OF AUIDTORS  
Objective 5.1: Sub-policy options to ensure th e independence and effec tiveness of supervision 
of national statutory auditors and audit firms. 
Baseline Scenario
. The Statutory Audit Directive, complemented by the Commission  
Recommendation on external quality assurance fo r statutory auditors and audit firms conducting 
audits of public interest entities  (see Annex 2 ), only establishes a prin ciples-based legislative 
framework. Member States have discretion conc erning the appointment of  national authorities 
for the different tasks foreseen in  the Directive. It is  specifically allowed to appoint a private 
professional body as competent authority for the a pproval and registration of auditors and audit 
firms.  
This framework has failed to ensure the robu stness and independence of all national audit 
supervisors. The external quality assurance and supervisory practices ar e still very divergent 
between Member States, which does not ensure a le vel playing field for audit firms. In terms of 
sanctions, the activity of Member States is relatively limited. 
On the whole, there is little public information regarding sanctions imposed by European Audit 
Oversight Authorities for auditors. Generally speaking, following their inspections, Oversight 
Authorities make recommendations to audit fi rms on how to improve their audit quality and 
                                                 
296 See for instance, the initiative of a Cana dian auditor in Cowperthwaite (2011).  
297 Therefore, it is technically possible for a statutory auditor/audit firm to issue a valid audit opinion ("an 
audit is an audit") while limiting the audit work to the essential steps that are meaningful to the dimension 
and complexity of the business of SMEs. 
 
EN 151   EN follow-up these recommendations. However, only a few Authorities report on sanctions coming 
from those recommendations: 
– In the Netherlands, the inspection report for 2010 states that the AFM intends to take 
formal enforcement measures against one or  more Big 4 firms. Formal enforcement 
measures may include an instruction, an orde r for incremental penalty payments or an 
administrative penalty. However, it is also  added that imposing a formal enforcement 
measure involves a certain amount of time; 
– In France, the inspection reports for 2009 a nd 2010 give details of  the recommendations 
made to audit firms following inspections unde rtaken during those years. However, no 
information is provided regarding sanctions  imposed on audit firms (just the "follow-
up" of those recommendations); 
– In Italy, the situation is similar to France. Consob has formulated specific 
recommendations on actions to be taken to remedy shortcom ings discovered during the 
reviews. However, there is no informati on on any sanctions which may have been 
imposed as a consequence of those recomm endations (just the "follow-up" of the 
recommendations) 
– In Spain, there have been no sanctions coming from the quality assurance 
system/inspections (mainly due to the late transposition of the Directive). However, 
there have been sanctions coming from the investigation system; 42 sanctions in 2010 and 40 sanctions in 2011 were imposed to auditors (which represents around 15% of the total number of investigations initiated); 
– In Germany, the disciplinary proceedings are reflected in the following table:  
 2010 2009 2008 2007 
Reprimands 
- with fines 115 
75 61 
32 58 
19 46 
14 
Judgment of court - 1 2 5 
Other sanctions by public 
prosecutor's office 19 22 21 17 
Instructions 105 165 145 160 
Dismissals 211 218 150 229 
 450 467 376 457 
– In the UK, the situation is similar to that  in France and Italy. The annual reports for 
2008/2009 and 2009/2010 detail the findings arising from the inspections and the need 
for improvements in the audits but do not  mention any sanctions imposed following 
those findings. Professional bodi es do impose sanctions, however. 
It is unlikely that this situation will change in the absence of amendments to legislation. 
Option 1: establishing an EU oversight authority . A newly created EU ove rsight authority would 
be responsible for the supervisory tasks fore seen in EU legislation on statutory audit. 
Option 2: strengthening nationa l audit supervisory practices . This option would imply building 
upon the existent national auditor supervisory structures, but establishing clear and robust 
requirements at the pan-European level on audit supervision, rather than  relying on high level 
principles established currently in the Statut ory Audit Directive. The requirements would be 
established in the field of i ndependence (from the accounting/a uditing profession), mandate and 
 
EN 152   EN powers of national audit supervisors. These re quirements would be adjusted depending on the 
part of the market addressed: in the case of the audit of PIEs , the requirements would be more 
detailed in EU legislation. 
For the supervision of the audit of non-PIEs , this option would imply reinforcing the 
independence requirements of the national comp etent authorities. It would also imply 
establishing a single author ity holding the ultimate responsibility for the s upervisory duties, even 
if the delegation of certain tasks could be admissible.  
In the case of national authoriti es supervising statutory audits of PIEs, this option would imply 
that a national competent authority takes responsibi lity for the supervisory duties. This authority 
would be selected from three possible opt ions: the securities markets supervisor298; the national 
authority that controls compliance with the financ ial reporting framework in accordance with the 
derogation foreseen in the second paragraph of Article 24(1) of the Transparency Directive299; or 
a national authority that is specifically en trusted to carry out supervision on audit300. 
The requirements for national supe rvisors regarding supervision of  statutory audits of PIEs 
would include: 
– cooperating with other relevant  authorities at national leve l, including supervisors of 
PIEs or financial intelligence units; 
– undertaking quality assurance revi ews on the audits carried out; 
– investigating with a view to  detecting, correcting and prev enting inadequate execution 
of the statutory audit of PIEs; 
– monitoring the developments in the market fo r the provision of statutory audit services 
to PIEs, in particular (but not exclusively) in relation to market concentration levels, 
including at the level of specific sectors; a nd assessing the need for structural measures 
to mitigate any risk arising from high c oncentration, such as: establishing caps on 
market shares, requiring the deconsolidation of audit firms or carving out part of the 
sectoral expertise of large audit firms;  
– regularly monitoring the possible threats to th e continuity of operations of large audit 
firms, including the risks arising from high concentration, as they could disturb the 
market and have effects on financial stab ility; and requiring large audit firms to 
establish contingency plans to address such threats301; 
– being transparent as regards their activit y, including publication of individual quality 
assurance reviews reports; 
– cooperating with other national authorities (see objective 5.2). 
This option would imply that the authorities supervising the statutory audit of PIEs be 
appropriately empowered to undertake their du ties: access documents, demand information, 
                                                 
298 This is the case in Italy (Consob) or the Netherlands (AFM). 
299 This is the case in the UK (FRC). 
300 Such as in France (H3C), Germany (Abschlussprüferaufsichtskommission) or Spain (ICAC) 
301 See European Parliament (2011), §49 and seq. 
 
EN 153   EN carry-out inspections etc. They should also be able  to take specific supervisory measures, such as 
temporarily prohibiting the statutor y auditor, audit firm or key audit partner from carrying out 
statutory audits of PIEs, declar ing that the audit report does not  meet the legal requirements, 
requiring the statutory auditors/a udit firms to modify their tran sparency reports, require the 
statutory auditor, audit firm or PIE to bring an infringment to an end, issuing public notices or 
referring matters for criminal  prosecution. See also Annex 22  on sanctions. 
Objective 5.2: Sub-policy optio ns to set-up an effective EU-wide supervisory cooperation 
mechanism that would also ensu re an efficient supervision of supranational audit firm 
structures  
 Baseline scenario Option 1 Option 2 Option 3 
 
 EGAOB Level 3 Lamfalussy-
type committee Integration of 
cooperation within 
the European 
Supervisory Authorities (ESMA, 
EBA, EIOPA) New Europea 
Authority on Audit 
Supervision 
Legal entity No Yes, under national 
law Yes, created by EU 
legislation  Similar to option 2 
Created by Commission decision Commission decision 
and a parallel private 
law agreement 
between members European Parliament 
and Council 
Regulations Similar to option 2 
Administrative 
structure No independent 
secretariat and no 
specific premises. The Commission 
provides both Independent 
secretariat would need 
to be created  
Specific premises 
needed Integration within the 
secretariat and 
premises of the ESAs and their Joint 
Committee 
 New administrative 
organisation to be 
created, including chair, executive 
director and 
secretariat 
Funding EU budget (meeting 
room, Commission 
secretariat and travel expenses of a national 
representative per 
Member State) Members 
contributions 
 EU budget 
contribution possible 
under certain circumstances Partially financed by 
EU budget, partially 
by members. Some fees from some 
market participants 
are possible Similar to option 2 
Commission's 
role Chair Observer Non-voting member Similar to option 2 
Role in 
regulation and 
standard 
setting Advisory role to the 
Commission Advisory role to the 
Commission Prepares guidance Advisory role to the 
Commission Prepares guidance 
Prepares draft 
technical standards for Commission 
endorsement Similar to option 2 
Role in 
supervision Exchange of good 
practices and 
information Exchange of good 
practices and 
information 
Mapping and peer reviews 
 Exchange of good 
practices and 
information 
Mapping and peer reviews 
Coordination  
Colleges of supervisors Similar to option 2 
Baseline scenario : The continuation with the status quo  on the EU-wide cooperation poses the 
following regulatory issues: 
 
EN 154   EN – misalignment of incentives and asymmetric  information. The Commission services 
would continue to run the structure t hough it has no incentives to organise the 
supervisory cooperation and exchange of best  practice since these tasks do not normally 
fall under the Commission's mandate. The ag enda is developed by the Commission 
services, which does guarantee that the i ssues put forward for discussion are those 
which are a priority for audit regulators . With the Commission leading the EGAOB, 
there is no possibility for European audit regu lators to discuss confidential matters, such 
as the findings of audit inspect ions or organisation of inspec tions of pan-European audit 
firm structures. 
– The EGAOB structure is informal. The EGAOB  is legally speaking an "expert group" 
advising the Commission, under the control of the latter. As such, the EGAOB has no 
mandate or powers to take any formal deci sions, such as in the field of EU-wide 
oversight or inspections of pan- European audit firm networks. 
– The absence of a performing structure does not result in supervisor y convergence. There 
are no common minimum criteria regarding inspections, no common practices regarding 
the adaptation of inspections/supervision to the different size/type  of auditors, no 
convergence on the access to the profession/aptitude tests etc. 
Option 1. Level 3 Lamfalussy Committee type structure  
This option would require the establishment of an independent advisory Committee by the 
Commission. This option would requi re that Member States agr ee on a seat for the level 3 
Committee, the establishment of a secr etariat and related funding issues.  
This option would give an independent legal status to the EGAOB. The level 3 Committee 
would be empowered to decide on its own work and would be independen t from the Commission 
in its decision taking, with the Commission being only an observer at its meetings.  
The scope of work of this le vel 3 Committee would cover conve rgence in the application of 
supervisory practices at Member State level, whethe r regarding audit of PIEs  or of other entities. 
However, it would not have the same lega l powers enjoyed by the European Supervisory 
Authorities (ESAs) in the area of convergence in supervisory practices. It would provide a 
platform to coordinate the EU-wide supervis ion/inspections of pan- European audit firm 
networks but with no possibility of direct involvement in the supervision or inspections of 
supranational audit firm structures. 
In terms of costs, it is expected that the annual budget of a level 3 Committee dealing with 
auditing issues could be around €3 – €4M. In 2 010, the smallest budget fo r a level 3 Committee 
was €3.7M for CEIOPS. 
Option 2. EU-wide cooperation on a uditor oversight within ESMA ( See also Figure A18.7  in 
Annex 18)  
This option would consist in entrusting ESMA to organise the EU-wide cooperation on audit 
oversight. ESMA would cooperate with EIOPA a nd EBA within the Joint Committee established 
by the 3 European Supervis ory Authorities (ESAs). 
A requirement for ESMA to establish a specific internal committee devoted to audit policy 
would be imposed (currently, th ere is a sub-committee within ES MA dealing with audit policy). 
 
EN 155   EN This option would also allow for the application of the legal powers of the ESAs: the possibility 
to issue guidelines or to prepare technical st andards for endorsement by the Commission, where 
specifically so empowered. 
The legal framework governing ESMA allows fo r accommodating different national authorities 
with different competences within its structure,  while respecting the repartition of competences 
at national level. Therefore, no legal change would be needed regarding the decision-making 
chain within ESMA.  
Option 3. New European Authority of Audit Supervisors  
European cooperation between aud it supervisors would adopt the same approach as in other 
areas of the financial sector: i. e. creation of a new European S upervisory Authority specifically 
devoted to the audit market. If this option is  pursued, a Regulation cr eating the new Authority, 
similar to the ones creating ESMA, EI OPA and EBA, would be needed.  
Advantages of Option 2 compared to options 1 and 3. Out of the three Authorities, a priori , the European Securities Ma rkets Authority (ESMA) would 
be the most appropriate body to undertake enhan ced EU-wide audit cooperation and supervision 
matters: 
– Some national audit regulators (LU, NL, IT) already functi on within the structure of 
national securities regulators.  
– ESMA members are also responsible for supervision of compliance with the 
Transparency Directive, which applies to all listed companies (the bulk of th e "public 
interest entities"). This includes complianc e with the financial reporting obligations.  
– ESMA has a flexible structure: while Member  States should appoint a "main" member 
(the main securities regulator in each market), the rules allow for this member to be accompanied in board meetings by other responsible authorities if the subject matter so requires. This allows, for instance, that othe r authorities are involve d in specific issues: 
e.g. for the UK, FRC regarding accounting or  The Takeover Panel regarding takeover 
rules. 
– ESMA already has an active group dealing wi th auditing issues within the Corporate 
Reporting Standing Committee. The ESMA s ecretariat would, with some marginal 
increase, cope with additional work. 
– While ESMA could take a leading role, th is does not prevent EIOPA and EBA from 
also being involved in auditing matte rs. The Joint Committee (grouping the 3 
authorities) formalises cooperation between the three authoritie s and it is already 
expected to work on auditing issues (cf.  Article 54 of the ESMA Regulation). 
– This option is less costly to implement than creating a new European Authority of Audit 
Supervisors, but ESMA would contribute to the convergence  of supervisory practices, 
coordination of the supervision of the supran ational audit firms stru ctures. In terms of 
the costs, they are expected to be simila r to the costs of r unning the current EGAOB 
structure (which mainly compri se the costs of meetings).  
 
EN 156   EN Compared to option 1, the ESMA structure coul d address these issues of the current EGAOB 
structure:  
– it could provide a platform to coordinate the EU-wide supervision/inspections of pan-
European audit firm networks, in particular as regards PIEs; 
– reducing differences in the application of superv isory practices at MS level, in particular 
as regards PIEs; 
– the structure provides legal recognition to the cooperation and in tegrates into the 
recently created structure for the supervision of the EU financial sector; 
– this option would allow the ESAs to devel op "technical standards" , helping convergance 
in auditor regulation and supervision. 
The main limitation of ESMA (or generally the Eur opean Supervisory Authorities) option is that 
any cooperation at ESMA (or ESAs ) level would be mainly limite d to public inte rest entities 
(listed companies and financial institutions). Th is would imply that cooperation on supervision 
of non-PIEs would more than like ly be carried out on a bilateral basis. At the same time, the 
cross-border dimension of non-PIEs (and therefor e the need for coordination on the supervision 
of audits) is limited. 
A new European Authority of Audit Supervisors ( option 3) would provide an additional benefit 
of being coherent in terms of mandate and powers with other Eu ropean Supervisory Authorities 
and of making sure that the cooperation on the overs ight of the audits of non-listed companies is 
fully taken into account.  
The new European Authority of Audit Supervis ors would be much more costly and time 
consuming to implement compared to all the othe r options considered in this analysis. The 2011 
budget for the current European Supervisory Authorities ranges fr om €12.7M to €16.9M. 
Additionally, the scope of such an Authority would be relatively limited, compared to EBA, 
EIOPA and ESMA.  
 
EN 157   EN ANNEX 9. SUMMARY OF VIEWS OF STAKEHOLDERS ON PREFERRED POLICY OPTIONS  
This Annex presents a summary table with the view s of stakeholders on pr eferred policy options. 
When appropriate, it illustrates the alternative solutions proposed. 
 
EN 158   EN Table A9.1 
Stakeholders Policy option  
In favour Against/Other views 
Clarify and specify the scope of 
statutory audit to reduce the 
expectation gap Broad support by the majority of stakeholders (professional bodies and 
associations linked to the profession; investors; public authorities and 
others). 
The European Parliament supports clarif ication of the role of auditors in 
order to address the expectation gap.  Many representatives of the profession maintain that the expectation gap is 
unlikely to be closed.  
Some representatives of the profession suggested that the audit report 
should provide more forward-looking information and some more 
disclosures on risk, judgements and estimates, whereas public authorities 
strongly disagree on this point. 
Improve and expand the content 
the audit report disclosed to the 
public and require the preparation of a longer and more 
detailed report for the audited 
entity 
 Broad support by the majority of stakeholders (professional bodies and 
associations linked to the profession; investors; public authorities and 
others). 
The European Parliament is in favour of providing more information in the 
audit report and that auditors should focus more on substance than on form. N.A. 
Increase the communication 
between the auditor and the audit committee Broad support by the majority of stakeholders (professional bodies and 
associations linked to the profession; investors; public authorities and others) N.A. 
Requiring the establishment of 
regular dialogue between 
auditors and supervisors of PIEs 
which are financial institutions Broad support by the majority of stakeholders (professional bodies and 
associations linked to the profession; investors; public authorities and 
others) 
The European Parliament is in favour of enhanced, two-way 
communication between auditors and financial supervisors of financial 
institutions, especially in relati on to specific areas of concern. N.A. 
Strengthening the role of the 
audit committee regarding the 
appointment of auditors Broad support by the majority of stakeholders (professional bodies and 
associations linked to the profession; investors; public authorities and 
others) 
Strong support by the European Parliament.   Some stakeholders are in favour of  establishing a procedure for the 
appointment of the auditor by a third party in the case of certain public 
interest entities or that a regulatory authority has the "right of veto" (public 
authorities, some professional bodies and investors).  
 
EN 159   EN Mandatory rotation  Some public authorities suggested that the audit firm should rotate at the 
same time as the audit partner. In addition, there is some support from 
academics.  There is a general rejection of mandatory firm rotation by the profession. 
Large audit firms and other professional bodies and associations linked to 
the profession claim that rotation would harm audit quality and increase costs. 
The European Parliament considers that internal rotation of key audit 
partners suffices to address the issue of auditors' independence.  
Mandatory regular tendering There is strong support among professional bodies and associations linked 
to the profession for tendering on a regular basis (e.g. every 3 or 5 years 
mentioned) or even mandatory tendering. 
Mid-tier Firms and SMPs are also in favour of mandatory tendering.  
Many investors, as well as some pub lic authorities, support mandatory re-
tendering after a specific period of time. 
The European Parliament is in favour of an open tendering process for 
statutory appointments of auditors ever y eight years, on a renewable basis. Some audited entities insist that the company should decide in certain 
circumstances to keep the same auditor if the benefits of continuity are 
demonstrable. 
Pure audit firms/prohibition of 
the provision of non-audit 
services Some of the representatives of the pr ofession could consider restricting 
non-audit services to audit clients. 
Mid-tier Firms and SMPs approve the prohibition of non-audit services 
only with regard to PIEs.  
Investors support the prohibition of non-audit services that have no natural 
connection with the audit.  
Public authorities consider that the pr ohibition of non-audit services should 
be done on a case by case basis. 
There is broad support by academic s for the introduction of such a 
prohibition. 
The European Parliament is in favour of the drawing-up of a list of 
conditions under which such services would be deemed incompatible with audit services (blacklisting). The vast majority of the profession  are against the prohibition of the 
provision of NAS by audit firms as they consider that this would weaken 
the range of skills they can offer.  
Joint audit Mid-tier firms and SMPs strongly support joint audit where at least one 
non-systemic firm is included. Public authorities generally support the introduction of joint audits provided that there are clear rules as to how it 
will work in practice. Preparers are no t opposed to joint audit if it is well-
balanced.  The Big Four are quite negative towards joint audit as they believe that it 
will impair audit quality and will cause coordination problems.  
Some public authorities expressed concerns regarding the introduction of 
joint audits as they might pose coordination problems. 
 
EN 160   EN The European Parliament recognises that  the implementation of joint audits 
could have positive effects on the diversification of the audit market.  
Prohibition of contractual 
clauses limiting the choice of an 
audit firm There is a strong support amongst the majority of stakeholders (profession; 
investors; Big Four; Mid tier firms and SMPs). N.A. 
Mutual recognition of audit 
firms and introduction of an 
adaptation period scheme and increased convergence, 
transparency and predictability 
in the aptitude test for statutory auditors 
 There is broad support among stakeholders (profession, investors) on the 
idea of a passport, though they do not focus on the details.  
 The European Parliament is in favour of enhanced harmonisation with a 
view to creating a European passport for auditors. Many public authorities were reluct ant to accept the introduction of an 
European passport as this would harm quality and would be difficult to 
supervise. 
Introduction of clarified ISAs Very broad support amongst the majority of stakeholders albeit not always 
for a binding approach (professional bodies and associations linked to the 
profession; investors; public authorities and others). 
 The European Parliament is in favour  of the adoption of clarified ISAs, 
through a regulation.  Some SMPs requested sensitivity to the administrative burden. Companies 
expressed less enthusiasm about the adoption of ISAs. The main reasons 
were that ISAs do not take account of the diversity of the audit model in 
Europe and that there is an important  cost dimension associated with the 
adoption of ISAs.  
Adapt audit standards to the size 
of the audited entity: 
proportionate audits for SMEs General support amongst stakeholders, especially by SMEs and SMPs N.A. 
Strengthening national audit 
supervisory authorities and 
giving ESMA responsibility for EU-wide cooperation on audit 
oversight  The vast majority of stakeholders favoured the strengthening of the 
national audit supervisory authorities.  
The European Parliament is in favour of integrating the European Group of 
Auditors’ Oversight Bodies into the European System of Financial 
Supervision, possibly through the ESMA The Big Four do not support integrating audit oversight bodies in the new 
European Supervisory Authorities. 
 
 
EN 161   EN ANNEX 10. THE PROVISION OF NON -AUDIT SERVICES TO THE AUDIT CLIENT AND THE QUESTION 
OF PURE AUDIT FIRMS  
Information is a key pillar for financial markets. Audits give investors as surance on the integrity 
of the financial information they receive. Audito r independence is therefore a key element in the 
statutory corporate reporting process.  
Providing non-audit services (NAS) while auditi ng a company presents a potential source of 
conflict of interest arising from or within the a udit firm: i.e. the audit firm has an interest to 
secure additional revenue from th e provision of other ( non-audit) services. In  instances where the 
revenues from NAS become substantial from a st atutory audit client, th e independence of the 
auditor is even more at risk. If  the provision of statutory audit effectively becomes a gateway to 
the provision of NAS to the same client, "professional scepticism" – i.e. the ability of the auditor to question the assumptions made by the audi ted entity – would naturally be compromised
302.  
This annex presents (1) the experience in the EU  and the US in dealing with this conflict of 
interest. It also describes the main advantages  and disadvantages of tw o possible policy options 
to address this conflict of interst: (2) a ban th e provision of certain NAS to the audit client and 
(3) a ban the provision of any NAS to the audit clie nt and (4) the creation of  "pure" audit firms. 
(1) The experience in the EU and the US in dealin g with the conflict of interest created by the 
provision of NAS.  
There is currently no EU-wide ban preventing auditors from of fering NAS to audit clients. 
According to Article 22 of the Statutory Audit Directive, audit should not be provided in cases 
where " an objective, reasonable and info rmed third party would conc lude that the statutory 
auditor's or audit firm's i ndependence is compromised ". However, Article 22 stipulates only the 
principles and, given the Member States' discretion, it has so fa r been implemented in a very 
divergent manner across the EU.  
In France and Belgium, national legislation provid es a strict framework regarding the provision 
of NAS. In the other Member St ates, auditors and audit committees have a large margin of 
manoeuvre in appreciating whether the provision of NAS results in a conflict of interest. 
The practice in Belgium  
Following the EC recommendation of 16/05/2002 on Statutory Auditors' Independence in the 
EU: a set of fundamental principles, a 2003 Belgia n law introduced a list of services which are 
not compatible with the provision of statutory audit services. The list covers the following type 
of services: 
– taking part in the decision making of the audited entity; 
                                                 
302 The International Standards on Auditing (ISAs) define professional scepticism as " an attitude that includes 
a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence ". The application of an appropriate degree of 
professional scepticism " is a crucial skill for auditors ". See FRC (March 2011), p.1. See also FRC (August 
2010) generally. 
 
EN 162   EN – assisting or taking part in the bookkeeping or  in the preparation of the annual accounts 
or the consolidated accounts of the audited entity; 
– conceptualising, developing, and/or installing information systems to manage financial 
information within the audited entity; 
– carrying out evaluations of im portant elements reflected in  the annual and consolidated 
accounts; 
– taking part in the inte rnal audit function; 
– representing the audited entity in the settle ment of disputes (including with the Tax 
Office); 
– intervening in the recruitment of  staff for the audited entity.  
It should be noted that the defini tion of audit firm (or statutory auditor) is enlarged to cover, 
apart from the audit firm performing the audit, any other legal entity or  physical person linked to 
the statutory auditor. However, the notion of a udit network is not introduced by this definition.  
As far as the volume of NAS (not banned by the la w) is concerned, the so called "one to one" 
rule is applied (revenues from NAS should not be  greater than revenues from statutory audit 
services). This rule aims at  limiting the NAS but only for a special group of entities (listed 
companies and companies publishing consolidated accounts). At the same  time, an option to 
derogate from the above mentioned rule for thes e companies is envisaged. Such a derogation can 
be approved in 3 cases, namely by the au dit committee, the Controlling Committee under 
Belgian Law, or in case no audit committee exists  a derogation can be a pproved by a college of 
independent auditors (if such body has been  introduced in the audited entity).  
The practice in France 
The definition and enforcement of independence rules in the area of audit in France are 
developed in the Code of ethics of the audit profession. As far as the provision of NAS is 
concerned, it is forbidden for the statutory aud itor (or any entity/ person part of its national/ 
international network, controlled by him or contro lling him) to provide a ny service not directly 
related to the core statutory audit service. In th e case of the provision of services directly by the 
statutory auditor or other auditor (part of its  network or having common commercial interests 
with him/her), the statutory audito r must ensure that they are compatible with its statutory audit 
functions. In case of doubt, he/she may also c onsult the High Audit Comm ission for an opinion.  
The compatibility of any services with the provision of statutory audit is assessed against a list of 
activities, some of which are considered direc tly incompatible with statutory audit services, 
while others are presumed to  affect the independence of the statutory auditor.  
Services which are incompatible with statutory audit service:  
– preparation of any financial or accountin g information to be included in the 
consolidated accounts subject  to the statutory audit; 
– development or enforcement of any procedural  element of the internal control or the 
risk management, related to the prepara tion or control of financial or accounting 
information to be included in the consolid ated accounts subject to  the statutory audit; 
 
EN 163   EN – Carrying out of any activ ity directly or on behalf of the management of the audited 
entity. 
Services presumed to affect the independence of th e statutory audit:  
– bookkeeping and any other activity related to the preparation of the accounts; 
– recruitment of staff exercising sensitive functions; 
– participation in the process of developing a nd installing financial information systems; 
– legal advice to the management of the audited entity; 
– advice related to financial management; 
– advice on tax issues; 
– acting on behalf of the management in fina ncial operations, representing them before 
any jurisdiction or providing expert advice to the management/ entity in the defense of 
their interests in legal disputes; 
– monitoring of subcontracting related to the above mentioned type of activities. 
The United States of America's example: 
In the United States of America, under the Sa rbanes-Oxley Act of 2002 , the audit committee is 
responsible for the appointment, compensation a nd oversight of the work  of the independent 
auditor. As part of this responsibility, the co mmittee is required to pre-approve any audit and 
NASs performed by the independent auditor in or der to ensure that they do not impair the 
auditor's independence from the company. To implement these provisions of the Act, the Securities and Exchange Commission (SEC) issued ru les specifying the types of services that an 
auditor may not provide to its audit client, and outlining the audit committee's administration of 
the engagement of the independent auditor. The rules list services that, regardless of the size of 
the fees they generate, place the auditor in a position inconsistent  with the necessary objectivity. 
It is considered that bookkeeping services, for ex ample, place the auditor in the position of later 
having to audit his or her own wo rk and identify the auditor too cl osely with the enterprise under 
audit. Similarly, an auditor who helped to negotia te the terms of employment for an audit client's 
chief financial officer is less li kely to bring quickly to the audit committee questions about the 
new chief financial officer's perf ormance. However, it is considered that an audit firm can 
provide tax services such as tax compliance, tax planning and tax a dvice to its audit clients, as 
long as such services are pre-approved by the aud it committee, without impairing the audit firm's 
independence. 
The SEC's rules establish two different approa ches to pre-approving services, which the SEC 
considers to be equally valid. Proposed NASs may be pre-approved by the audit committee without consideration of specific  case-by-case services ("genera l pre-approval"), or pre-approved 
by the audit committee on a specific case-by- case basis ("specific pre-approval").  
Under the US rules, while there are certain aud it services for which there is a presumption of 
conflict of interest and which, th erefore, cannot be provided by the auditor to the audited entity, 
for a number of others it is up to the compa ny to decide, on a case by case basis, whether a 
 
EN 164   EN conflict of interest exists, and thus whether or not the auditor concerned could be appointed to 
perform the audits of the company. 
(2) A ban on the provision of CERTAIN non- audit services to the audited entity 
(blacklisting)303: 
This is the option supported by the European Parliament304. Some stakeholders (authorities, 
investors) could also accept it.  
This solution implies that audit firms providing st atutory audit and financia l audit services would 
not provide certain NAS to an audited entity. This would amount to a blacklist of NAS. The 
prohibition would be extended to the parent company of the audi ted entity and its material 
subsidiaries.  
The blacklist of certain NAS would include the following services: 
– preparing accounting records and financial statements;  
– bookkeeping services;  
– designing and implementing financial information technology systems;  
– valuation services (including appraisal or valuation services, fairness opinions or contribution-in-
kind reports);  
– actuarial services;  
– participation in the audit client's internal audit and the general provision of services related to the 
internal audit function;  
– design and implementation of internal control or risk management procedures related to the 
preparation and/or control of financial information included in the financial statements;  
– acting for the audit client in the resolution of litigation;  
– legal services and expert services unrelated to the audit;  
– tax advice/consultancy services;  
– recruiting senior management and human resources generally;  
– broker or dealer, investment advisor, or investment banking services;  
– risk advice; 
– due diligence services to the vendor or the buy side on potential mergers and acquisitions; 
– providing assurance on the audited entity to other parties at a financial or corporate transaction; 
– providing comfort letters for investors in the contex t of the issuance of an undertaking's securities; 
– general management consultancy services; and 
– any partial or total outsourcing of the above tasks.  
It would also require adding a general catch-all clause for non-audit services modelled on the existing 
Article 22(2). 
In addition, concerning the provision of other serv ices which are not part of the audit mandate 
and are not included in the black list, the general rules on the a ssessment of possible threats to 
                                                 
303 The blacklist could include services such as prep aring accounting records an d financial statements, 
bookkeeping services, designing and implementing financial information technology systems, etc. See Annex 8
. 
304 European Parliament (2011), §29 and seq. The European Parliament also suggests that the role of the audit 
committee in deciding whether the provision of NAS is possible should be reinforced. 
 
EN 165   EN independence would apply. Therefore, to provide th ese other services, the audit firm would need 
to request the approval of the audit committee305. 
Advantages:  
• The issue of conflict of interest which is ge nerally associated with  the auditor providing 
both audit services and NAS to the audit client  would not be as pate nt as it is today. 
Allowing the auditor to provide only a limited number of NAS would mean that his/her 
independence would no longer be potentially  questioned in all circumstances. 
• Blacklisting would have a positive effect on st reamlining and harmonising policies 
among Member States306, creating a level playing field fo r all audit providers in the EU. 
It would be easier for investors and regulat ors to identify the cases in which auditor 
independence might raise an issue. 
• It would also eliminate the legal uncertainties and potential conflicts of interest307 due to 
discrepancies in the blacklisting among Me mber States on the one hand and global 
geographical coverage of big audit firms on the other hand.  
• This option could be supplemented with a cap  on the other service (those which are not 
within the audit mandate and are not in the blacklist) fees compared to the total audit 
fees for a given client308.  
The credibility of the audited financial statem ents of companies woul d increase accordingly 
(although not necessarily to the same extent  as in the case of pure audit firms). 
Disadvantages:  
• In the case of a ban on the provision of certa in NAS to the audit client, the issue of 
conflict of interest is not entirely solved, at least in appearance. Since the revenue of the 
audit firm from NAS is generally higher to that  from audit services, it is difficult to 
envisage, at least in appearance, that the engagement partner is ready to admit that 
his/her objectivity might be impaired when pr oviding NAS to the audited client. But it 
is not only the amount of NAS fees that creates the problem.  
                                                 
305 The current  system in the Statutory Audit Directive relies on the role of the audit committee to take 
decisions regarding the provision of NAS by the statutory auditor or audit firm. It must review and monitor 
the independence of the statutory auditor or audit firm, and in particular the provision of additional services 
to the audited entity. For this, the st atutory auditor or audit firm is required to (a) confirm annually in 
writing to the audit committee their independence from the audited public-interest entity; (b) disclose 
annually to the audit committee any additional services provided to the audited entity; and (c) discuss with 
the audit committee the threats to th eir independence and the safeguards applied to mitigate those threats. 
306 Belgian and French lists are not identical, for instance. 
307 For instance, an audit firm providing the same NAS to several entities within the same group in different 
MSs may be in situation of conflict of interest in one and in not in the other MS due to the differences in 
the way NASs are treated. In such a cas e, in order to provide the audit service to the parent undertaking of 
the group, the audit firm may apply the more lenient rules on independence of the country of the parent 
undertaking in the assessment of potential conflict of inte rests at the level of a given subsidiary, even if the 
legislation in the country of the subsidiary is stricter.  
308 An option that would be based only on a cap on NA S fees (without blacklisting certain services) would not 
be practicable because of the risk of self-review. 
 
EN 166   EN • A conflict of interest arises not necessarily  from the proportion of  NAS fees compared 
to the audit fees, but from the fact that by performing two kinds of  services, the audit 
firm is serving two kinds of clients: the management in the case of NAS and the audit 
committee in the case of the audit. The pe rformance by the company's auditor of NAS 
at the direction and under th e control of management is  inherently corrosive and 
fundamentally incompatible w ith the duty of independence owed by the auditor to the 
investors. Therefore, the freedom necessary to perform the auditor's duties is curtailed 
and could even be eliminated where the auditor is also the provider of NAS. 
• This option also does not address the percep tion problem concerning the role played by 
the audit partner. As the primary link between the audit firm and the client company, the 
audit partner has significant influence on the company's perceptions of the audit firm's 
reliability and the value of its services. Theref ore, the company's trust in the audit firm's 
ability to provide NASs often comes from the confidence in the audit partner's competence. Such a close relationship betw een the audit partner and the company may 
impair both the real and perceived independen ce of the auditor because the audit firm is 
not likely to criticise the work done by its consultancy department.  
• Despite the existence of a list of banned services, the audit firm has incentives to 
"rename" a NAS so as to avoid being captured by the blacklist. In addition, any service which is not on the blacklist is not a priori  prohibited, but should be assessed. This 
obliges the audit committee to be vigilant on the issue, therefore relying on its capacity 
to take decisions on a case-by-case basis as to whether there are threats to independence 
arising from the provision of NAS. The syst em therefore over-rel ies on the judgement 
of audit committee members. 
(3) A ban the provision of ANY non-au dit services to the audited entity  
Another way to reinforce the auditor inde pendence is to ban the provision of any
 NAS by the 
statutory auditor or audit firm  to the audited entity (PIE) : statutory auditors or audit firms 
providing statutory audit to a PI E would not provide any non-audit service to this audited entity. 
However, the provision of non-audit services to entities which are not audited by the statutory 
audit or audit firm would not be prohibited.  
The prohibition on the provision of services othe r than audit would also be extended to the 
parent company of the audit client  and at least its material subsid iaries. A cooling off period of 2 
years after the end of the audit engagement will be envisaged before being in a position to provide services other than audit.  
Some services which are closely connected to st atutory audit (including other statutory duties) 
should, however, be authorised (a "white list "). They would not be considered "non-audit" 
services. 
Services closely connected to statutory audit which could be authorised: 
– review of interim financial statements;  
– assurance on corporate governance statements; 
– assurance on corporate social responsibility matters; 
– assurance on or attestation of regulatory reporting provided to regulators of financial institutions 
beyond the scope of the statutory audit and designed to assist regulators in fulfilling their role, 
such as on capital requirements or specific solvency ratios determining how likely a company will 
be to continue meeting its debt obligations; 
 
EN 167   EN – any other statutory duty related to audit work imposed by EU legislation. 
Similar rules apply to credit rating agencies: credit rating agencies in the EU are not allowed to 
provide " consultancy or advisory services " to the rated entity or a related third party regarding 
the corporate or legal structure, a ssets, liabilities or activities of that rated entity or related third 
party309.  
This option is supported by investors and accepted by some representatives of the profession, 
provided it applies to PIEs only310. 
Advantages:  
• The positive effects would be similar to those for the previous option.  
• In addition, independence of the auditor/ audit firm/key audit partner would be 
reinforced, since no NAS coul d be provided to the audited entity, thus eliminating the 
conflict of interest that could arise from  the provision of NAS. Therefore, the 
disadvantages of the first opti on (see above) would disappear.  
• The incentives for audit firms/statutory aud itors to by-pass the blacklist by providing 
remaining/other services would be reduced. On ly a few additional audit-related services 
would be permissible and the list is less open to interpretation.  
• Also, the over-reliance on the audit co mmittee is reduced to the minimum.  
• At the same time, this option should facili tate the growth of mid-size audit firms 
focusing on audit services and of consultancy firms focusing on NAS.  
Disadvantages:  
• A drawback, however, is that if the audit fi rm provides NAS to a particular client, it 
would no longer be able to provide audit services to that client, which could de facto  
reduce the number of audit firms eligible  to audit large PIEs in the short term311.  
(4) The option of 'pure' audit firms 
Another way to reinforce auditor independence is  to ban the provision of NAS by the audit 
firm312 to any client. In other word s, audit firms would only provide  statutory aud it (and related 
                                                 
309 See Regulation (EC) No 1060/2009.  
310 On the contrary, audit firms fear the weakening of  the range of skills they can offer and anticipate 
difficulties in attracting talented staff. This argument is somehow counterintuitive: if talented staff are 
recruited to provide NAS rather than audit services, this  would have no direct effect in raising audit quality. 
311 For instance, information provided by Assonime, the association of Italian listed companies, suggests that 
large Italian PIEs, when implementi ng the rotation of audit firm rule, find themselves faced with a very 
limited choice. Sometimes, only one audit firm (a Big-Four audit firm) is available to provide the statutory 
audit service (the outgoing audit firm being prevented from providing the service during the cooling-off 
period; the two other large audit firms being prevented from providing the service because of independence 
rules either in Italy or with regard to subsidiaries in  other countries, and smaller audit firms are not always 
able to cope with the geographical coverage of the group of the PIE). This implies a shift of bargaining power to the detriment of the PIE. It also effectively results in rotation between two Big-Four audit firms.  
312 This ban would be difficult to enforce regarding a statutory auditor as natural person. However, statutory 
audit services to PIEs are normally provided by audit firms. 
 
EN 168   EN services, see above) and only have a udit clients. This would result in the creation of 'pure' audit 
firms.  
For this obligation to be effectiv e, it should be accompanied by so me ancillary measures in order 
to make sure that the obligation is  not circumvented. In particular: 
– The audit firm should not be part of a network/group which provides "non-audit 
services" to avoid circumventing this rest riction by simply split ting the responsibility 
for the different services into two diffe rent legal entities within a network; 
– If the capital of the audit firm is open to  non-partners, no more than 5% of the voting 
rights and/or the capital is held individua lly by any firm providing non-audit services 
and firms providing non-audit services taken as a whole do not account or more than 
10% of the voting rights and/or of the capital; 
– The audit firm should not dire ctly or indirectly invest  in firms providing non-audit 
services. 
The advantages of 'pure' audit firms  
• If 'pure' audit firms were created, this will  radically solve the issue of both real and 
perceived conflict of interest arising from the provision by the audit firms of audit and 
NAS to the same client because the aud itors would no longer be connected to the 
persons providing NASs. Indeed, public per ception is important a nd investor confidence 
in the effectiveness of audit can be undermined  if there is a percepti on that auditors lack 
independence and objectivity by providing NASs. If 'pure' audit firms existed, situations 
where the shareholders/the public consider that  it is possible that an audit partner/firm 
whn faced with an import ant client is likely to sacrific e his/her independence to secure a 
longer auditor-client relationship would bea voided. Consequently, the confidence of 
investors in the audit reports issued  by the auditor would increase;  
• The credibility of the audited financial stat ements of companies would increase as the 
auditor's independence would no longer be questioned, whereas cu rrently due to the 
provision of dual sets of services to the same  audit client there might be a perception 
that the professional judgement  of the auditor is negatively influenced by his/her 
proximity to the audit client;  
• This option would create incentives, on both the demand and the supply sides, to focus 
on audit quality: PIEs would have to select an auditor purely on the basis of their audit 
capabilities and audit firms would have to focus on audit services, which would 
significantly reinforce audit quality and th e perception of the independence of the 
auditor; 
• At the same time, a separation of the audit services from the NAS would not necessarily 
lead to a situation where the revenues of th e audit partners would decrease, since profit 
margins would remain the same due to the respective adaptation of cost structure/ 
business model of the "pure audit firms".. 
• Despite the fact that audit companies will st ill be paid by the audi ted clients, the audit 
partners would become less vulnerable to eco nomic pressure from these audit clients, 
since the potential loss of the parallel provis ion of NAS will no longer be at stake. At 
 
EN 169   EN the same time, if this option will be comb ined with mandatory rotation, the economic 
pressure not to lose the audit client would al so be mitigated due to  the inevitable switch; 
• The audit report would better play  its role as a key element of information for investors 
on the financial statements of a company and, thus, the investors would not be inclined 
to seek other sources of information to confirm the conclusion s of the audit report; 
• There would be a level playi ng field for the provision of NAS allowing other providers 
to compete for NAS previously provided by audi t firms to their 'captive' audit clients;  
• Some market entry barriers could be eliminat ed as new or smaller audit firms might be 
ready to invest knowing that in the context of  'pure' audit firms they would have a better 
change to enter the market segments of large listed companies and financial institutions currently largely dominated by Big Four audit firms; 
• The choice of audit firms for the financial institutions and large listed companies which 
currently receive NASs from so me audit firms would be en larged: once converted into 
'pure audit' firms there would no longer be an y impediment to provi ding audit services 
to any entity (currently, an audit firm providing certain NAS to a client is de iure  not 
eligible to provide audit services to that client because of the conflict of interest). 
The disadvantages of 'pure' audit firms: 
• Audit firms would need to segr egate their audit and non-audit services into two separate 
entities. This entails legal transaction costs. 
• The multi-disciplinary networks of the Big Four  audit firms would also have to separate 
the audit services from NAS, which also entails costs and possibly resistance by third country members of those networks. 
• Audit firms consider that this option might deprive them of the knowledge and 
understanding of their clients' businesses whic h they deem necessary to the provision of 
good quality audit servic es. While there may be synergies, providing NAS to an audited 
entity is not a condition necessary to provi de audit services or be able to do so
313. 
• The audited entities would have to rely on other service providers for the NAS, who 
may or not have appropriate skills and e xperience. Finding altern ative NAS providers 
could entail initial extra costs for the comp anies. However, the audited entity may 
decide to keep the new entity segregated fr om the audit firm (and independent from it) 
as a provider of NAS, in which case this concer n disappears. In any event, if the audited 
entity decides to look for another provider, th e cost would be part of  a business as usual 
situation.  
• Any new NAS providers would require time to get to know the audite d client. Similarly, 
the audited client would need to invest time and resources in order to facilitate the NAS 
provider's familiarisation with the client's business. This concern, however, is part of a business as usual situation. 
                                                
 
313 See Articles 6 and seq. of the Statutory Audit Directive.  
 
EN 170   EN • The conversion into 'pure audit' firms may act  as a barrier to growth for mid-tier and 
small audit firms. Certain audit firms are e ssentially providing audit services to small 
PIEs and non-PIEs and are hardly present in the market for audits of large PIEs. 
Requiring their conversion into pure audit firms may lead to the creation of a barrier to 
growth and/or it may lead to their abandoni ng of the PIE market. This may impact on 
complementary initiatives such as joint audits  with at least one non-Big Four audit firm. 
However, this concern may be adddressed if this option is adjusted (see the 
proportionality analysis in Annex 19 ) to the size and dimension of activities of the audit 
firms (see Annex 16 ).  
 
EN 171   EN ANNEX 11. MANDATORY ROTATION OF AUDIT FIRMS  
The introduction of mandatory audit firm rotation is one of the proposed options to mitigate the 
risk of any potential conflict of interest due to  a "familiarity threat" (objective 2.3). Together 
with other options, it could also aim at contribut ing to the switching of an audit firm to improve 
market conditions (objective 3.1).  This option, however, is contro versial and has attracted the 
opposition of many stakeholders, in particular fro m the profession. The European Parliament has 
also expressed opposition. Opponents of mandatory firm rotation cl aim that the Statutory Audit 
Directive rules on partner rotation (as opposed to audit firm rotati on) are enough to deal with the 
independence concerns. They also argue that the Italian experience has not been positive and the 
Italian market is as concentrated as others. It aly is currently the only Member State where the 
mandatory rotation of audit firms is enforced. In addition, they often refer to the increased costs, 
the loss of knowledge and therefore the negativ e impact on audit quality, the difficulty in 
maintaining industry specialisation a nd the potential lack of choice.  
This annex presents (1) the experience of Italy with mandatory rotation of audit firms; (2) the 
main arguments in favor of mandatory rotation of audit firms; (3) the main arguments against 
mandatory rotation of audit firms and some count er-arguments; and (4) other experiences with 
mandatory rotation. 
(1) The experience of Italy and others with mandatory rotation  
Currently, Italy is the only Member State that  requires mandatory audit firm rotation. It was 
introduced in 1974 to guarantee independence.  The Italian model is as follows: 
– Duration of the audit engagmeent (9 years) . Public-interest entities are obliged to 
change audit firm every nine years. The initial duration of a si ngle audit appointment 
was three years and the same audit firm coul d be re-appointed twice.  However, in order 
to reinforce independence, the system was m odified in 1998. Currently, the audit firm is 
appointed for 9 years. The Ital ian authorities consider that  this long-term appointment 
guarantees the well-functioning of  the rotation system. In a ddition, the duration of the 
engagement allows the audit firm enough time to recover the higher investment (e.g. to 
understand the audited entity etc) in the first years of the audit engagement. 
– Cooling-off period (3 years) . Until 1998, audit firms that finalised their activities after 
a nine year appointment, coul d not be re-appointed for five  years; since 1998, this time 
limit has been reduced to three years. 
– Rotation of audit partner  (7 years). The rotation of audit firm rule applies in 
combination with the Statutory Audit Directiv e rule on audit partne r rotation. Therefore, 
the audit firm would need to change the key audit partner within the 9-year audit 
engagement. 
Concerning the question of independence , according to a Bocconi study conducted to 
investigate the impact of the ma ndatory rotation rule in Italy314, 69 % of managers of listed 
companies approve of rotation. 14 % consider it ne gatively. They take a positive view mainly 
because they believe that over the years auditors tend to concentrate on routine activities and pay 
                                                 
314 Bocconi (2002). 
 
EN 172   EN less attention to making suggestions/improvements. The people contacted in  the survey generally 
agreed that the current existing mandatory rotation in Italy constitutes a mechanism to guarantee auditor independence. This has also been reco gnised by Assonime, the association of Italian 
listed companies
315. 
Concerning the question of market structure , the Bocconi study316 came to the conclusion that: 
mandatory audit firm rotation did not have mu ch impact on the level of competition in the 
mandatory audit segment; and it has not given small to medium sized audit firms the opportunity to compete against large audit firms for contr acts with the large public -interest entities.  
These findings suggest that mandatory rotation of audit firms, taken in isolation, would have a 
limited effect on the structure of the market. Ho wever, mandatory rotation may have a positive 
effect in enlarging the choice of auditor for the audited entities when combined with other 
measures, such as a mandatory tendering rule requi ring the audited entity to also invite small and 
medium-sized audit firms to submit bids or the jo int audit rule. None of these rules are applied in 
Italy. Indeed, if a joint audit rule would require  that at least one of the audit firms in the 
consortium is not among the largest firms, it would automatically in troduce new players to 
compete in that segment of the market. Therefore,  the rotation of audit firm rule may contribute 
to enlarging the choice of auditor and to provi de an opportunity to (especially) medium-sized 
entities to enter into that segment of the market and compete with the largest ones.  
Another argument, raised in the Bocconi study
317, refers to the point that mandatory audit firm 
rotation has a considerable imp act upon the overall cost s of audit services. More man-hours were 
necessary for the incoming auditor/ audit firm in order to get to  know the entity's business.  
However, other measures may help to reduce this  costs. Firstly, a true  handover file could be 
made available by the outgoing auditor/audit firm . Secondly, if joint audits were required, it 
would mitigate that risk as both auditors would not  need to rotate at the same time. This would 
smooth the transition of the audit engagement from one firm to the other and also ensure that the 
specialised knowledge of th e entity is not lost. Therefore, th e amount of working hours needed to 
introduce the incoming audit firm to the special features of the audited entity could be reduced (see also the arguments advanced in section 6.3
 of this paper). 
(2) Positive impacts of mandatory rotation  
Mandatory audit firm rotation presents advantages both in terms of meeting potential conflicts of 
interest and stimulating competition. Th e following issues should be considered: 
• In a long term audit relationship, the audito r will tend to identify too closely with the 
management. The proper professional sceptici sm will be diluted and auditors will be 
more likely to smooth over areas of difficulty  in order to preser ve the relationship. 
Auditors may become stale and view the audit as a simple repetition of earlier 
engagements318. This staleness fosters a tendency to anticipate results rather than 
                                                 
315 " Il nostro sistema…garantisse alti livelli di indipendenza ". Assonime (February 2011), p. 9 
316 Bocconi (2002). 
317 Bocconi (2002). 
318 A long term engagement leads to audit work becoming excessively routine, which would ultimately affect 
the competence. A long period working with the same client can lead the auditor to put too much trust in 
the previous years' work and, consequently, may lead the auditor to treat the work as a repetition of the 
reviews performed in prior years.  
 
EN 173   EN keeping alert to subtle but important circ umstances. The great preponderance of high 
profile financial reporting failures occurred in circumstances where the audit firm had been engaged for many years
319. 
• As explained above, managers of Italian list ed companies broadly approve of mandatory 
rotation of the audit firm320 and consider that this mechanism guarantees auditor 
independence.  
• A similar effect is alleged in "self-revisi on" cases, those in wh ich the auditor must 
report negatively on his previous work. In these contexts, by bringing a "fresh view" 
and forcing an in-depth review, rotation of the audit firm might attenuate these 
problems321. 
• In addition, in long term engagements it is more likely to increase materiality 
thresholds. A study performed by Bates et al.322 demonstrated that in the absence of 
rotation of the audit firm, th e materiality threshold was set at an average of $ 365,000. 
When there was rotation of audit firms, th e threshold was only set at an average of $ 
201,000. 
• Dopuch, King and Schwartz (2001) observed that  the highest frequencies of favourable 
auditors' reports, as a measure of the actu al behaviour of the auditor, occurred in 
regimes without mandatory audit firm rotation. 
• The fear that reputation will be affected, when discovery of an unreported breach is 
made public, will also enhance audit quality. According to Hoyle323, mandatory rotation 
will make it possible for audit firms to c ontrol each other's work. The knowledge that 
another audit firm will scrutinise the auditor' s work within a short period of time will 
encourage the auditor to do its best. Mandatory rotation will also minimise the risk that 
errors in the audit procedure continue due to the fact that th e auditor looks upon the 
audit engagment as a reiteration of last year's audit.  
• As shown in section 2.3  high concentration is observed in  national markets for audits of 
listed companies and financial institutions. This leads to limited choice and high prices. 
The introduction of mandatory  audit firm rotation ensures that mandates regularly 
become available in the market. This opens  the opportunity to acquire new engagements 
and therefore stimulates competition.  
• Mandatory rotation of audit firms addresses th e shortcomings of the "partner rotation." 
According to Article 42 (2 ) of Directive 2006/43/EC, the key audit partner(s) 
responsible for carrying out the statutory audit of a PIE on beha lf of the audit firm needs 
to rotate from the audit engagement with in a maximum period of seven years. The 
European Parliament seems satisfied with the statu quo  on this point: while it regards 
external rotation as a means of  strengthening the independence of auditors, it reiterates 
                                                 
319 Arel et al. (2005). 
320 The main reason why they take a positive view is that  they believe that over the years auditors tend to 
concentrate on routine activities and pay less attenti on to making suggestions/improvements. See Bocconi 
(2002). 
321 Arruñada & Paz-Ares (1997). 
322 Bates et al. (1982). See also FEE (2004), p. 9. 
323 Hoyle (1978). 
 
EN 174   EN its view that " the existing partner rotation arr angements provide the independence 
necessary for audits to be effective ."324 However, the key partner rotation seems to be 
insufficient to solve the existing problems. On the one hand, the threat of familiarity is 
not resolved. The "partner rotation scenar io" with no rotation of audit firm risks 
perpetuating the syndrome of decades-long audit engagements, where the partner of a firm's long standing (sometimes over a hundred  years) audit client  naturally remains 
under pressure not to  lose the client
325. Moreover, in case of pa rtner rotation only, a new 
partner will likely feel obliged to live with decisions and agreements made by the previous partner; he/she may have little flex ibililty to reopen them. The partner of a new 
firm does not have that problem
326. On the other hand, opportuni ties to enter the upper 
segment of the market are not provided. 
Taking the above mentioned into consideration, the introduction of mandat ory rotation of audit 
firms improves audit quality in terms of the avoi dance of over-familiarity with the client and its 
management and the opportunity for a fresh approach  to the audit. Moreover,  it provides a better 
perception of auditor independence327. Additionally, it stimulates co mpetition so that potential 
new players have access to certain segments of the market. Furthermore, the stimulation of 
competition could lead to a decrease in audit costs because when looking for a new auditor, the 
audited firm is also able to l ook at different price offers and can  include that in their decision. 
The audit as such gains in terms of reliability and trust taking into consideration that statutory 
auditors and audit firms fulfil a societal role. 
(2) Downsides of mandatory rotation  
Those who speak out against mandatory audit firm rotation often refer to the increase of costs, 
the loss of knowledge and therefore the nega tive impact on audit quality, the difficulty 
maintaining industry specialisati on and the potential lack of choi ce. To address these suggested 
disadvantages the following issues s hould be taken into consideration: 
• It is obvious that the new auditor has to become familiar with the company's business, 
its financial and non-financial procedures, systems and recent history and therefore 
more time might be needed. Moreover, there are costs in terms of management time 
particularly in terms of working with the new auditor to familiarise him/her with the 
company. However, other issues should be al so considered. The turnover of executive 
management is an important factor. As a consequence, the auditor-management relationship is renewed continually even w ithout mandatory rotation. To address those 
situations, audit firms developed internal procedures to smooth the trasition on such 
occasions and to reduce cost in case of a management change. These rules could also 
apply in case of audit firm rotation. Moreove r, audit firms develope d even more detailed 
and specified rules for new engageme nts in order to reduce costs.  
                                                
 
324 See European Parliament (2011), §26. On the cont rary, the US has recently launched a reflection on 
"whether mandatory audit firm rotation would help address the inherent conflict created because the 
auditor is paid by the client ." See Doty (2011a), section III.B. See also the consultation document 
published by the audit oversight body, US PCAOB (August 2011).  
325 See above Section 2.3.2 . 
326 See Doty (2011b), section II. 
327 A study conducted by Gates et al. (2007) concluded that rotating the audit firm will better advance the goal 
to enhance auditor independence and audit quality and to restore investor confidence in the markets. 
 
EN 175   EN • As it is more likely that additional costs w ould appear during the first or second year 
than at a later point of time, the frequency of mandatory firm rotation should be not too 
high. Rotation every three years would be too cost-intensive. Therefore, the rotation 
period should not be too shor t and should include the possib ility to renew the contract 
once. As a consequence, potential additional costs are spread over a certain number of years. Taking this into consideration, the initial time period of engagement should not 
be on a short term basis, e.g. for less than fi ve years. A possibility to renew the contract 
should be given once. However, to avoid conf licts of interest, nine years should not be 
exceeded.  
• Currently, in some Member States, the audit contracts are only signed for one year. This 
implies uncertainty for the auditor regarding his own planning for s ubsequent years. By 
introducing mandatory rotation, the contracts would be signed for a longer period and 
therefore give the auditor a be tter possibility to plan hi s future work. All the above 
mentioned aspects outweigh pot ential additional costs. 
• Often, it is feared that ma ndatory firm rotation leads to a loss of knowledge and 
therefore audit quality would be undermined. As mentioned above, at the beginning of 
an audit engagement the auditor needs to familiarise himself/herself with the special procedures, systems and the recent history of the entity - a knowledge what the previous 
auditor had already gained. In this process knowledge could be lost. This threat could be 
minimised by ensuring that the incoming auditor has access to the important 
information on the entity he needs by pr oviding a handover fi le. Additionally, in 
combination with another option such as jo int audit, the loss of  knowledge could be 
minimised. Both incumbent statutory auditors and audit firms do not necessarily need to 
rotate at the same time. Therefore, one auditor would stay in  place while a new one 
comes in ensuring that the knowledge  of the entity is preserved. 
• Another negative impact that is feared is th e potential difficulty of auditors to develop 
and maintain the industry knowledge to oper ate in specialised sectors. However, 
specialised knowledge can also be obtained by working together with external specialists. An increase in co sts should not be feared becau se the specialist would be 
appointed for a certain period of  time. He or she would only be  paid for the actual work 
and not throughout the whole year. 
• Finally, the introduction of mandatory firm ro tation is opposed because of the fear that 
it would lead to a lack of choice when a ppointing a new auditor.  First of all, by 
introducing transitional periods for introduci ng mandatory firm rotation, only a certain 
number of auditors rotate at the same time.  Moreover, audit firms or statutory auditors 
that have not been previously engaged in  certain segments of the market could 
participate in the selection procedure in  order to obtain such engagements.  
(4) Other issues: Spain and the rotation obliga tion; the International Monetary Fund, Brasil
 
and the US  
Other aspects that have not been considered so far are the following: 
 
EN 176   EN • Those opposing mandatory firm rotation ofte n mention Spain as an example where 
mandatory firm rotation was introduced and abolished. However, a study328 clearly 
demonstrates that at no st age was mandatory rotation of audit firms ever enforced on 
Spain. Therefore, it is difficult to use this as an example that mandatory rotation does 
not fulfil its expectations. 
• Looking at practical examples, the Interna tional Monetary Fund requires the mandatory 
rotation of the Fund's external audit firm every 10 years329. The contracts to conduct the 
annual external audit of  the financial statements of th e Fund are subject to bids every 
five years. 
• In Brazil, currently auditors of listed companies must rotate after 5 years, with a 
cooling-off period of 3 years. Recent academ ic studies present evidence favourable to 
rotation. For instance, Assunçao and Carrasco330, using data from 1999 to 2006, point 
that rotation of audit firm has a positive and statistically significant impact on the audit 
process of listed companies.  It is argued that rotation of audit firms increases the 
efectiveness of governance mechanisms in t hose companies. Braunbeck suggests that 
audit quality is lower when agency conf licts between controlling and non-controlling 
shareholders are higher and when  auditors' tenure is higher331. It is often raised in Brazil 
that rotation of audit firms every five y ears entails a high cost. The Brazilian stock 
exchange supervisor ( Commissão de Valores Mobiliários , CVM), however, interprets 
that this argument is more related to the time-limit (5 years) rather than rotation itself332. 
As a result, the CVM has rece ntly proposed to modify the rotation rule: the rotation of 
audit firms would be maintained as an oblig ation, but it would only be required every 10 
years (provided that the audited entity has an audit committee)333.  
• The US has recently launched a reflection on " whether mandatory audit firm rotation 
would help address the inherent conflict created because the auditor is paid by the 
client ."334 This lead to the public ation of a consultation pa per on 16 August 2011 on this 
issue by the US audit oversight body335. This consultation paper links the question of 
rogation of audit firm to the question of independence, which is seen as " critical to the 
viability of auditing as a profession "336. The paper presents the historical context of the 
mandatory firm rotation option in the US, s howing arguments put forward in favour and 
                                                 
328 Gómez-Aguilar et al. (2006).  
329 International Monetary Fund (2004).  
330 " Os números indicam que o rodízio tem impacto positive e estaísticamente significativo sobre o processo 
de auditoria para as empresas listadas. Como auditoria é um insumo para um série de mecanismos de governança, os resultados sugerem que o rodízio aumenta a efetividade desses mecanismos ". Assunçao & 
Carrasco, p. 5. 
331 Braunbeck (2010). 
332 " O grande argumento contrário à realização do rodízio que vem sendo trazido à CVM desde a emissão da 
Instrução CVM n° 308, de 1999 está relacionado ao custo que o rodízio a cada 5 anos impõe às firmas de 
auditoria e àas companhias auditadas – incluindo os custos de aprendizado da realidade operacional do novo cliente. Tal argumento, no entanto, é mais relacionado ao prazo entre as rotações do que ao rodízio 
propriamente dito. Mantido o rodízio obrigatório com prazos mais dilatados, tais custos seriam diluídos ao 
longo do tempo, o que mitigaria, em grande parte, a força do argumento ." CVM (2011). See also 
Assunçao & Carrasco, p. 34 and seq. regarding arguments raised on costs of rotation of audit firms. 
333 See CVM (2011). The deadline for comments on the possible modification of the rules was 15 August.  
334 See Doty (2011a), section III.B. 
335 US PCAOB (August 2011). 
336 US PCAOB (August 2011), p. 4.  
 
EN 177   EN against this measure337. It also refers to the limitations of existing academic studies, 
which observe the consequences of "volunt ary" audit firm rotation, which "may be 
associated with auditor-issuer disagreemen ts, other financial reporting issues or 
economic issues". As a result, those studi es may not be fully reliable in showing 
whether the effects of short audit tenure are riskier or not338. The consultation paper 
presents a number of questions for discus sion. It is noteworthy that, regarding the 
possible maximum duration of an audit contra ct, reference is made to 10 years as " a 
substantial period of time ".339 
                                                 
337 Ibid. p. 10 and seq.  
338 Ibid. p. 16 and seq. 
339 Ibid. p. 19. On this issue, the PCAOB refers to a report prepared in 2003 by another body. See US 
Conference Board (2003),p. 39. 
 
EN 178   EN ANNEX 12. JOINT AUDIT OF FINANCIAL STATEMENTS OF PIE S 
One of the possible ways to increase the choice  of audit providers for public-interest entities 
(PIEs) and to further improve a udit quality would be the introduction of the obligation for PIEs 
to have more than one audit firm to perform th e statutory audit or in other words – introduction a 
of "joint audit" requirement. Th is would entail a tendering process for the selection of joint 
auditors where the scope and responsibility of each auditor is clearly defined. Such a measure 
would increase the choice of audit pr oviders for PIEs (objective 3.3).  
According to different studies, France and Denmark, which are two countries that currently or 
previously require mandatory joint audit (Denma rk abolished joint audit requirements in 2005), 
have the least concentrated audit markets in Europe340. Thus, it has been a dvanced that joint 
audit would safeguard auditor independence and would stimulate market competition. Moreover, 
the Institute of Chartered Accountants in Englan d and Wales (ICAEW), which is one of the UK's 
most prominent accounting institutes, said that the introduction of mandat ory joint audits should 
be one option explored in a bid to promote competition in the top-heavy audit market.  
This option, however, is controversial and has attracted the opposition of many stakeholders, in 
particular from the Big Four audi t firms and some public authoritie s. Mid-tier audit firms have 
more positive views on joint aud it. The European Parliament r ecognises that the implementation 
of joint audits could have positive effects on the diversification of  the audit market.  
This annex presents the experience in two Memb er States – (1) France and (2) Denmark; (3) 
describes the possible joint audit rule at EU level; (4) presents the benefits of joint audit and (5) 
describes the main arguments against joint audit as well as some counter-arguments. 
(1) Joint audit in practice – the French example:  
Under French law, the audited ent ity must appoint at least two stat utory auditors or audit firms to 
carry out a joint examination of the procedures and methods used to draw up the accounts, in accordance with the instructions laid down in a standard of professional practice.
341 This 
standard will also determine the principles that govern the distribution of task s to be carried out 
by each auditor in order to complete the assignment.  
Three goals were pursued by the French legislat or when imposing such a requirement on certain 
companies: 
• Reinforcement of the level of transparency and financial security; 
• Improvement of the independence of audito rs and as a consequence enhancement of 
audit quality; 
• Limitation of the hyper-concentration in  the upper end of the audit market342. 
The joint audit requi rement applies to all entities, whic h are obliged to publ ish consolidated 
accounts – i.e. those entities that exercise exclus ive or joint control or significant influence over 
                                                 
340 See London Economics (2006), p.19. 
341 See French Commercial Code, Article L.823-2. 
342 See Fremeaux et Noël (2009). 
 
EN 179   EN one or more other companies. There are two gr oups of entities that are exempted from the 
general obligation – (i) exemption within a larg er group (i.e. if the consolidated financial 
statements are published by another entity at a hi gher level in the group); (ii) exemption due to 
the size of the entity (i.e. the total assets of  the entity do not exceed €15 million; the turnover 
generated by the entity does not exceed €30 million and the entity  has less than 250 employees). 
As a matter of fact, listed companies in France ge nerally publish consolidat ed accounts, certainly 
the larger ones. 
The auditors are appointed  at the shareholders' meeting and th ey are not obliged to present their 
bids together or to act in consortia. The only re quirement is that the tw o appointed auditors are 
members of different firms or networks. Under th e French model, there is no restriction on the 
size of the audit firm to be appoi nted, thus there are three possible scenarios: (i) a ppointment of a 
Big Four and a non Big Four firm; (ii) appointment of two Big F our firms and (iii) appointment 
of two non Big Four firms. The following table presents the actual co mbinations for 2004 to 
2009 for the top 120 listed companies in France. 
 
Figure A12.1 Source: Billard et al. (2001), p.14 (Table 5: Market share and concentration of audit 
missions according to size (2004 to 2009)).  
LL (combination of two big Four firms); LM (combinaiton of a big Four firm and a medium-size audit 
firm, such as Mazars or Grant Thornton); LS (combi nation of a big Four firm and a smaller firm); MM 
(combination of two medium-sized firms); MS (combination of a medium-sized and a small firm); SS (combination of two small audit firms). 
The main underlying principle is that the appo inted auditors will together carry out a joint 
examination of the accounts, in accordance with endorsed professional standards. All rules that 
are applicable in principle for statutory auditors ar e also applicable to the joint auditors, with one 
further requirement – a specific additional professional standard is applicable to them which deals with the organisation of the joint audit, de fines the modalities of the allocation of the joint 
audit work and requires consultation between the auditors at each step of the conduct of the 
work. The three guiding principles , contained in this additional standard, of joint audits are: 
• Balanced distribution of the working pr ogramme between the two co-auditors and 
reciprocal review of the audited documents; 
• Functional and effective independence not on ly between the auditors and the audited 
company, but also between the two co-aud itors, which implies that each of them 
conducts a significant part of the audit; 
 
EN 180   EN • Real participation of each co -auditor in the review stage343. 
Thus, according to this additional standard, each joint auditor must be able to express his/her 
opinion on the financial statements of the audited entity and must  communicate jointly with the 
company. Thus, at the end of the review, both aud itors will deliver a single audit report, which 
will be signed by both auditors, not allowing the possibility of having two partial or divergent opinions. As a result, both audito rs are jointly and se verally responsible fo r the audit opinion 
provided. This requirement requires a strong consen sus to be reached between the joint auditors 
in the conduct of their work.  
Regarding the work allocation, the French system requires a very balanced approach, taking into 
account quantitative (e.g. hours wo rked) and qualitative (e.g. experience and qua lifications of the 
audit team members) criteria. Ea ch auditor must be able to ob tain a general unde rstanding of the 
audited entity, to assess the risk of material misst atement at financial statement level and to have 
an understanding of the analytical procedures in  the conduct of the work. Both auditors must 
jointly decide the overall common strategy and a pprove the audit plan. The audit procedures are 
divided among the two auditors and each one of the will cross review the work performed by the 
other. In practice, the allocation of the work could be done on business,  product or geographical 
location criteria, or the basis of  the applicable audit cycles a nd/or corporate functions of the 
audited entity.  
In relation to the split of audit fees, the main objective is to achieve an overall balance under 
which each auditor would normally receive between 40%  and 60% of the total fees at the level of 
the consolidating entity. Splits of less than 30% fo r one of the auditors with more than 70% for 
the second auditor might be permissible, but are very closely monitored by the AMF, the French 
Securities Markets Authority, with a view to progressively readju sting them. Studies have shown 
that uneven audit work allocation between the tw o co-auditors might seriously harm audit quality 
and lead to increased audit costs
344. The following table (figure A12.2 ) presents data on the 
distribution of fees in the French market in recen t years. Regarding the difference in the fees paid 
to each of the two co-auditors, it may be linked to  the reputation of each of the audit firms and 
might not be the direct result of the allocation of the audit work.  
 
Figure A12.2 Source: Billard et al. (2001), p.16 (Table 6: Market  shares and distribution of audit fees by size 
combination (2004 - 2009). 
                                                 
343 See Fremaux et Noël (2009). 
344 See Audousset-Coulier (2006). 
 
EN 181   EN It should be noted that the fees reflected in the table correspond to the audit of consolidated 
accounts, therefore reflecting th e work carried out by the resp ective networks of the joint 
auditors. If only the data  at the level of the pa rent company is taken into account, unbalances 
between the joint auditors are normally reduced. Figure  A12.3 shows data from selected 
Frenchcompanies:  
Distribution for consolidated 
accounts  Distribution at the level of the parent 
company Company 
Auditor 1 Auditor 2 Auditor 1 Auditor 2 
Michelin (2009) 91% PwC 9% Corévise 50% 50% 
Axa (2009) 83% PwC 17% Mazars 86% 14% 
Peugeot (2009) 75% Pw C 25% Mazars 71% 29% 
Suez Envir. 
(2009) 73% E & Y 27% Mazars 55% 40% 
Danone (2009) 66% PwC 34% Mazars 57% 43% 
 
Axa (2010) 81% PwC 19% Mazars 82% 18% 
Peugeot (2010) 77% Pw C 23% Mazars 67% 33% 
Suez Envir. 
(2010) 71% E & Y 29% Mazars 52% 48% 
Danone (2010) 69% PwC 31% E & Y 58% 42% 
Figure A12.3 Source: data from AMF (2010), p.6 and AMF (2011), P.7.  
Joint audits present numerous advantages both in  terms of improving audi t quality and increasing 
competition in the market. The main benefits, as well as the principal criticisms of the introduction of joint audit requirement are outlined in turn below. 
(2) Joint audit in practice – the Danish example:
 
Joint audit was introduced in Denmark at a time  where the audit firms lacked the capacity to 
carry out audits of very  large, complex and global companie s. This was intended to ensure the 
sufficiency of audit resources for such companie s. The concept of joint audit was abolished in 
2005, as it was considered that the administrati on and financial burden placed on entities did not 
necessarily result in any tangible benefits for the business from an audit quality perspective. The 
original concerns with audits of large mu ltinational companies are now addressed through 
independence requirements, review partner requir ements, key audit partner rotation and effective 
internal and external quality control345. 
(3) The obligation for PIEs to have more than one audit firm at least one of which is not 
among the largest audit firms  
The Green paper brought forward the idea of a manda tory formation of an audit firm consortium 
with the inclusion of at least one  smaller, non systemic audit firm. This form of joint audit would 
contribute to higher audit quality through compleme ntary and combined e xpertise, applying the 
"four eyes principle" in the strate gic preparation of the joint audit as well as in the analysis of the 
                                                 
345 See FEE, Briefing paper, Appointment of the Auditor , June 2011. 
 
EN 182   EN findings. Both audit firms will have joint responsibility for the audit by signing the final audit 
report.  
The obligation for PIEs to have more than one audit firm  at least one of which is not among 
the largest audit firms,346 will provide opportuniti es for the smaller firms to get exposure, 
demonstrate their capability and build reputation ove r time so that they become real competitors 
to the current Big Four audit firms both in size and in expertise, therefore having positive effects 
on market structure. Also, there is a real conc ern that appointing two Big Four audit firms to 
perform joint audit may result in a less extensive review by each of the auditors of the work of 
the other, as they may rely too much on the reputa tion of the other. In other words, one Big Four 
firm would somehow subc onsciously validate any work performed by another Big Four firm, as 
they link it to quality and high pe rformance. For this reason, it may seem more appropriate to 
appoint one Big Four and one mid- tier firm as this would resu lt in more confrontation and 
exchange of views that would ultimately improve audit quality347. 
The House of Lords has also explored  joint audits in its report as a " way to enhance 
competition ".348 Even if the Economic Affairs Committee of the upper chamber was not entirely 
convinced that this would deliver better financial statements, if it was to be introduced as a means to reduce market concentration in the UK, " it should be on the basis that at least one joint 
auditor was a non-Big Four ".  
Following that line of reasoning, the long-term bene fits in terms of more  choice, audit quality 
and other benefits resulting from more competit ion in the market are expected to outweigh the 
increased costs of joints audits. 
(4) Benefits of joint audits:
 
• Enhance audit quality  – The "four eyes" approach to audit issues would enhance audit 
quality and reduce the risks of errors. Moreover, audit firms would be able to benefit from their mutual technical expertise and comprehensive geographical coverage, 
particularly in the case of complex busin ess areas, such as banking, insurance and 
others. In addition, communication between joint auditors would in some cases lead to a 
real debate on technical issues and offer additiona l room for discussion and 
improvement;  
• Reinforce professional scepticism – In the conduct of the join t audit, each of the 
auditors would cross-review the work of the other. As a consequence, knowing that 
his/her work will be the subj ect of review by his/her peer , the auditor will have an 
additional challenge which should normally re inforce professional scepticism. This will 
have a considerable value added in the case of PIEs in the financial sector given the systemic importance of even a 'small bank' ( e.g. Northern Bank had PwC as its sole 
auditor and IKB had KPMG ); 
• Overall impact of joint a udit on the financial sector– : It will create more expertise at the 
top level of the market. In some MS, statutor y audits in the banking sector are currently 
conducted by Big Three or Big One (Spain, UK , Germany), which results in a lack of 
                                                
 
346 Joint audits combining an audit firm with a substantial market share in the top listed company market 
segment in a Member State with an audit firm that ha s a small or no market share in that same segment. 
347 See Fremaux et Noël (2009). 
348 See House of Lord s (March 2011).  
 
EN 183   EN sufficient expertise even at the top level of  the market. Therefore, applying the joint 
audit in this area could build up respective e xpertise and bring additional audit providers 
in this segment within the medium term ( by also creating incentives for next-tier firms 
to invest and to grow). It could be also expe cted that some of the specialist sector teams 
(e.g. the banking audit team) may leave the Bi g Four and form specialist new firms that 
could then be appointed as a second auditor. The French experience of joint audit in the 
financial sector shows a demonstrated adde d value for major banks. BNP Paribas today 
has three auditors, which shows real added value and demonstrates that there are no 
major operational problems linked to joint au dit. The empirical evidence shows that 
voluntary joint audit is used also in some  MSs by some listed companies and financial 
institutions, which is a clear indicator of its value added to audit quality. In Sweden, 
including a number listed on the main stoc k exchange index (OMX Stockholm 30) (e.g. 
Svenska Handelsbanken). Voluntary joint audi t is also used by a number of banks in 
Austria (e.g. Raiffeisenlandesbank Nied erösterreich-Wien, Raiffeisenlandesbank 
Oberösterreich, Raiffeisenlandesbank Steiermark). 
• Reduce overall concentration in the market  – Joint audits, in the form of a mandatory 
creation of an audit firm consortium with the inclusion of at least one smaller, non 
systemic audit firm, would allow non Big Four  firms to penetrate the audit market for 
listed companies, as today this top end of the market is highly dominated by the Big Four. The French market is less concen trated than other European markets
349. 
According to a study carried out by the AMF, the French securities regulator, and to 
estimations provided to the Commission by di fferent stakeholders, around 50% of the 
audit engagements for the companies listed on the CAC 40, the French stock market, are performed by a Big Four firm, working join tly with a non Big Four audit firm; 33% are 
performed by two Big Four companies and 16% by two non Big Four  companies. This 
permits one mid-tier firm to be involved in 12 audit engagements of the 40 companies listed in the CAC 40. The French experience th us shows that joint audits (despite the 
fact that the French model does not intend, an d therefore it is not designed, to address 
market concentration) could contribute to facilitating the growth of audit firms other 
than the Big Four audit firms;  
• Ensure continuity of audit work  – Joint audit secures the minimal loss of information on 
the entity in the event of re signation or replacement of one of  the auditors, especially in 
the scenario where joint audit is combined with mandatory rotation of the statutory auditor after a certain period of time has elapsed. As there is no legal requirement for 
the dates of appointment of  both audit firms to coinci de, the disruption would be 
minimised, as only one of the audit firms would be changed,  allowing a certain degree 
of continuity of the audit wo rk to be ensured. Thus, it has been suggested that the 
audited company could stagger the appoint ments whereby changing one of the two 
auditors without putting the whole audit at risk. Taking this into consideration, joint audits are well suited to banks because of th eir systemic risks and complexity of their 
financial statements; 
• Reinforce the auditor's positi on vis-à-vis the audited entity  – Joint audits allow the 
statutory auditor or audit firm to move away from the close client relationship to a more 
balanced situation where the au dited entity will be  exposed to two suppliers instead of 
                                                
 
349 See Francis, Richard and Vanstraelen (2006). 
 
EN 184   EN one350. This would further address the "familia rity threat", as under a joint audit 
scenario, it seems less likely that any audito r develops a too-trusti ng ‘cosy’ relationship 
with the client. In addition, in  the case of disagreement between one of the auditors and 
the audited entity, the auditor will have  more incentive to stand its ground. 
                                                 
350 See Haapamäki, Järvinen, Niemi and Zerni (2011). 
 
EN 185   EN (5) Downsides of joint audits:  
• Extra costs  - It has rightly been su ggested that joint audit en tails further costs for the 
audited entity. However, based on the availabl e data, it is difficult to determine exactly 
this additional cost. According to estimati ons received from differe nt stakeholders, the 
joint audit approach would involve about 10% (according to data from France) in additional costs compared to a single audito r scenario. However, the cost mentioned by 
several stakeholders, including Danish representatives, which have had experience with 
joint audit in the past, is  significantly higher, alth ough, no estimates are provided
351; 
• Additional complexity and workload – Joint audits may bring additional complexity as 
the audited entity must choose and must co mmunicate with two aud itors instead of one 
and in some instances the audited entity ma y have to act as a re feree in case of a 
disagreement between the auditors352. In addition, it has been s uggested that joint audits 
could lead to an increase in the workload resulting from the duplic ation of audit work; 
• Risk of loss of information – It has been argued that under a joint audit scenario, some 
issues may fail to be considered by any of  the auditors, following the division of the 
work. For instance, in its reply to the Green  paper, the Canadian Public Accountability 
Board insisted on the fact th at under certain circumstances, joint audit might lead to a 
reduction in audit quality as some issues might  fail to get addressed as they fall between 
the two firms; 
• Limited review – Some stakeholders fear that there is a risk th at, in the conduct of the 
joint audit, the work performed by one of the auditors will be subject only to a limited 
and superficial review by other joint aud itor and would not bring any added value.  
• Unbalanced relationship between the two auditors – In the scenario where one Big Four 
audit firm is appointed to perform the statut ory audit, together w ith a non Big Four firm, 
the latter can easily become  dependent on the first one, as it does not possess a high 
level of technical expertise353. Thus, the second auditor might act simply as a "sub-
auditor" of the first one and follo w the instructions he is given354. 
                                                 
351 Estimation provided to Commission services by stakeholders. 
352 See Francis, Richard an d Vanstraelen (2006).  
353 See Benecib (2002). 
354 See Fremaux et Noël (2009). 
 
EN 186   EN ANNEX 13. DEFINITION OF PUBLIC -INTEREST ENTITY  
(1) The existing definition of PIE  
Currently, the Statutory Audit Dire ctive establishes stricter requirements for the statutory audit 
of the annual or consolidated accounts of pub lic-interest entities (PIEs) because they " have a 
higher visibility and are economically more important "355. 
The Statutory Audit Directive defines PIEs356 as: 
– entities governed by the law of a Member St ate whose transferab le securities are 
admitted to trading on a regulated  market of any Member State357; 
– credit institutions; and 
– insurance undertakings. 
It is noted that Member States have some flex ibility when implementing this definition. On the 
one hand, they may also designate other entities as PIEs, for instance entities that are of 
significant public relevan ce because of the nature of their bu siness, their size or the number of 
their employees358. On the other hand, Member States ma y exempt PIEs which have not issued 
transferable securities admitted to trading on a re gulated market and their statutory auditor(s) or 
audit firm(s) from one or more of the specific  requirements applying to the statutory audit of 
PIEs359.  
(2) The growing importance of financial ins titutions other than cr edit institutions and 
insurance companies  
Financial institutions other than  credit institutions and insura nce companies have a growing 
importance for the financial system.  
Assets managed by investment fund s are increasing (see figure A13.1  as regards UCITS). Total 
net assets of the European Investment Fund Industry were above €8 trillion at the end of 
December 2010360, of which roughly 75% corresponded to UCITS funds and 25% to non-UCITS 
funds. Only some investment funds  (those that issue securities admitted to trading on regulated 
                                                 
355 Cf. recital 23 of the Statutory Audit Directive.  In the explanatory memo randum accompanying the 
Commission proposal, the Commission explained that re cent scandals showed th e importance of further 
strengthening requirements concerning the audits of  public interest entities. See European Commission 
(2004). 
356 Article 2, point 13, of the Statutory Audit Directive. The Commission proposal of 2004 contained a slightly 
different definition, based on open- ended criteria to define the public relevance of the audited entities. 
Those criteria were: the nature of the business, size or number of employees. The draft article made clear 
that this definition was intended to capture liste d companies, banks, insurance undertakings and " other 
financial institutions "). See European Commission (2004), point (11) of draft Article 2. 
357 Third country issuers of securities admitted to trading on regulated markets are thus not covered by the 
definition of PIE. 
358 Article 2, point 13 in fine  of the Statutory Audit Directive. 
359 Article 39 of the Statutory Audit Directive. 
360 See Efama (2010), table 6. Data includes UCITS and non-UCITS funds. Data includes funds from Norway, 
Switzerland and Turkey. 
 
EN 187   EN markets) are captured by the definition of public interest entity. But alternative investment funds 
are not.  
 
Figure A13.1 – UCITS assets under management (€bn). Source: Efama factbook 2007. 
When comparing the total assets  held by credit institutions, insurance undertakings, pension 
funds and investment funds (excluding mone y market funds) in the EU, the non-banking 
institutions represent around 25% of total assets361. Investment funds have a similar weight as 
insurance undertakings. 
2009 2008 Institutions 
Total assets % of total Total Assets  % of total 
Credit institutions 42143710 74 42217558 76 
Insurance undertakings 6381947 11 6066224 11 Investment funds 6291915 11 5125478 9 
Pension funds 2363128 4 2073043 4 
Total 57180700  55482303  
Figure A13.2
 – Distribution of assets for credit institutions, insurance undertakings, pension funds and 
investment funds. Source: data from ECB (2010). 
The recent financial crisis has also shown the risks involved in the non-banking financial system 
for financial stability362 and for market integrity.  
The financial crisis has evidenced that " systemically important pockets developed in the financial 
system without any regulatory oversight "363. The importance of the so -called shadow financial 
                                                 
361 ECB (2010). 
362 See Generally European Commission (April 2011c). 
363 González-Páramo (2011). 
 
EN 188   EN system is growing364 and the Financial Stability Board is l ooking at policy opti ons to deal with 
systemic risks arising in the sector365.  
 
Figure A13.3  – The shadow banking sector (MMFs means money market funds; SPVs means special 
purpose vehicles; SIVs means special investment vehicles; ABCP means a sset-backed commercial 
paper). Source: FSB. 
For this reason, it is believed that " the regulatory reform should not only focus on regulated 
banks. It should instead be based on a comprehens ive system that extends  in a proportional way 
to all actors, intermediaries, markets and activitie s that embed potential systemic risk. In this 
area the identification of data gaps and putting in place an effective monito ring framework as 
well as reinforcing the accounting rules on consolidation inte rnationally are key "366. Moreover, 
the shadow financial system also conducts an e normous amount of trading activity in the over-
the-counter (OTC) derivatives market, which grew  exponentially in the decade prior to the 2008 
financial crisis367.  
However, investment firms (securities brokers), alternative investment funds, central securities 
depositories or clearing houses are not included in the concept of public-interest entity for the 
purposes of auditing their financial statements.  
                                                 
364 For instance, by June 2008, the U.S. shadow banking system (e.g. non-depository banks and other financial 
entities such as investment banks, hedge funds, money market funds and insurers) was approximately the 
same size as the U.S. traditional depository bankin g system. In a June 2008 speech, U.S. Treasury 
Secretary Timothy Geithner, then President and CEO of the NY Federal Reserve Bank, described the 
growing importance of the shadow banking system: " The structure of the financial system changed 
fundamentally during the boom. This non-bank financial system grew to be very large, particularly in 
money and funding markets.  In early 2007, asset-backed commercial paper conduits, in structured 
investment vehicles, in auction-rate  preferred securities, tender option bonds and variable rate demand 
notes, had a combined asset size of roughly $2.2 trillion.  Assets financed overnight in triparty repo grew to 
$2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank 
holding companies in the United States at that point were just over $6 trillion, and total assets of the entire 
banking system were about $10 trillion ." See Geithner (2008). 
 The size of the shadow financial system in the EU, compared to the banking system, is estimated to be 
lower than in the US. 
365 FSB (2011). 
366 González-Páramo (2011). 
367 See European Commission (September 2010), p. 11 and seq. 
 
EN 189   EN In this context, transparency about financial information (including the auditing of disclosed 
information) is of paramount importance: " private financial market s cannot function properly 
unless there is enough information and reporting bot h to market participants and to relevant 
regulators and supervisors. The financial cris is evidenced the increasing opaqueness of the 
financial sector and the resulting counterparty risk externality "368. 
Concerning market integrity, the recent Mado ff fraud case, which constitutes the biggest 
financial fraud ever, originated from the inve stment fund sector (i.e . a non-banking financial 
institution). The diligence and capacity of the audit firm auditing Madoff's accounts has indeed 
been questioned.  
Additionally, EU legislation has recently created new categories of financial institutions such as 
the payment institutions369 and the electronic-money institutions370. They are allowed to provide 
specific financial services, under certain circum stances, in competition with traditional credit 
institutions. They are also subj ect to prudential requirements and specific supervision. However, 
they are not included in the category of public-i nterest entities for the purpose of having their 
accounts audited. 
(3) A new definition of PIE appears necessary  
In this context, it appears that the existing definition of public-interest entities no longer covers 
all financial institutions that ar e relevant from the perspective of  financial stability or investor 
protection (e.g. protectio n against fraud).  
Hence, it is appropriate that th e definition of public-interest en tities is expanded to also 
encompass the following institutions: 
– Investment firms; 
– UCITS; 
– Alternative investment funds; 
– Payment institutions; 
– Electronic-money institutions; 
– Central securities depositories and institutions clearing securities transactions371. 
(4) Implications of the new definition 
For the PIE itself, the main consequences would be to have an audit committee; increase the 
dialogue between the auditor and the audit committ ee; receive expanded audit reports as well as 
internal audit reports from their auditor(s); apply the specific ru les on the appointment of the 
auditor(s) which would imply limiting the durati on of the audit engagement (rotation rule) and 
                                                 
368 Ibid. On the importance of transparency on financial reporting for the good functioning of financial markets 
and financial stability, see also Maaijoor (2001). 
369 Currently, there are about 200 payment institutions in the EU.  
370 The e-money Directive was due to be transposed by Ap ril 2011. E-money institutions are required to have a 
minimum initial capital of at least €350,000.  
371 This is already the case in Italy, for instance. 
 
EN 190   EN inviting tenders when seeking to engage a new auditor (tendering rule); and, in certain 
circumstances, engage more than one auditor (joint audit rule).  
However, as explained in Annex 19 , these rules would apply in a proportionate manner. Not all 
public-interest entities would be subject to thes e obligations. The applicat ion of some of them 
(joint audit rule, tenderi ng rule or existence on an audit committee) woul d depend on their size 
(see also Annex 16  on this). Moreover, for some of the in stitutions, because of their nature (i.e. 
UCITS and alternative investment funds), it would not be appropria te that they are required to 
have an audit committee in all circumstances (e.g. when these funds function merely for the 
purposes of pooling assets). 
The implications of the new definition of PIE for the statutory auditors or audit firms are limited. 
In practice, it is estimated that most of the st atutory auditors or audit firms auditing financial 
institutions other than credit institutions and insurance undertakings are already auditing PIEs. 
Therefore, they are already subject to the stri cter requirements for th e auditors of PIEs.  
 
EN 191   EN ANNEX 14. CHOICE OF LEGAL INSTRUMENT : DETAILED EXAMINATION  
A non-binding legislative instrument would not be  appropriate to implement the policy options 
described. As explained in Section 3.2  there is a need for a more  harmonised legal framework 
within which statutory audit is c onducted across the Union, in par ticular as regards the audit of 
PIEs. The current legal framework (a principles-based directive) which allows for a large margin 
of self-regulation by the profession has proved to  be inadequate to ad dress all the problems 
described. The objectives presented in Section 4  can only be achieved with a legally binding 
instrument, whether a regulation or  a more detailed directive. Th erefore only these options will 
be examined in detail in this Annex . The examination will consider the following criteria:  
– (i) effectiveness : the extent to which the measure fulf ils the objectives in Section 4;  
– (ii) certainty : highest possible confidence of the rele vant stakeholders as to the content 
of the rules to be respected and that the rules followed in practi ce are closely aligned 
with the objectives of  the framework; and  
– (iii) common framework : the same requirements applying in all Member States. 
(1) Regulation .  
Under this hypothesis, rules appl icable to statutory audit woul d be included in a directly 
applicable Regulation. This solution presents several advantages. While a Directive requires 
national implementing provisions to be adopted, leaving scope for inte rpretation, the direct 
applicability of a Regulation would offer great er legal certainty for those subject to the 
legislation across the EU. Also, the legislation becomes applicable on the same date across the 
EU, thus avoiding problems associated with late transposition of legislation by Member States. 
Furthermore, a Regulation would offer the highest  degree of harmonisation: statutory audits 
would be applied under substantially  identical rules in all EU Memb er States. Once in force, it 
would override incompatible provisions in domestic legislation. In terms of administrative costs, 
it avoids the resource-intensive and time-cons uming transposition of directives by national 
legislators as well as the mon itoring of timely and correct tr ansposition by the Commission. 
A regulation could effectively deal with some of the policy options described above, in particular 
those regarding the performan ce of the statutory audit of PIEs. These policy options are 
sufficiently detailed so that the transpositi on into national law would amount to a mere copy-
and-paste exercise: e.g. rules on duration of audit engagement. The Regulation solution is 
considered the best regulatory choice for th ese policy options: the same regulatory framework 
based on the same principles, thereby ending the current fragmentation of the regulatory 
response. 
The adoption of a regulation w ould not prevent Member States from adopting additional 
supplementing legislation, as long as such legislation would not contradict the regulation. It 
should be noted that the policy options  regarding supervision (see section 6.5 ) would, in any 
case, require Member States to adopt implementing legislation.  
However, the regulation solution seems to be legally impossible for some of the policy options 
presented. Indeed, rules regarding the establishment of companies,  such as thos e in connection 
 
EN 192   EN with the approval and registration of auditors and firms, would need to be  adopted as a directive 
given the requirement in Article  50(1) TFUE (ex article 44 TEC)372. This implies that, should a 
regulation be adopted for the rules concerning the audit of PIEs, a directive would need to co-
exist at least to regulate the rules regard ing approval and registration of firms.  
(2) Directive (or modification of Directive 2006/43/EC) .  
Under this hypothesis, a new directive would be proposed or Directive 2006/43/EC amended. A 
Directive has the advantage of being a legally bi nding instrument which at the same time leaves 
Member States the flexibility to  adapt some measures to their legal and economic environment. 
The main disadvantage is that national transp osition may lead, and often does, to different 
interpretations and variations in national rules.  Another recurrent problem is the dealyed or 
incomplete transposition. Therefore, in terms of certainty and common framework criteria, it presents fewer advantages than a regulation, certa inly as regards those policy options calling for 
detailed rules such as those in c onnection with the audit of PIEs.  
In terms of effectiveness, as advanced above, a directive would be the only legal solution for the 
policy options regarding the approval and regist ration of auditors and audit firms. Also, it 
appears to be a suitable solution for the policy options regarding the audit of SMEs, considering 
the content (i.e. a mandate to Member States to  act) and level of detail of the policy option. 
Concerning the policy options on the adoption of  audit standards, the choice of the legal 
instrument would be neutral, given that the cont ent of the obligation would be determined by the 
texts to which they would make reference. This obligation would become ancillary to other policy options. 
In terms of coherence, should a regulation be adopted in connectio n with the audit of PIEs and a 
directive remain for the approva l and registration of auditors and audit firms, the existing 
principles in the Directive re garding professional ethics, prof essional secrecy, independence and 
reporting as well as the associated  supervision rules could remain applicable for the audit of non-
PIEs. Transferring these rules to a regulation would add little value at this stage, given the margin of discretion enjoyed by Member States. 
(3) Completing the regulation or directive with additional legislation
.  
Whether a European Parliament and Council regula tion or directive is pr oposed as the preferred 
solution, it would need to be completed at a late r stage with additional secondary legislation in 
some cases. There are instances in which the poli cy options regarding the audit of PIEs require 
detailed technical rules that would need to be drafted with  the cooperation of the national 
competent authorities. Having recourse to the "t echnical standards" that could be developed by 
ESMA or the other ESAs a ppears the logical solution373. In the case of the areas covered by the 
directive, it would also be necessary to comp lete it in the future, but technical standards 
developed by ESMA would not be the solutio n in this case, but rather delegated acts374 or 
implementing acts375 prepared by the Commission under the normal Treaty conditions. 
                                                 
372 " In order to attain freedom of establishment as regards a particular activity, the European Parliament and 
the Council, acting in accordance with the ordinary legislative procedure and after consulting the 
Economic and Social Committee, shall act by means of directives ". Emphasis added. 
373 See articles 10 (regulatory technical standards) an d 15 (implementing technical standards) of ESMA 
Regulation. 
374 Article 290 TFUE: 
 
EN 193   EN Figure A14.1 
Objectives  
 
Policy option  effectiveness certainty common framework 
Policy options relating to the aud it of PIEs, including supervision 
Regulation ++ ++ ++ 
Directive + + + 
Policy options relating to the audit of SMEs 
Regulation ≈ + + 
Directive ++ + + 
Policy options relating to the approval and re gistration of statutory auditors and audit firms 
Regulation -- -- -- 
Directive + + + 
Policy options relating to th e adoption of auditing standards 
Regulation + + + 
Directive + + + 
Policy options relating to the supe rvision of the audit of non-PIEs 
Regulation ≈ ≈ ≈ 
Directive + + + 
Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly positive; 
+ positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable  
On this basis, the Commission services conclude that:  
– (i) a regulation is a suitable and proportionate solution for the policy options that are 
connected with the audit of PIEs, includi ng the supervision of compliance with the 
obligations as long as the rules on supervis ion are ancillary to the main substantive 
rules;  
– (ii) a modification of the existing directiv e is a suitable and proportionate solution for 
the policy options that are connected with the approval and registration of statutory 
auditors and audit firms and those co nnected with the audit of SMEs;  
                                                                                                                                                             
 " 1. A legislative act may delegate to the Commission the power to adopt non-legislative acts of general 
application to supplement or amend certain n on-essential elements of the legislative act. 
 The objectives, content, scope and duration of the delegation of power shall be explicitly defined in the 
legislative acts. The essential elements of an area shall be reserved for the legislative act and accordingly shall not be the subject of a delegation of power. 
 2. Legislative acts shall explicitly lay down the conditions to which the delegation is subject; these 
conditions may be as follows: 
 (a) the European Parliament or the Coun cil may decide to revoke the delegation; 
 (b) the delegated act may enter into force only if no objection has been expressed by the European 
Parliament or the Council within a period set by the legislative act. 
 For the purposes of (a) and (b), the European Parliament shall act by a majority of its component 
members, and the Council by a qualified majority. 
 3. The adjective ‘delegated’ shall be inserted in the title of delegated acts. " 
375 Article 291 TFUE: 
 " 1. Member States shall adopt all measures of nati onal law necessary to implement legally binding Union 
acts. 
 2. Where uniform conditions for implementing legally  binding Union acts are needed, those acts shall 
confer implementing powers on the Commission, or, in duly justified specific cases and in the cases 
provided for in Articles 24 and 26 of the Treaty on European Union, on the Council. 
 3. For the purposes of paragraph 2, the European Parliament and the Council, acting by means of 
regulations in accordance with the ordinary legislative procedure, shall lay down in advance the rules and general principles concerning mechanisms for contro l by Member States of th e Commission’s exercise of 
implementing powers. 
 4. The word ‘implementing’ shall be inserted in the title of implementing acts ." 
 
EN 194   EN – (iii) both instruments are equally effective, certain and provide a similar harmonisation 
level concerning the adoption of inte rnational auditing standards; and  
– (iv) both a directive or a regulation woul d need to be completed with additional 
secondary legislation, in one  case delegated acts, in th e other technical standards 
developed by ESMA.  
 
EN 195   EN ANNEX 15. IMPACT ON STAKEHOLDERS : ANALYSIS  
This Annex presents a summary an alysis of the main impacts of  the preferred policy options on 
different stakeholders. This anal ysis integrates the results of the assessment of the costs and 
benefits of the preferred po licy options done under Annex  20, while presenting their impact from 
the point of view of key stakeholders.  
The following stakeholders are considered separately:  – users of audited accounts: e.g. investors, analysts etc. It should also be noted that 
employees are users of audited accounts and they  are generally interested in the ability 
of the audited entity to c ontinue as a going concern;  
– audited entities: PIEs and SM Es. Concerning SMEs, it should be noted that when the 
options considered are addressed at PIEs only, SMEs are not affected unless they are 
also PIEs themselves. Having sa id this, one should consider that within PIEs, size also 
matters. Smaller PIEs, although bigger than SMEs, may still be quite small compared to larger PIEs and, in some cases, any cost im plication of the proposed measures will be 
proportionally more important for them than for larger PIEs; and  
– providers of statutory audit services: the imp act on providers of statutory audit services 
is considered separately for Big Four firms, mid-size audit firms and smaller 
firms/auditors (referred to as small a nd medium-size practitioners, or SMPs).  
The impact of those measures on governments, employment and financial stability are jointly 
considered for each of the five general objectives.  
Concerning the impact on th ird countries, see Annex 17
.  
 
EN 196   EN (1) Comparison of preferred options - Object ive 1: Clarify and define th e role of the statutory auditors generally as well as w ith specific regard to 
PIEs 
Stakeholder 
 
 
 
Policy option  Investors, analysts 
employee organisations 
and other users of audit 
reports PIEs SMEs 
[only medium-sized 
enterprises are required to 
have their accounts 
audited, unless they are 
PIEs] Big Four audit firms Mid-size audit firms SMPs 
Baseline scenario 0 0 0 0 0 0 
Clarify and specify the scope of statutory 
audit to reduce the expectation gap + 
Better understanding of scope of audit and therefore 
better valuing the accounts 
of the audited entity + 
Certainty on the accounts of PIES and therefore on its 
credibility will be reinforced + 
Certainty on the accounts of PIES and therefore on its 
credibility will be reinforced + 
Positive impact as the role of the auditor will be clarified. 
 + 
Positive impact as the role of the auditor will be 
clarified. + 
Positive impact as the role of the 
auditor will be 
clarified. 
Improve and expand the content the audit report disclosed to the public + 
Investors will obtain more and better information from 
auditors on the accounts of 
the PIE, which should facilitate the evaluation of the accounts + 
Better judgement of accounts by investors should 
result in more confidence in 
the PIEs accounts and therefore better value of their securities. 
The additional disclosure 
requirements will have a certain cost (estimated at 8 
working hours/ report). n.a. 
This measure would only affect SMEs which are also 
PIEs. + 
Audit firm will be in a position to better explain the 
quality of the work 
undertaken and this should improve the reputation of the audit firm + 
Audit firm will be in a position to better explain 
the quality of the work 
undertaken and this should improve the reputation of the audit firm + 
If SMPs audit accounts of PIEs, 
same positive 
effect as for mid-size audit firm 
Require the preparation of a longer and 
more detailed report for the audited 
entity 
+ 
Investors will indirectly 
benefit from this measure as a result of the expected 
increase in audit quality. ++ 
The audited company will 
receive more and better information from the auditor 
as regards the outcome of 
the statutory audit. The preparation of the 
additional report will result 
in a cost increase (estimated at 80 working hours/report 
for large PIEs) n.a. 
This measure would only 
affect SMEs which are also PIEs.s ++ 
The audit firm will be in a 
position to better explain to the audited entity the 
outcome of the statutory 
audit. It is expected that the cost increase will be 
transferred to audited entity.  ++ 
The audit firm will be in a 
position to better explain to the audited entity the 
outcome of the statutory 
audit. It is expected that the cost increase will be 
transferred to audited 
entity.  ++ 
If SMPs audit 
accounts of PIEs, same positive 
effect as for mid-
size audit firm 
Increase the communication between the 
auditor and the audit committee + 
Investors will indirectly 
benefit from this measure as a result of the expected 
increase in audit quality. ++ 
Audit committee is better 
able to exercise its role on the monitoring of the audit. 
Possible cost implications 
(greater involvement of the audit committee members), 
which are estimated at about n.a. 
This measure would only 
affect SMEs which are also PIEs. In any case, SMEs that 
are PIEs are not obliged to 
have an audit committee and another body can fulfil this 
function, so the cost ++ 
Reinforced communication 
with the audit committee can only result in improved 
quality of the statutory audit 
carried out by the audit firm. Hence, positive reputational 
effects too. As shown by he ++ 
Reinforced communication 
with the audit committee can only result in improved 
quality of the statutory 
audit carried out by the audit firm. Hence, positive 
reputational effects too. ++ 
If SMPs audit 
accounts of PIEs, same positive 
effect as for mid-
size audit firm 
 
EN 197   EN Stakeholder 
 
 
 
Policy option  Investors, analysts 
employee organisations 
and other users of audit 
reports PIEs SMEs 
[only medium-sized 
enterprises are required to 
have their accounts 
audited, unless they are 
PIEs] Big Four audit firms Mid-size audit firms SMPs 
53.600 euro on a yearly 
basis (based on 20 expert days and cost of 3 annual 
meetings).   implications are lower. co st estimate in Annex 20, 
the potential cost increase for Big 4 participation 
should be marginal and is 
expected to be transfered to the audited PIE.. Cost increase should be 
marginal only. 
Requiring the establishment of regular dialogue between auditors and 
supervisors of PIEs which are financial 
institutions + 
Investors will indirectly 
benefit from this measure as 
a result of the expected increase in audit quality. + 
PIEs will indirectly benefit 
from this measure as a result 
of the expected increase in audit quality. It could be 
expected that cost will be 
invoiced to the PIE.  n.a. 
This measure would only 
affect SMEs which are also 
PIEs.s ++ 
Reinforced communication 
with the audit committee can 
only result in improved quality of the statutory audit 
carried out by the audit firm. 
Hence, positive reputational effects too. Yearly cost 
increase estimated at about 
11,000 euro (cost for 2 annual meetings). Cost 
likely to be transferred to the 
audited PIE. ++ 
Reinforced communication 
with the audit committee 
can only result in improved quality of the statutory 
audit carried out by the 
audit firm. Hence, positive reputational effects too. 
Yearly cost increase 
estimated at about 11000 euro (cost for 2 annual 
meetings). Cost likely to be 
transferred to the audited PIE. ++ 
If SMPs audit 
accounts of PIEs, 
same effect as for mid-size audit 
firm 
 
Stakeholder 
 
Policy option  Government Financial stability Employment 
Joint impact of all measures under objective 1 ++ 
The combined effect of the 
measures under objective 1 should facilitate the exercise of supervisory 
tasks over statutory 
auditors and audit firms as well as over PIEs. This 
should result in improved 
supervision, which in turn should help prevent market + 
The expected increase in 
audit quality as well as the improvement in the quality of supervision should have 
positive effects on the 
financial markets and their stability.  ≈  
Regarding the level of 
employment, the effect of these measures should be neutral. The greater 
involvement of key audit 
partners in reinforced dialogue with audit 
committees and supervisors 
could result in opportunities for other 
 
EN 198   EN Stakeholder 
 
Policy option  Government Financial stability Employment 
problems. auditors to also become key 
audit partners, therefore enlarging the pyramidal 
structure within the firm. 
This could lead to marginal job increase at lower levels.  
 
Magnitude of impact as compared with the baseline scenario (the  baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; 
? uncertain; n.a. not applicable  
 
EN 199   EN (2) Comparison between options - Objective 2:  Eliminate the inherent conflict of intere st in the provision of statutory audit t o PIEs 
Stakeholder 
 
 
 
Policy option  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs 
[only medium-sized 
enterprises are required 
to have their accounts 
audited, unless they are 
PIEs] Big Four audit firms Mid-size audit firms SMPs 
Baseline scenario 0 0 0 0 0 0 
Strengthening the role of 
the audit committee regarding the appointment 
of auditors + 
Investors will indirectly benefit from this measure as 
a result of the expected 
increase in audit quality. ++ 
Audit committee will be better able to exercise its role 
on the monitoring of the 
audit. Possible cost implications (greater 
involvement of the audit 
committee members).  n.a. 
This measure would only affect SMEs which are also 
PIEs. In any case, SMEs 
that are PIEs are not obliged to have an audit 
committee and another 
body can fulfil this function, so the cost 
implications are lower. + 
Stronger audit committees can only result in improved 
quality of the statutory audit 
carried out by the audit firm. Hence, positive reputational 
effects too. 
 + 
Stronger audit committees can only result in improved 
quality of the statutory 
audit carried out by the audit firm. Hence, positive 
reputational effects too. + 
If SMPs audit accounts of PIEs, 
same positive 
effect as for mid-size audit firm 
Mandatory rotation of an audit firm via regular 
tendering + 
Investors will indirectly 
benefit of this measure as a 
result from the expected increase in audit quality and 
reduction in audit costs. + 
Tendering costs will have to 
be covered by the PIE (most 
likely tendering costs on the audit firms side will be also 
transferred to the PIE). As 
estimated in Annex 20 a rough annual cost for a PIE 
with a turnover of 2 bn euro 
would be about 330.000 euro. The likely cost increase 
resulting from the need to 
support the new auditor at initial stages, which may be 
partially compensated if 
hand-over file is prepared by the previous auditor. Feed-
back from PIEs also shows 
that a first re-tendering may result in audit cost decrease 
by 15-20% due to increased 
competition.  + 
This measure would only 
affect SMEs which are also 
PIEs. For small PIEs, cost 
implications may be higher 
than for larger ones, but at the same time the 
complexity of accounts 
should normally be lower. - / ≈ 
Rotation will result in the 
need for these firms to 
search for new customers, with potentially lower fees. 
There is a potential loss of 
market share in the top end of the market. At the same 
time, rotation should result 
in increased quality audits. Hence, positive reputational 
effects too. It is expected 
that there will be certain costs for the preparation of a 
tender, which is considered 
to be between 100.000 and 1M euro (in exceptional 
cases of very large PIEs up 
to 5M euro). However, these costs represent between 0.6-
1% of audit fees on an 
annual basis. It could also be expected that those cost will 
be transferred to audited 
entity later on. The real cost for audit firms will be the tenders which will not result + 
Rotation will result in the 
need for these firms to 
search for new customers, with potentially lower fees. 
But at the same time, 
rotation will potentially lead to possible new market 
opportunities for these 
firms in the top end of the market.  
 
The tendering will have certain costs as presented in 
the case of Big Four audit 
firms.  - / ≈ 
SMPs will lose 
their audit 
engagements with PIEs with no 
guarantee that they 
will be able to take up new ones 
without important 
investments. 
 
EN 200   EN Stakeholder 
 
 
 
Policy option  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs 
[only medium-sized 
enterprises are required 
to have their accounts 
audited, unless they are 
PIEs] Big Four audit firms Mid-size audit firms SMPs 
in a signed contract.   
Pure audit firms ++ 
Investors will indirectly 
benefit from this measure as 
a result of the expected increase in audit quality that 
would result from such 
increased independence. + 
This measure should result in 
increased audit quality, 
which in turn should lead to better judgement of accounts 
by investors and in turn more 
confidence in the PIEs accounts and therefore better 
value of their securities. 
Possible increase in audit fees, as no longer possible for 
firms to charge for other non-
audit services, although these costs may be offset due to the 
tendering process and/or due 
to the entry of new audit providers into the upper 
segment of the market. + 
This measure would only 
affect SMEs which are also 
PIEs. Same effects as for other 
PIEs. -- 
Negative financial impact in 
the short term resulting from 
the need to adapt the firm structure and segregate audit 
from other activities, which 
are today more profitable and a larger source of 
revenues. This negative 
financial impact would be mitigated by adapting the 
cost structure to the new 
scope of authorised activities. At the same time, 
this measure offers the 
possibility to focus on the real audit service, thus 
increasing the quality of the 
service. - 
Similar impact as for Big 
Four, although the scale 
and dimension is smaller. Mid-size firms tend to 
provide less non-audit 
services than Big Four ones. At the same time, this 
measure offers the 
possibility to focus on the real audit service, thus 
increasing the quality of the 
service. -- 
SMPs will most 
likely prefer not to 
audit PIEs and continue to be able 
to provide non-
audit services to audited 
companies. 
Therefore, this measure is likely 
to exclude SMPs 
from the audit of PIEs, where they 
are less present 
anyway. 
Additional requirements for the internal organisation and 
governance of audit firms + 
Investors will indirectly benefit from this measure as 
a result of the expected 
increase in audit quality. + 
PIEs will indirectly benefit from this measure as a result 
of the expected increase in 
audit quality + 
This measure would only affect SMEs which are also 
PIEs. Same effects as for 
large PIEs  + 
Virtually no cost effect on these firms, due to the 
partial existence of such 
policies and procedures. Positive effects in terms of audit quality. + 
Virtually no cost effect on these firms, due to the 
partial existence of such 
policies and procedures. Positive effects in terms of audit quality. -/≈ 
Costs arising from these requirements 
likely to be 
important for SMPs willing to audit PIEs, 
although there is 
the possibility to adapt requirements 
to size. 
 
Stakeholder 
 
Policy option  Government Financial stability Employment 
Joint impact of all measures 
under objective 2 ++ 
The combined effect of the measures under 
objective 2 should lead to a market which is + 
The expected increas e in audit quality 
as well as the improvement n the ≈ 
Regarding the level of employment, the effect of these measures should 
be neutral. There could be some po sitive employment implications in 
 
EN 201   EN Stakeholder 
 
Policy option  Government Financial stability Employment 
more focused on the audit service and audit 
quality. This should facilitate the exercise of 
supervisory tasks over statutory auditors and 
audit firms as well as over PIEs. This should result in improved supervision, which in turn 
should help prevent market problems. quality of supervis ion should have 
positive effects on the financial 
markets and their stability. PIEs (need to organise tenders, monitor more closely the incoming 
auditor, support to a more active a udit committee etc.). Regarding firms, 
it is alleged that prohibiting audit firms from providing non-audit 
services will result in high quality employees eaving these firms to join consultancy firms. However, this will not necessarily result in fewer 
employees in audit firms, although an  overall diminution of revenues for 
the average junior auditor or staff support may be expected. 
Magnitude of impact as compared with the baseline scenario (the  baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; 
? uncertain; n.a. not applicable  
 
EN 202   EN (3) Comparison between options - Objective 3: Improve market condi tions for audits of PIEs so th at audit firms compete more on audit quality and 
price while eliminating the ex istence of or emergence of the 'too big to fail' phenomena 
Stakeholder 
 
 
Policy option376  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs Big Four audit firms Mid-size audit firms SMPs 
Baseline scenario 0 0 0 0 0 0 
Mandatory rotation with 
regular tendering + 
Will have a positive impact resulting from more 
competition in audit 
markets: higher audit quality, lower price + 
Initial costs of mandatory rotation and tendering will 
be offset by lower prices 
and higher quality of audits resulting from more 
competition (on the cost 
estimates see same point above as well as respective section in Annex 20) +/≈ 
There will be a positive impact on those SMEs that 
will be considered as PIEs – 
Profits margins and the revenues paid out to partners 
within Big Four firms will go 
down closer to the margins of non-Big Four audit firms + 
Non-Big Four audit firms will profit from the 
possibility to compete for 
new contracts in the market for listed companies and 
other PIEs +/≈ 
SMPs may benefit from more competition between 
large audit firms for the 
market of audits of PIEs, e.g. by becoming more 
attractive employers in the 
labour market 
Pure audit firms + 
Investors will indirectly 
benefit from this measure 
as a result of the expected increase in audit quality 
that would result from more 
choice and independence in the audit market + 
This measure should result 
in increased audit quality 
and lower cost due to more choice and thus more 
bargaining power for the 
companies, especially the largest ones, since they are 
the most affected by limited 
choice in the market, such as the financial institutions. + 
This measure would only 
affect SMEs which are also 
PIEs. Same effects as for other 
PIEs. – 
Negative financial impact in 
the short term resulting from 
the need to adapt the firm structure and segregate audit 
from other activities. This 
measure is likely to make audit firms focus on the real audit 
service, thus increasing the 
quality of the service. – 
Similar impact as for Big 
Four, although the scale 
and dimension is smaller. Mid-size firms tend to 
provide less non-audit 
services than Big Four ones. This measure is likely 
to make audit firms focus 
on the real audit service, thus increasing the quality 
of the service. – 
This measure is likely to 
exclude SMPs from the 
audit of PIEs, where they are less present anyway. 
SMPs will most likely 
prefer not to audit PIEs and continue to able to provide 
non-audit services to 
audited companies. 
Joint audits on a voluntary 
basis +/– 
Could have positive impact 
in long-run due to increased competition and less 
concentration in the audit 
markets. In short run, there will be additional costs for 
joint audits that would 
finally have to be +/– 
In long-run, the market will 
provide companies with a sufficient choice of audit 
firms. In short run, there 
will be additional costs for joint audits, but also the 
beneficial effects on the 
quality of audits. Although, +/– 
To the extent that SMEs are 
considered as PIEs, in the long-run, there will be a 
positive impact since the 
market will provide companies with a sufficient 
choice of audit firms. In 
short run, there will be – 
Big Four audit firms will 
become smaller and in the long-run less likely to stay "too 
big to fail" by being required to 
share the audit work with smaller audit firms on the 
audits of PIEs. + 
Non-Big Four audit firms 
will profit from building expertise on audits of PIEs 
which in the long-run will 
make them similar to Big Four audit firms in terms of 
size and expertise. +/≈ 
SMPs may benefit from 
more competition between large audit firms for the 
market of audits of PIEs, 
e.g. by becoming more attractive employers in the 
labour market 
                                                 
376 On the impacts of the pure audit firm option, see the table regarding objective 2 in Annex 10 . 
 
EN 203   EN Stakeholder 
 
 
Policy option376  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs Big Four audit firms Mid-size audit firms SMPs 
transferred to companies 
and finally investors, but there will be also the 
beneficial effects on the 
quality of audits no clear cost estimate can 
be established, it is considered that there will 
be an increase in audit cost 
of between 5 and 10% (based on data from 
France).  additional costs for joint 
audits that will be likely transferred to companies, 
but also the beneficial 
effects on the quality of audits 
More transparency on audit 
quality, on audit firms' 
financial statements and a pan European audit quality 
certificate + 
More objective information 
on the quality of audits and audit firms in the market + 
More objective information 
on the quality of audits and audit firms in the market +/≈ 
There will be a positive 
impact to those SMEs that will be considered as PIEs – 
Big Four firms' reputation 
versus non-Big Four firms is likely to decrease and will be 
less likely to act as a 
competitive advantage over non-Big Four firms 
There is a cost increase 
resulting from the publication of information. The cost of 
applying for the pan-European 
certificate is not estimated at this stage. + 
Big Four firms' reputation 
versus non-Big Four firms is likely to decrease and 
will be less likely to act as 
a competitive advantage over non-Big Four firms. 
On costs, same costs issues 
as for Big Four audit firms. + 
Big Four firms' reputation 
versus non-Big Four firms is likely to decrease and 
will be less likely to act as 
a competitive advantage over non-Big Four firms. 
On costs, same costs issues 
as for Big Four audit firms. 
Lift restrictions on ownership of audit firms + 
Allowing non-auditors to 
own audit firms will 
increase competition in the audit markets + 
Allowing non-auditors to 
own audit firms will 
increase competition in the audit markets + 
Allowing non-auditors to 
own audit firms will 
increase competition in the audit markets – 
Allowing non-auditors to own 
audit firms will increase 
competition in the audit markets – 
Allowing non-auditors to 
own audit firms will 
increase competition in the audit markets – 
Allowing non-auditors to 
own audit firms will 
increase competition in the audit markets 
Prohibition of contractual clauses limiting the choice of an audit firm + 
Disappearance of contracts favouring Big-Four audit 
firms will have a positive 
impact on other audit service providers + 
Disappearance of contracts favouring Big-Four audit 
firms will have a positive 
impact on other audit service providers + 
Disappearance of contracts favouring Big-Four audit 
firms will have a positive 
impact on other audit service providers – 
Since Big-Four audit firms, to our knowledge, were the only 
ones benefiting from these 
contractual clauses they would be the only stakeholder group 
worse-off + 
Disappearance of contracts favouring Big-Four audit 
firms will have a positive 
impact on other audit service providers + 
Disappearance of contracts 
favouring Big-Four audit 
firms will have a positive 
impact on other audit 
service providers 
Joint impact of all measures 
under objective 3 + 
Overall, investors and other 
users of audited financial information will be better-
off from more competition 
and choice in the audit market. + 
Overall, PIEs will be the 
winners with more competition and choice in 
the audit market. The 
benefits brought about by more competition will 
offset the slight increase of 
costs in organising regular + 
Overall, SMEs will benefit 
from more competition in the provision of audit 
services 
 – 
Overall, the Big Four audit 
firms will be the only stakeholder group which will 
suffer from the measures to 
open up the market for audits of large companies to 
competition. Competitive 
pressure will raise the audit + 
Overall, other international 
non-Big Four networks will be better off due to opening 
up of the market for audits 
of PIEs, despite the competitive pressure they 
might be facing due to 
removal of ownership + 
Overall, SMPs will be 
positively, though not likely significantly, 
impacted by the measures 
taken to promote competition in the market 
for audits of PIEs 
 
EN 204   EN Stakeholder 
 
 
Policy option376  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs Big Four audit firms Mid-size audit firms SMPs 
tenders and changing an 
audit firm quality and lower the costs of 
services restrictions 
 
Stakeholder 
 
Policy option  Government Financial stability Employment 
Joint impact of all measures 
under objective 3 + 
Facilitating the 
development of a competitive market for 
audits of PIEs as well as the 
removal of barriers to entry into this market will ensure 
that there will be no place 
in the market for a "too big to fail" audit firm. Thus, the 
need to bail out an audit 
firm in the case of its demise will become a 
highly unlikely scenario + 
The higher quality of PIE 
audit, resulting from more competition (without taking 
into account other measures 
discussed in this Impact Assessment under other 
objectives) will contribute 
to the stability of financial markets ≈/+ 
Regarding the level of 
employment in the provision of statutory audit 
services to PIEs, there is no 
likely change, since the measures proposed will not 
affect a number of audits to 
be performed. However, more efficient audit 
markets might generate 
savings for the economy as a whole and indirectly have 
a slightly positive impact 
on the employment level in the whole economy 
Magnitude of impact as compared with the baseline scenario (the  baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; 
? uncertain; n.a. not applicable  
 
EN 205   EN (4) Comparison between options - Objective 4: Avoid unnecessary additional compliance costs for au dited SMEs as well as for aud it providers in a 
cross-border context  
Stakeholder 
 
 
 
Policy option  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs 
[only medium-sized 
enterprises are required to 
have their accounts 
audited, unless they are 
PIEs] Big Four audit firms Mid-size audit firms SMPs 
Base line scenario 0 0 0 0 0 0 
Mutual recognition of 
audit firms ≈ 
No particular impact for users of audit reports + 
Easier for audit firms to provide services in a cross-
border context, so increased 
choice for PIEs regarding audit firms  + 
Easier for audit firms to provide services in a cross-
border context, so increased 
choice for SMEs regarding audit firms. Easier for an 
SME to keep its audit firm 
in case the SME creates a subsidiary abroad. ++ 
More flexibility for firms to provide services in a cross-
border context. Possibility to 
consolidate firms in a cross border context. No need to 
maintain separate national 
structures ++ 
More flexibility for firms to provide services in a cross-
border context. Possibility to 
consolidate firms in a cross border context, which could 
help developing stronger and 
larger actors. No need to maintain separate national structures.  ++ 
Small firms could be able to provide services in a cross-
border context.  
Introduction of an 
adaptation period scheme 
and increased 
convergence, transparency and 
predictability in the 
aptitude test for statutory auditors ≈ 
No particular impact for 
users of audit reports ≈ 
PIEs in general use audit 
firms and not individual 
auditors, so the impact is likely to be neutral + 
Easier for statutory auditors 
to provide services in a 
cross-border context, so increased choice for SMEs 
regarding statutory auditors. ++ 
Easier for statutory auditors 
to be approved in another 
Member State. This will benefit the statutory auditors 
employed by audit firms. ++ 
Easier for statutory auditors 
to be approved in another 
Member State. This will benefit the statutory auditors 
employed by audit firms. ++ 
Easier for statutory auditors 
to be approved in another 
Member State and therefore be able to provide statutory 
audit services in that 
Member State. Of particular interest for SMPs working in 
cross-border environments. 
Introduction of clarified ISAs 
+ 
Investors will indirectly 
benefit from this measure as a result of the greater 
uniformity of audits across 
the EU and the expected increase in audit quality. + 
Clarified ISAs should lead 
to more structured audit work and ultimately increase 
financial reporting quality. 
This should benefit the audited entity. ≈ 
Clarified ISAs should lead 
to more structured audit work and ultimately increase 
financial reporting quality. 
But they may be costly for SMEs unless adapted to 
their size. ++ 
Clarified ISAs across the EU 
facilitates the structuring of the audit work by firms, in 
particular those of larger size 
providing audit services to PIEs. 
Improvement in quality of 
transnational audits ++ 
Clarified ISAs across the EU 
facilitates the structuring of the audit work by firms, in 
particular those of larger 
size providing audit services to PIEs. 
Improvement in 
transnational audit client access to capital and 
business opportunities. + 
If SMPs audit accounts of 
PIEs, same positive effect as for mid-size audit firm. 
The impact of clarified ISAs 
is less positive as regards the audit of SMEs. 
Improvement in 
transnational audit client access to capital and 
business opportunities 
Adapt audit standards to the size of the audited 
entity: proportionate audits for SMEs + 
Investors will indirectly 
benefit from this measure as a result from the expected 
increase in audit quality. n.a. 
[this measure would not 
apply to SMEs which are also PIEs] ++ 
Adapted audit standards to 
the size of SMEs should result in cost savings and no 
diminution of audit quality. ≈ 
Big four firms are less 
present in the market for the audit of SMEs. The impact 
of this measure should be of + 
Possibility to provide better 
value for money to audit clients. In the short term, it 
could entail a diminution of + 
Possibility to provide better 
value for money to audit clients. In the short term, it 
could entail a diminution of 
 
EN 206   EN Stakeholder 
 
 
 
Policy option  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs 
[only medium-sized 
enterprises are required to 
have their accounts 
audited, unless they are 
PIEs] Big Four audit firms Mid-size audit firms SMPs 
marginal importance for 
them. audit fees, but it could be 
compensated by small enterprises continuing to 
having their accounts 
audited under a proportionate and simplified 
audit for SMEs. audit fees, but it could be 
compensated by small enterprises continuing to 
having their accounts 
audited under a proportionate and simplified 
audit for SMEs. 
 
Stakeholder 
 
Policy option  Government Financial stability Employment 
Joint impact of all measures 
under objective 4 ≈ 
The combined effect of the measures under objective 4 
should have a relatively 
neutral effect regarding the exercise of supervisory 
tasks over statutory 
auditors and audit firms.  ≈ 
No particular impact on financial stability is 
identified.  - / ≈ 
It is possible that these measures may lead to a diminution of employment in audit 
firms in the short term. A proportionate 
and simplified audit for SMEs should entail fewer resources invested by firms, 
which could result in lower levels of 
employment. Also, facilitating the recognition of auditors from other Member 
States should lead to better allocation of 
resources within firms and therefore an overall diminution of employment.  
At the same time, more efficient audit 
markets might generate savings for SMEs and the economy as a whole and indirectly 
have positive impact on the employment 
level in the whole economy. 
Magnitude of impact as compared with the baseline scenario (the  baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; 
? uncertain; n.a. not applicable  
 
EN 207   EN (5) Comparison between options under - 5: Improve the effectiveness, in dependence and consistency ac ross the EU of the regulati on and 
supervision of auditors of PIEs  
Stakeholder 
 
Policy option  Investors, employee 
organisations and other 
users of audit reports PIEs SMEs Big Four audit firms Mid-size audit firms SMPs 
Strengthening national audit 
supervisory authorities and giving ESMA responsibility 
for EU-wide cooperation on 
audit oversight  + 
Independent and robust supervision will ensure 
trust in the audited financial 
statements + 
Companies will get additional assurance that 
the audits provided to them 
were of high quality +/≈ 
To the extent SMEs are PIEs, companies will get 
additional assurance that 
the audits provided to them were of high quality. +/≈ 
The consistency of supervisory practices will reduce the 
regulatory burdens +/≈ 
The consistency of supervisory practices will 
reduce the regulatory 
burdens ≈ 
As long as SMPs does not provide statutory audit 
services to PIEs, no impact 
is foreseen 
 
Stakeholder 
 
Policy option  Government Financial stability Employment 
 
Strengthening the national 
audit supervisory authorities and giving ESMA 
responsibility for EU-wide 
cooperation on audit oversight  – 
There will be additional, but 
not substantial, oversight costs in establishing and 
running the national public 
oversight authorities to the extent these will not be 
recovered; running 
cooperation at EU level would also require 
contributions from the 
national/EU budgets + 
Independent and effective 
national supervisory practices and their 
coordination at EU level 
will ensure an efficient functioning of markets for 
audits of PIEs, will have a 
positive impact on audit quality and ultimately will 
be conducive to financial 
stability ≈/+ 
No direct impact is 
expected; indirectly positive with distortions 
less likely in the financial 
markets and their impact on the economy as a whole  
Magnitude of impact as compared with the baseline scenario (the  baseline is indicated as 0): ++ strongly positive; + positive; – – strongly negative; – 
negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 
 
EN 208   EN ANNEX 16. IMPACT ON SME S (AND PIE S OF SMALL DIMENSION ) 
One of the main concerns of the stakeholders w ho have been consulted is to ensure that any 
possible new initiative on the role  of statutory audit,  as well as the current functioning and the 
configuration of the audit market in the EU, w ill not increase the costs and administrative burden 
on SMEs and that any new requireme nt is proportionate to SMEs.  
This annex aims at explaining how the principle "think small fi rst" is applied by the Commission 
and that the policy options descri bed in Sections 5, 6 and Annex  8, take due care of the possible 
impact on SMEs, whether as audited entities or audit firms/auditors. 
For the purposes of this annex, unless otherwise specified, 'small and medium-sized enterprises' 
means companies, which, according to their last a nnual or consolidated ac counts, meet at least 
two of the following three criteria : an average number of employees  during the financial year of 
less than 250, a total balance sheet not exceeding EUR 43 000 000 and an annual net turnover 
not exceeding EUR 50 000 000377. 
(1) Statutory audit and SMEs  
It is often stated that there are about 22 Million SMEs in the EU.  
It should be underlined from the start that st atutory audit, as required by EU law, does not 
concern all those SMEs. On the contrary, only a small fraction of those 22 Million SMEs: less 
than 300,000 SMEs would be concerned. In other terms: less than 2%. 
As explained in Annex  2, statutory audit is essentially required for companies with limited 
liability and certain types of companies because of  the nature of their activities (PIEs). Statutory 
audit of the accounts of European Companies (S E) and European Cooperatives (SCE) is also 
required, but the number of entities using these legal forms is marginal.  
The following table provides an overview of th e number of SMEs which prepare accounts and 
consolidated accounts in accordance with the 4th Company Law Directive, the 7th Company Law 
Directive and the Transparency Directive (which refers to the IAS Regulation). 
Figure A16.1 - Number of companies in the scope of  the 4th and 7th Directive and the IAS Regulation 
Directive Micro Small Medium-
sized Large Total 
4th Directive on Annual Financial 
Statements* 5,936,774 1,117,214 245,431 45,301 7,344,720 
7th Directive on Consolidated 
Financial Statements** 86,748 33,657 12,365 14,095 146,865 
IAS Regulation ~150**** ≤ 1,100**** ≥ 6,115**** 7,365*** 
Source: European Commission (October 2011a) 
The requirement to have the accounts audited does not apply to all co mpanies (with limited 
liability) that are subject to the 4th and 7th Company Law Directives.  
• Currently these directives re quire that the accounts of th e companies concerned (those 
with limited liability) should be audited, what ever the size of the company, but Member 
States are permitted to exempt small companies from this obligation.  
                                                 
377 Cf. Article 2(1)(f) of Directive 2003/71/EC. 
 
EN 209   EN • In 2011, however, the Commission proposed that  small companies should no longer be 
required to have their accounts audited378, although Member States may still require it. 
Small companies are those which do not exceed two of the following criteria: balance sheet total (EUR 5,000,000), net turnover (EUR 10,000,000) and average number of 
employees (50). Compared to the table above, the estimation is that  as a result of the 
application of these thres holds, around 62,000 medium-sized companies would shift to 
the small category
379.  
 The savings that arise from this proposal  are evaluated in the impact assessment 
accompanying it
380.  
SMEs
[22 Million]
Sole traders
Entities with
UNLIMITED liability
Companies with
LIMITED liability
SMEs which are public-interest entities: 
listed companies & financial institutionsAUDIT
Required by EU lawSmall companies, less than:5M balance sheet
10M turnover
50 employes
Medium-sized companies-balance sheet: between 5M and 43M
-turnover: between 10M and 50M
-employees: between 50 and 250NO AUDIT
Required by EU law
Between 200000 and 250000 
companies concernedSMEs
[22 Million]
Sole traders
Entities with
UNLIMITED liability
Companies with
LIMITED liability
SMEs which are public-interest entities: 
listed companies & financial institutionsAUDIT
Required by EU lawSmall companies, less than:5M balance sheet
10M turnover
50 employes
Medium-sized companies-balance sheet: between 5M and 43M
-turnover: between 10M and 50M
-employees: between 50 and 250NO AUDIT
Required by EU law
Between 200000 and 250000 
companies concerned
 
Figure A16.2 
To maintain coherence with the 2011 proposal to modify the 4th and 7th Company Law 
Directives, only SMEs of certain size (as well as SMEs which are PIEs) will be subject to an 
audit obligation arising from EU law: less than 250,000 companies for the whole EU381. 
Therefore, the policy options desc ribed in Sections 5, 6 and Annex  8 should be assessed in the 
light of this very limited scope. 
(2) SMEs as audited entities  
Two possibilities need to be  distinguished when a SM E is an audited entity: 
                                                 
378 See European Commission (October 2011b). 
379 See European Commission (October 2011a). 
380 Ibid. 
381 Total = (245431+12365+1100+150) – 62000 + (large companies accord ing to the accounting directive 
which meet the SME criteria). Please note that the defi nition of "large company" in the accounting directive 
includes SMEs when the traditional definition of SME is used. 
 
EN 210   EN • (2.1) the audited en tity is a PIE; 
• (2.2) the audited enti ty is not a PIE. 
(2.1) SMEs as PIEs and other PIEs  of small dimension (small caps). 
The majority of the preferred po licy options in this paper addre ss the audit of PIEs. SMEs will 
not be affected by the new measures regardi ng the audit of PIEs, unless they are PIEs 
themselves .  
While the possibility that a bank or an insu rance company is a SME is low, many listed 
companies are SMEs or have a small dimension compared to the size of financial markets. Also, payment institutions or e-money institutions may also be of small dimension. 
There is an on-going debate about the question of  adapting the disclosure  obligations of SMEs 
and issuers of small dimension to their size, so  as to reduce the burden associated with such 
disclosure. The publication of the annual financial report with au dited financial statements is 
among these obligations. 
Extract from the impact assessment on  the amendment to the Transparency 
Directive (European Commiss ion (October 2011c), p.10).  
"[…] Small and medium sized issuers often ar gue that, for them, th e costs of compliance 
with transparency requirem ents are disproportionate382. They consider this is the case 
both compared to the relative costs borne by larger companies, and in relation to the 
benefits they obtain from being listed.  
Indeed the smaller issuers do not benefit from an increase in investment volumes. In 
absolute terms, they make up the majority of listed companies on financial markets, but 
they represent only a small par t of total market capitalis ation and of total trading 
volumes. This is particularly the case on Regulated Markets383, as illustrated by Figure 
2 below. 
Figure 2: Relative importance of listed companie s on EU regulated markets by size  
                                                 
382 " See for instance replies from EuropeanIssuers, QCA and Middlenext to the consultation on the 
Modernisation of the Transparency Directive (the question of disproportionate costs was not asked as such 
in this consultation). This view is also supported by Demarigny (2010). According to Mazars (2009), 34.6 % of mid-cap companies and 38.1% of small listed companies consider that compliance with the 
Transparency Directive has been onerous for them: see section 2.3.5, p. 71."  
383 " See Glossary Annex 4. " 
 
EN 211   EN 
 
Source: FESE (2009). (Federation of European Securitie s Exchanges) which establishes four categories 
of companies: micro caps (XS ≤ €50M)), small caps (S: between €50M and €150M), mid caps (M: 
between €150M and €1b) and large cap (L: ≥ €1b). The first column presents the relative importance (%) 
by number of listed companies (equity issuers); the second column by market capitalisation; the third 
column shows the trades, in numbers, while the fourth column shows the turnover, in volume. 
Low trading volumes mean lower market liqui dity and more difficulties for small and 
medium size companies to raise capital on regulated markets, compared to larger 
companies. However, small and medium size li sted companies still bear the full costs 
associated with the listing384. According to recent research385, the explosion of the 
private equity market in the last twen ty five years suggests that for some firms, 
especially small firms in R&D intensive se ctors, disclosure costs are substantial." 
Similar issues arise regarding th e question of statutory audit. Fo r SMEs which are PIEs as well 
as for PIEs of small dimension, specific obligations re garding the conduct of  audits may increase 
the burden on boards and senior management (opport unity cost) in addition to the costs of the 
service.  
Therefore, adapting the requireme nts on statutory audit to the size and dimension of the business 
of PIEs appears appropriate a nd proportionate. From the perspec tive of stability of financial 
markets, it must be underlined, as shown by the above figure, that small listed companies (e.g. 
below €150 Million capitalisation)  while constituting the majority in number, account for less 
than 5% of the capitalisation of EU regulated markets.  
Such adaptation was already present in the Statut ory Audit Directive regarding the need to have 
an audit committee: the administ rative or supervisory body as a w hole of a SME was allowed to 
perform the functions of the audit committee, provided that this body was not chaired by an 
executive member when pe rforming those functions. 
                                                 
384 " Many aspects of these costs do not directly result fr om the requirements of the Transparency Directive but 
are linked to national additional measures or other legislative texts (e.g. obligation to publish all regulated information in the printed press, accounting rules) , which are particularly problematic for smaller 
companies. However, these costs are outside the scope of this impact assessment."  
385 "Zingales (2009) p.18."  
 
EN 212   EN When developing the policy options desc ribed in Sections 5, 6 and Annex 8 , account has been 
taken of the SME dimension. As a result, the following adapta tions are foreseen: 
– Audit Committee : As is the case today in the Statutory Audit Directive, PIEs which are 
SMEs should not be obliged to have an audit committee provided that the board undertakes this function under a different ch airmanship. This option should also be 
extended to small caps, understood as companie s with reduced capital isation (less than 
€100 Million)
386. Also, the flexibility offered to companies with a dual board system to 
entrust the supervisory board with the audit committee functi on is maintained in this 
option; 
– Tendering : PIEs which are SMEs should not be ob liged to tender for their audit service 
and may directly negotiate with a possible se rvice provider. At l east 0.6 – 1% of the 
total audit fees will be saved by SMEs (for the assessment of tendering costs, see Annex 
20); 
(2.2.) SMEs as audited entities which are non-PIEs. 
Medium-sized companies 
When SMEs which are not PIEs are audite d, the preferred policy option under objective 4 
requires Member States to make sure that the audit standards are applied to SMEs in a 
proportionate manner. In practice,  this would only apply to "m edium-sized companies" which 
are the only ones subject to audit requirements by EU law. As seen above, small companies 
would only conduct audits if required by national law or if done voluntarily. 
The adaptation of the audit standard s to the size of the audited entity  should result in better audit 
services to the SMEs concerned – with no diminu tion in audit quality – and possibly lower cost.  
The proposed measure does not define in detail how  this adaptation must be done, this is left to 
the discretion of Member States. Therefore, given that such an adaptation of standards must be 
done at national level it is not easy to estimate in advance the savings fo r the audited entities.  
In France, auditing standards have  already been adapted for a category of small companies since 
2009: the "small enterprise" standard ( norme petite enterprise ).  
In France , there is a specific standard ( norme petite entreprise, NEP 910 )387 that 
provides for a simplified and proportionate audit for certain small limited liability 
companies, those that do not exceed two of  the following three criteria: balance sheet 
total (€1,550,000), net turnover (€3,100,000) and employees (50)388. This French 
standard is inspired and adapted from the ISAs and, according to the French auditors' 
                                                 
386 Cf. definition of company with re duced market capitalisation, Article 2(1)(t) of Directive 2003/71/EC.  
387 See Arrêté du Ministère de la Justice du 2 mars 2009 portant homologation de la norme d'exercise 
professionnel relative à la certification des comptes annuels des entités mentionnées à l'article L.823-12-1 
du code de commerce, Journal officiel de la République Française du 14 mars 2009 . 
 The NEP 910 is accessible at: 
https://www.cncc.fr/sections/documentation_profes/do cumentation_de_ref/norme_et_doctrine_pr/table_sy
nthetiques_d/nep_910._certificati/ooo_preview_html 
388 However, this specific standard is not applicable to the companies incorporated as "sociétés anonymes". In 
this case, the normal standards should be applied.  
 
EN 213   EN professional body (Compagnie Nationale des Commissaires aux Comptes, CNCC), it 
would be compatible with the ISA requirements.  
The simplified auditing standards allow for the use of audit procedures which are 
adjusted to the nature, timing and extent of a simple and small entity with the increased 
use of professional judgment and audit documentation adjusted to the size and 
complexity of the audited entity. 
The French professional body (CNCC) has de veloped specific operational guidance (so-
called "pack PE") to faciliate the auditor' s tasks when auditing SMEs. Additionally, the 
CNCC provides training to a uditors on how to audit an SM E and to use the "pack PE", 
irrespective of whether the NE P 910 standard applies or not  (so, also for the audit of 
larger SMEs than those covered by the NEP 910). 
This standard, as well as the CNCC support, is modelled to carry out  the statutory audit 
in about 40 hours, compared to 50 to 120 hour s in normal circumstances for a company 
of such this389. Therefore, the audit cost is reduced.  
This recent experience in France shows that it is  possible to apply the auditing standards in a 
proportionate manner to small companies without resulting in a corresp onding reduction in the 
value attached to the audit of SMEs. The positive e xperience results from the combined effect of 
a legislative empowerment to carry  out proportionate and simplified audit and a substantial effort 
from the audit profession to provide operational guidance and training to auditors auditing 
SMEs.  
It also shows that the potential savings for a small audited entity having its accounts audited 
under the “ norme petite entreprise ” could be around 40% (of c ourse, savings would depend on 
the complexity of the audited entity). 
The French example, however, is not easy to extr apolate to the entities subject to the auditing 
obligation under EU law. French thresholds for the norme petite enterprise  are much lower 
compared to the EU ones. The SMEs subject to  the auditing obligation are companies meeting 
the following criteria: balance sheet total (b etween EUR 5 000 000 and 43 000 000), net turnover 
(between EUR 10 000 000 and 50 000 000) and averag e number of employees (between 50 and 
250).  
As a result, it cannot be claimed th at the savings would be comparab le to the French case for the 
small companies. In any event, the French exam ple shows that there is a real possibility to 
achieve savings for SMEs by adapting the auditin g standards to the size of the audited entity. 
Small companies 
Small companies are not subject to the EU re quirement to have their accounts audited.  
                                                 
389 Article R823-12 of the French Code  of Commerce sets out the working hours that an auditor is "normally" 
expected to apply considering the size of the audited company. The size is measured by the addition of: the balance sheet, the net turnover ( produits d'exploitation ) and financial income. For a size between 
€1,525,000 and €3,050,000, 50 to 80 working hours are considered normal. For a size between €3,050,000 
and €7,622,000, 70 to 120 working hours are considered normal. 
 
EN 214   EN In Estonia390, certain small companies are however required to have a “limited review” 391 of 
their accounts done.  
Similar types of alternative/limited assurance se rvice are available for certain types of small 
companies392 in other EU Member States393, as a voluntary service. 
The ICAEW Assurance Service in the UK394 
The ICAEW Assurance Service is in line wi th the IAASB International Framework for 
Assurance Engagements395. The technical guidance for the service (AAF03/06)396 
adopts limited assurance (in contrast to r easonable assurance) instead of moderate 
assurance as used in ISRE (Internatio nal Standard on Review Engagement) 2400397. The 
key characteristic of AAF 03/06 is its focus on the practitioner’s judgement as to the 
work effort required to reach a limited assurance conclusion. 
Under AAF 03/06, the practitioners are expect ed to perform additional or alternative 
procedures where minimum defined procedur es (analytical revi ew and management 
enquiry) do not provide them w ith the assurance required to  reach a limited assurance 
conclusion. The report issued includes a ne gative opinion. The reporting criteria are the 
relevant requirements of the Companies Act 2006 and Generally Accepted Accounting 
Practice in the UK (‘UK GAAP’). 
The ICAEW Assurance Service is provided for by practicing members of the ICAEW. 
In carrying out an assurance engagement, accountants who are members of the ICAEW 
are subject to ethical guidance as laid down by the ICAEW’s Code of Ethics. When 
conducting an assurance engagement, there are additional requirements in Independence 
for Assurance Engagements within the Code. This applies to all assurance engagements 
outside the scope of audit and is in co mpliance with the IFAC Code of Ethics. 
In addition, the International Standard on Quality Control (UK and Ireland) (ISQC (UK 
and Ireland)) 1, Quality Control for Firms that Perform Audits and Reviews of 
Historical Financial Information, and Other Assurance and Related Services 
Engagements is applicable to firms providing audits and revi ews of historical financial 
information, and other assurance and related services engagements.  
There is no information on the frequency of its use as the ICAEW Assurance Service is 
a voluntary service and no filing requirements exist. 
                                                 
390 For companies exceeding two of the three following criteria: turnover (€600,000 ), balance sheet total 
(€300,000) and number of employees (10); but not exceeding two of the three following criteria: turnover (€800,000), balance sheet total (€900,000) and number of employees (30).  
391 A different type of assurance service providing a lower level of assurance than statutory audit. 
392 Those small companies are not required to have thei r accounts audited under EU law, since Member States 
may waive the obligation arising from the Fourth and the Seventh Company Law Directives. 
393 E.g. France, Ireland (for charities and small pension schemes), Italy (continuous assurance by Collegio 
Sindacale), Romania and the UK (ICAEW limited assuran ce service). Other EU Member States considered 
the introduction of limited reviews. See FEE (2009), p.13.  
394 See FEE (2009), p. 46. See also ICAEW (2009). 
395 http://www.ifac.org/IA ASB/Pronouncements.php. 
396 ICAEW (2006). 
397 See www.ifac.org/IAASB/Pro nouncements.php#Standards.  
 
EN 215   EN In any case, according to ICAEW, the expe rience is positive and limited reviews are 
considered valuable by the market398 
Concerning third countries, "limited revi ews" for the accounts of SMEs are required399 in 
Switzerland400).  
In Switzerland401, since 1 January 2008, all limited liability companies (especially 
corporations Aktiengesellschaft ) and closed corporations (G esellschaft mit beschränkter 
Haftung)) are either subject to a statutory fu ll scope audit ("ordent liche Revision") or a 
limited statutory examination (" eingeschränkte Revision"). 
Swiss alternative assurance service  
The Swiss alternative assuran ce service is called a limited statutory examination, as it 
provides a moderate level of assurance that  the financial statements are free from 
material misstatement. This is expressed in a negative way in the assurance report (thus 
similar to a review). Nonetheless, certain substantive audit procedures are required for 
certain balance sheet or income statement items in case of a heightened risk in that area. 
In any case, third party confirmations, inventory observations and internal control 
testing are not part of the limited statutory examination. 
The examination is based on a standard whic h has been prepared by the Institute of 
Certified Accountants and Tax Consulta nts (Treuhand-Kammer). A limited statutory 
examination consists primarily of inquiries of company personnel and analytical 
procedures as well as certain substantive tests of company documents as considered 
necessary in the circumstances. However, th e testing of operational processes and the 
internal control system, as we ll as inquiries and further te sting procedures to detect 
fraud or other legal violations, are not within the scope of a limited statutory 
examination. 
If, during the performance of a limited stat utory examination, certain matters come to 
the auditor's attention, the auditor has to de scribe those matters and should quantify the 
possible effect, unless it is impracticable to do so. Situations of material scope 
limitations are also possible. This new assura nce service does not materially differ from 
review engagements widely applied worldwide. 
The limited statutory examination is strongly re lated to a review as laid out in ISRE 
(International Standard on Review Enga gement) 2400. The structure of the Swiss 
standard for the limited statutory examin ation is thus comparable to ISRE 2400. 
The companies concerned by the obligation 
The limited statutory examination is a compulsory assurance service for small and mid-
sized companies. 
                                                 
398 ICAEW (2009). 
399 In the US, limited reviews are common practice, but are not required by law. 
400 A so-called limited statutory examination (" eingeschränkte Revision ") is mandatory for small companies 
with more than 10 employees but which are not required to have their accounts audited (i.e. are covered by 
the audit exemption). 
401 See FEE (2009), p. 43. 
 
EN 216   EN The types of entities subject to limited stat utory examination assurance are entities not 
meeting two out of the following three criteria in two consecutive years as such entities 
are subject to statutory audit:  
– Balance sheet total over 10 million Swiss Francs (approximately €6,6 million); 
– Net sales over 20 million Swiss Francs (approximately €13,3 million); 
– Employees over 50 (full-time equi valents on average per year). 
The following entities are always su bject to a full scope audit: 
– Companies with listed equity or debt financing; or 
– Companies, contributing at least 20% to the balance sheet total or net sales of 
another company's group accounts, provided this other company has either listed 
equity or listed debt financing; or 
– Companies, which have to prepare group accounts; or 
– Companies, which exceed the thresholds as mentioned above. 
Nonetheless, the company might decide to  opt-out. Under the opting-out rule the 
company might decide not to have an aud it - assurance engagement, provided that the 
company does not employ more than ten employees on a full employment basis and 
provided that all shareholders  agree with this opting-out. 
On the other hand, a company subject to a limited statutory examination might also 
decide for to opt-up, i.e. it decides to have a full scope audit on its financial statements. 
The professionals providing the service 
Under the Auditor Oversight Act (AOA), Swi ss practice differentiates between licensed 
auditors and licensed audit experts. There are higher education and qualification 
requirements for licensed audit experts. 
Licensed auditors and licensed audit expe rts are both allowed to perform limited 
statutory examinations, but only licensed a udit experts are legally permitted to conduct 
full scope audit engagements required under Swiss Law. 
The limited statutory examination is both mandatory and regulated. 
In the case of a limited statutory examina tion, the independence requirements are less 
strict than for a full scope a udit. Thus, advisory services  including bookkeeping services 
are allowed provided that certain safeguard measures are adhered to and disclosed in the 
report. In general, li censed auditors performing the lim ited statutory examination are not 
subject to firm and file re views (inspections) undertaken by the Federal Audit Oversight 
Authority. 
Nonetheless, licensed auditors have to adhe re to high quality st andards and compliance 
with these standards has to be confirmed regularly in connection with re-licensing 
 
EN 217   EN procedures. In cases where so le practitioners perform the limited statutory examination, 
they are subject to an external qual ity control reviews (peer review).  
All auditors who want to pe rform audit services regulat ed by Swiss Law (full scope 
audits, limited statutory examinations, a udits in respect of capital decreases, 
contributions in kind etc.), have to re gister with the Swiss audit oversight body. 
(3) SMEs as Audit firms/statutory auditors: th e small and medium-sized  practitioners (SMPs)  
Audit firms or statutory auditors may as well qu alify as "small and medium-sized enterprises". 
They are often referred to as "Small and medium-size practitioners (SMPs)". 
SMPs and the recognition of their competence in a cross-border context. 
The automatic recognition of audit firms within the EU should allow small firms to be able to 
provide services in a cross-border context. 
The facilitation of the establishment of auditors  in a different Member State (via an improved 
aptitude test or an alternative adaptation pe riod) should have positive effects for statutory 
auditors working in cross-borde r environments. The same is tr ue for the statutory auditor 
providing cross-border services: the mutual reco gnition the qualifications should be positive for 
SMPs. 
SMPs and the audit of PIEs 
SMPs are also present in the market for audits of listed companies and other PIEs, in particular 
regarding the audit of PIEs of smaller dime nsion. Hence, the policy options addressing 
specifically the auditors of PIEs will also imp act on SMPs. In this case, it has also been 
considered appropriate and proportio nate to adjust the policy options described in Sections 5, 6 
and Annex 8 , to the size and dimension of the business of SMPs. 
As a result, the following adaptations are foreseen: – Pure audit firms
. The imposition of the pure audit require ment with respect to audits of 
PIEs could make the entrance (or maintenance)  of SMPs more difficult into this market. 
In order to avoid that SMPs who currently perform audits of  PIEs would have to join 
larger audit firms or decide to quit this se gment of the audit market, a special derogation 
for SMPs is foreseen: the pure audit firm requirement would only apply to firms that 
obtain at least one third of their audit fee revenues from large PIEs (see above for the threshold). This derogation would logical ly cease to apply should the SMP grow. 
– Internal policies and procedures to comply with legal requirements  regarding potential 
conflicts of interest . The policies and procedures shall be proportionate in view of the 
scale and the complexity of the business of  the SMP. Supervision should be adapted 
accordingly.  
Concerning the impact of joint audit, small audit firms willing to audit PIEs may be in a position 
to be the second partner in a jo int audit engagement, although this will very much depend on the 
complexity of the entity to be audited. Con cerning the mandatory rotation rule, SMPs auditing 
PIEs will be on equal footing comp ared to larger audit firms. SMPs  will have to seek new audit 
engagements once the mandatory rotation rule b ecomes applicable. The tendering rule should 
facilitate this process. In the case of individua l auditors, they may bene fit from more competition 
 
EN 218   EN between large audit firms for the market of a udits of PIEs: e.g. by becoming more attractive 
employers in the labour market.  
When seeking new audit mandates, SMPs will particularly benefit form the policy options 
aiming at facilitating the choice of audit provider: 
– The prohibition of contractual clauses limiting the audit firm choice : e.g clauses 
between the audited entity and a third party (such as a bank) requiring that the statutory 
audit is performed by a "Big-Four firm” only. These clauses are often referred to as 
"big-Four only clauses"; 
– The increased transparency on audit quality th rough the disclosure of  inspection reports  
on quality assurance reviews s hould provide information to th e market on the quality of 
SMPs work. The increased transparency by audit firms themselves (e.g. regarding the transparency report
) will have a moderate impact on SMPs, due to their less complex 
structures and businesses. 
– The European audit quality certification  should also benefit SMPs willing and able to 
carry out statutory audits of PIEs as they will be in a position to demonstrate that their work is of a satisfactory standard. 
SMPs and the audit of non-PIEs 
The use of auditing standards adap ted to the audit of SMEs should result in the possibility to 
provide better value for money to audit clients. In the short term , it could entail a diminution of 
fees, but it could be compensated if small comp anies (only medium-sized companies are subject 
to the obligation to have their accounts audited) are willing to voluntarily have their accounts audited under a proportionate a nd simplified audit for SMEs.  
In any case, it should be noted  that for non-PIEs, SMPs will be  in a position to continue 
providing other non-audit serv ices to audit clients. 
The impact on SMPs resulting from the modification of the 4
th and 7th Company Law Directives 
(only the audit of accounts of medium-sized comp anies will be required) is examined in that 
context. 
 
EN 219   EN (4) Summary of specific adjustments to the policy options for SMEs402 
Figure A16.3 
 
Policy option SME as audited entity 
PIE SME as audited entity 
Non-PIE SME as auditor/audit firm 
SMPs 
Audit Committee PIEs which are SMEs or companies with reduced 
market capitalisation (below €100M) are not obliged to have an audit committee, provided that 
the board undertakes this function under a 
different chairmanship.  N/A N/A 
Tendering PIEs which are SMEs would not be obliged to 
organise tenders for their audit service and may 
directly negotiate with a possible service provider.  N/A N/A 
Joint Audit 
  N/A N/A 
Prohibition on the provision of non-
audit services / pure audit firms [N.B. the prohibition for the auditor/audit firm to 
provide non-audit services to the audit client 
would apply irrespective of the size of the PIE ] N/A Obligation to become a pure audit firm would only be 
applicable to large audit firms. 
Internal policies and procedures to 
comply with legal requirements on 
threats to independence   Policies and procedures to be proportionate in view of 
the scale and complexity of business of the audit firm or 
statutory auditor. 
Application of the auditing standards 
(the adopted clarified ISAs) Request that the auditing standards are applied in a proportionate manner when auditing medium-sized undertakings. 
The request for the proportionate application of the auditing standards is also extended to small undertakings, if audit requir ed by national 
law or the company voluntarily decides to have its accounts audited. Voluntary review of financial statements remains possible. 
Supervision   Quality assurance reviews to be proportionate in view of 
the scale and complexity of business of the reviewed audit firm or statutory auditor  
 
                                                 
402 This table does not take into  account the policy options that ar e expected to have positive im pacts on SMEs as audited entitie s or on SMPs, but which are not necessarily 
adjusted to the size of either SMEs or SMPs: e.g. the mutual recognition of audit firms or statutory auditors etc. 
 
EN 220   EN ANNEX 17. IMPACT ON THIRD COUNTRIES  
The proposed measures are rather neutral regarding thei r effects on third countries Firstly, there 
is no change regarding the scope of application of EU audit rules. Seco ndly, the possibility for 
third country nationals to become statutory auditors  in the EU is not advers ely affected but rather 
facilitated. Thirdly, there are marginal improv ements regarding the audit of consolidated 
accounts: the policy choices take account of th e particularities regarding the audit of 
consolidated financial statements with a view to  facilitating such an audit when either a EU 
company has subsidiaries in third countries or a third country company ha s subsidiaries in the 
EU. Fourthly, the supervisory coop eration with third country auth orities is encouraged, but the 
substantive rules on such coopera tion (e.g. transfer of audit wo rking papers) remain largely 
untouched.  
(1) No change regarding the sc ope of application of the EU au dit rules: no impact on third 
country companies.  
EU rules respect, in principle, the “comp any law” of the audited entity as “ critère de 
rattachement ” for requiring the audit of accounts and for establishing how such  an audit should 
be conducted. The special rules on the audit of PIEs  (Regulation) apply to listed companies 
incorporated in the EU and to certain financia l institutions regulated by EU law and which have 
obtained a license in the EU. The definition of PIE does not capture third country companies, 
although it may of course capture EU legal entities with foreign ownership. Therefore, these 
special rules on the audit of PIEs do not a ffect, as such, third country companies. 
The normal rules on the audit of non-PIE companies  (Directive) only apply to companies for 
which the audit is required by EU  law. This concerns primarily companies with limited liability 
incorporated in the EU. A few third country companies  may also be captured because of the 
requirements of the Directive 2004/109/EC (Trans parency Directive): third country companies 
issuing securities in regulated markets in the EU . However, a special procedure for the audit of 
these companies is alrea dy foreseen (see below).  
The audit of third country incorporated comp anies which list securities on EU exchanges  
presents some particularities, which are not modi fied by the policy choices made in this impact 
assessment. Those companies are, because of the applicable company law, already subject to the 
audit requirements of the third c ountry of incorporation. There are two possible situations within 
the EU: 
• the securities of the thir d country company are listed in an EU Regulated Market . The 
Transparency Directive requires that the au dit of the accounts of such a company is 
carried out in accordance with the Direc tive 2006/43/EC (Statutory Audit Directive)403. 
                                                 
403 It should be noted in this regard that the Tran sparency Directive specifies  the applicable accounting 
standards: basically IFRS as adopted in the EU, the IFRS and the GAAPs of US and Japan (during a 
transitional period, also the GAAPs of Canada, Ch ina, India and Korea are accepted). See Commission 
Decision of 12 December 2008 on the use by third countries’ issuers of securities of certain third country’s 
national accounting standards and International Financial Reporting Standards to prepare their 
consolidated financial statements , OJ L 340, p. 112. 
 Therefore, in some cases, a third country issuer may have to restate their accounts (initially prepared under 
its national law) in accordance to EU law and a second audit report (on the restated accounts) may be 
necessary. 
 
EN 221   EN The audit carried out in the third country by a third country auditor or firm in 
conformity with the national law of the audite d entity is not automatically recognised in 
the EU404. However, the Statutory Audit Directiv e provides for the recognition of such 
audits carried out by a third country audi tor or audit firm if two conditions are 
respected: (i) the thir d country auditor or firm is regi stered with an EU Member State 
(but he/she/it does not need to be approved as  statutory auditor or audit firm within the 
EU)405; and (ii) the third country auditor or fi rm is subject to pub lic oversight, quality 
assurance reviews and investigations and penalties within the EU406.  
• the securities of the third country company are listed in a market which is not an EU 
Regulated Market : i.e. a second tier market which qualifies as MTF such as AIM (in 
London), Alternext (in Euronext markets) or  EuroMTF (in Luxembourg). The EU rules 
are silent in this case and national law applies. In practice, the listing rules in those 
markets tend to require that those issuers disclose audited accounts.  
In conclusion, the EU a udit rules, whether those for PIEs or those for non-PIEs, only apply to 
EU companies, with a few minor exceptions fo r which specific proportionate measures are 
already in place. 
(2) The possibility for a third country national to  audit an EU PIE or an EU company is not 
adversely affected but rather facilitated.  
The proposed measures do not adversely affect the statu quo . 
Firstly, there is no nationality restriction to become auditor in the EU407. Therefore, a third 
country national can become statutory auditor in the EU, provided he/she meets the required 
conditions, and audit EU PIEs.  
Secondly, the third country national must prove hi s/her professional qualif ication in the same 
manner as an EU national. Currently there are three options:  
• the normal approval procedure foreseen under Article 3 of the Statutory Audit 
Directive , as for any domestic applicant: this implies compliance with the conditions 
established in Articles 4 and 6 to 10 of  this Directive rega rding good repute and 
educational qualifications.  
• if he/she has already been approved as a st atutory auditor in acco rdance with Article 3 
in an EU Member State , the third country national can seek approval in another EU 
                                                 
404 Cf. Article 45(4) of the Statutory Audit Directive. 
405 Cf. Article 45(1) of the Statutory Audit Directive. 
406 Cf. Article 45(3) of the Statutory Audit Directive. However, a Member State ma y exempt the third country 
auditor or firm from its system of quality assurance review if the third country's system of quality assurance 
is assessed as equivalent. So far, the following countries are considered equivalent for these purposes: Australia, Canada, China, Croatia, Japan, Singapore, South Africa, South Korea, Switzerland and the US. 
A number of other countries are temporarily accepted as equivalent during a transitional period. See 
Commission Decision of 19 January 2011 on the equivalence of certain third country public oversight, 
quality assurance, investigation and penalty systems for auditors and audit entities and a transitional 
period for audit activities of certain third country auditors and audit entities in the European Union , OJ L 
15, p.12. 
407 A requirement imposing that only EU nationals could become auditors would not be possible given the 
international commitments of EU Member States: i.e. GATS. 
 
EN 222   EN Member State through the procedure forese en in Article 14 (aptitude test) of the 
Statutory Audit Directive;  
• if he/she has already been approved as  statutory auditor in a third country , EU Member 
States may (but are not obliged to do so) r ecognise this professi onal qualification and 
approve the third country auditor. Article 44 of the Statutory Audit Directive sets three 
conditions: (i) the third country  auditor must indeed prov ide proof that he or she 
complies with requirements equivalent to thos e laid down in Articles 4 and 6 to 13 of 
the directive, (ii) the procedure foreseen in  Article 14 (aptitude test) of the Statutory 
Audit Directive shall apply, and (iii) it should be possible for an auditor of that Member 
State to obtain recognition of his/her qualifications in that  third country (reciprocity 
requirement).  
The proposed measures intend to simplify the pro cedure foreseen in Article 14 of the Statutory 
Audit Directive for the recognition of statutory auditors of a different  Member State: the 
applicant auditor would have the choice between an aptitude test  and an adaptation period. Third 
country auditors would also be nefit from this simplification , since the Article 14 procedure is 
also applicable to them408: it will also be easier for them to  obtain the recogniti on because of the 
conditions required in Article 44. 
Thirdly, in the case of third c ountry audit firms, they need to  obtain approval in the EU in 
accordance with Article 3 as woul d any EU audit firm. It should be noted that there is no 
nationality restriction regard ing the ownership of the firm  by third country investors. 
Additionally, third country aud it firms would also benefit from the lifting of ownership 
restrictions in audit firms as regards voting ri ghts controlled by persons  other than statutory 
auditors approved in the EU. 
(3) The proposed measures take account of the particularities regarding the audit of 
consolidated financial statements with a view to facilitate such aud it when either an EU 
company has subsidiaries in third countries or a third country company has subsidiaries in the 
EU. 
The audit of consolidated accounts, when either  an EU company has subsidiaries in third 
countries or a third country company has subsidiari es in the EU presents some particular needs. 
The proposed measures take account of these pa rticularities and the following issues are 
considered: 
• duties and powers of the EU group auditor of an EU PIE . The existing rules (cf. Article 
27 of the Statutory Audit Directive) will be further clarified regarding: the 
documentation of the work by the EU group auditor and the need to secure the 
cooperation of third countr y auditors auditing subsid iaries of the EU PIE; 
• duties and powers of an EU auditor (e.g. auditin g an EU subsidiary of a third country 
company) towards a third country group auditor of a third country company . 
Clarification of the circumstances in whic h the EU auditor can derogate from the 
professional secrecy rule and transfer re levant documentation to the group auditor 
situated in a third country for the purposes of the group audit. It is al so clarified that the 
EU auditor cannot send documents to a th ird country authority (e.g. for a quality 
                                                 
408 Cf. Article 44(2) of the Statutory Audit Directive.  
 
EN 223   EN assurance review of the group audit) outside the procedure foreseen under Article 47 of 
the Statutory Audit Directive;  
• the question of the provision of non-audit serv ices to subsidiaries of EU companies in 
third countries: third count ry auditors/firms are affected by the new restrictions . The 
new measures will establish stricter requirements for EU statutory auditors and audit 
firms in the EU:  
– an EU statutory auditor and the members of  his/her network (whether in the EU or 
not) will not be allowed to provide non-audit services to the audited entity or to its 
subsidiaries within the EU;  
– Certain EU audit firms should become pure audit firms (and therefore will not be 
in a position to provide non-audit services  at all) and should not belong to a 
network providing non-audit se rvices within  the EU.  
These new measures do not affect the capacit y of a third country auditor/audit firm 
which is a member of the network of an EU  statutory auditor/aud it firm to provide non-
audit services to his/her/its audit clients a nd do not require third country audit firms to 
become pure audit firms.  
However, regarding subsidiaries of EU PIEs in third countries, the group auditor in the 
EU shall assess whether the provision of non- audit services by a member of his/her/its 
network to the subsidiary of  the PIE would compromise hi s/her or its independence. 
Some services are considered to affect such  independence in all cases (blacklist) while 
some other are presumed (but this presumpti on is rebuttable) to affect it. As a result, 
there is an effect on the ability of the third country auditor/firm wh ich is member of the 
same network of the group auditor to provide certain non-audit services.  
• the question of the rotation of the auditor rega rding the subsidiaries of EU PIEs in third 
countries . The new measures are silent regarding ro tation of auditors in a subsidiary of a 
PIE, whether such subsidiary is in  the EU or in a third country.  
(4) Supervisory cooperation with third country authorities: the new measures are neutral.  
Supervisory cooperation with thir d country authoritie s and bodies regardi ng the exchange of 
information, quality assurance reviews and investigations is encouraged. However, the new measures do not establish additional specific channels for cooperation and do not affect the 
existing rules on cooperation on th e transfer of aud it working papers which remain untouched. 
Therefore, the new measures are neutral. 
 
EN 224   EN ANNEX 18. OVERVIEW OF THE CUMULATION OF THE PREFERRED POLICY OPTIONS  
This annex presents an overview of the cumulation of the preferred policy options. 
– Figures  A18.1 to A18.4 present the pr eferred policy options regard ing objectives 1 to 5, 
with more detail for those regarding objec tives 1 to 3. Figure A18.1 shows an overview 
of the actors and the main cumulative eff ects: increased choice of more independent 
auditors; more transparency on audit quality; better quality of audit results; enhanced supervision and contribution to financial stability. Figure A.18.2 presents the policy 
options from the perspective of the selection and appointme nt of auditors. Figure A.18.3 
presents the policy options from the perspe ctive of the performa nce of the statutory 
audit and the related measur es on supervision. Figure A.18 .4 combines figures A18.2 
and A18.3. 
– Figures
 A18.5 and A18.6 present the meas ures regarding objective 4.  
– Figure  A.18.7 present the measures  regarding objective 5. 
Figure A18.1. General overview. 
AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR 
Strengthened and independent
AUDIT SUPERVISORSUPERVISOR of 
financial institutionsAudit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
More transparency on
AUDIT QUALITY
FIGURE A.18.2Increasedchoiceof more
Independent auditors
FIGURE A18.2
ESMA  & Other national 
AUDIT SUPERVISORSContribution to financial stability
FIGURE A.18.7Enhanced SUPERVISION
FIGURE A.18.4 & A18.7Better quality of AUDIT RESULTS
FIGURE A.18.3AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR 
Strengthened and independent
AUDIT SUPERVISORSUPERVISOR of 
financial institutionsAudit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
More transparency on
AUDIT QUALITY
FIGURE A.18.2Increasedchoiceof more
Independent auditors
FIGURE A18.2
ESMA  & Other national 
AUDIT SUPERVISORSContribution to financial stability
FIGURE A.18.7Enhanced SUPERVISION
FIGURE A.18.4 & A18.7Better quality of AUDIT RESULTS
FIGURE A.18.3
 
 
EN 225   EN Figure A18.2. Policy options on the se lection and appointment of auditors. 
AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestorsSELECTION & APPOINTMENT OF AUDITOR(S)
Strengthened and independent
AUDIT SUPERVISOREUROPEAN QUALITY
CERTIFICATEPUBLICATION-Financial information-Corporate informationLICENCING OF AUDIT FIRMS
-Pure audit firms
-No restriction on ownership
-Single approval within EUORGANISATION OF FIRMS
-Enhanced rules on internal org. 
-Enhanced rules on ethics
-Enhanced rules on independence
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firmsAPPOINTMENT (2)
-Decision by General Meeting
PUBLICATION
-Inspection ReportsMore transparency on
AUDIT QUALITYSELECTION 
PROCEDURE
-Tendering
-Maximum duration
-Rotation of audit firm
-No big-four only clauses
-Joint audit (large 
PIEs and financial inst.)APPOINTMENT (1)
-Recommendation by audit committee
IncreasedchoiceReinforced independence
AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestorsSELECTION & APPOINTMENT OF AUDITOR(S)
Strengthened and independent
AUDIT SUPERVISOREUROPEAN QUALITY
CERTIFICATEPUBLICATION-Financial information-Corporate informationLICENCING OF AUDIT FIRMS
-Pure audit firms
-No restriction on ownership
-Single approval within EUORGANISATION OF FIRMS
-Enhanced rules on internal org. 
-Enhanced rules on ethics
-Enhanced rules on independence
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firmsAPPOINTMENT (2)
-Decision by General Meeting
PUBLICATION
-Inspection ReportsMore transparency on
AUDIT QUALITYSELECTION 
PROCEDURE
-Tendering
-Maximum duration
-Rotation of audit firm
-No big-four only clauses
-Joint audit (large 
PIEs and financial inst.)APPOINTMENT (1)
-Recommendation by audit committee
IncreasedchoiceReinforced independence
 
 
EN 226   EN Figure A18.3. Policy options regarding th e performance of statutory audit. 
AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR PERFORMANCE OF STATUTORY AUDIT
CLARIFIED SCOPE OF AUDIT
-Rules on Professional scepticism
-Rules on audit tasks
-Rules on audit standards
Improved and expanded
AUDIT REPORT
Additional
INTERNAL REPORT
Improved communication 
with Audit Committee
-Reporting on problems
-Regular dialogue
Strengthened and independent
AUDIT SUPERVISORSUPERVISOR of 
financial institutionsQuality Assurance Reviews
& InvestigationsBetter quality of AUDIT RESULTS
PUBLICATION-Inspection Reports
ESMA  & Other national 
AUDIT SUPERVISORSEnhanced SUPERVISIONAUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR PERFORMANCE OF STATUTORY AUDIT
CLARIFIED SCOPE OF AUDIT
-Rules on Professional scepticism
-Rules on audit tasks
-Rules on audit standards
Improved and expanded
AUDIT REPORT
Additional
INTERNAL REPORTImproved and expanded
AUDIT REPORT
Additional
INTERNAL REPORT
Improved communication 
with Audit Committee
-Reporting on problems
-Regular dialogue
Strengthened and independent
AUDIT SUPERVISORSUPERVISOR of 
financial institutionsQuality Assurance Reviews
& InvestigationsBetter quality of AUDIT RESULTS
PUBLICATION-Inspection Reports
ESMA  & Other national 
AUDIT SUPERVISORSEnhanced SUPERVISION
 
 
EN 227   EN Figure A18.4. Combination of all policy options. 
AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
Shareholders Investors
(appointed)
AUDITOR SELECTION & APPOINTMENT OF AUDITOR(S) PERFORMANCE OF STATUTORY AUDIT
CLARIFIED SCOPE OF AUDIT
-Rules on Professional skepticism-Rules on audit tasks-Rules on audit standardsImproved and expanded
AUDIT REPORT
Additional
INTERNAL REPORT
Improved communication 
with Audit Committee
-Reporting on problems
-Regular dialogue
Strengthened and independent
AUDIT SUPERVISORSUPERVISOR of 
financial institutionsQuality Assurance Reviews
& Investigations
-Market monitoring
-Contingency planningEUROPEAN QUALITY
CERTIFICATEPUBLICATION
-Financial information
-Corporate informationLICENCING OF AUDIT FIRMS
-Pure audit firms
-No restriction on ownership
-Single approval within EU
ORGANISATION OF FIRMS
-Enhanced rules on internal org. 
-Enhanced rules on ethics
-Enhanced rules on independence
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firmsBetter quality of AUDIT RESULTSAPPOINTMENT (2)
-Decision by General Meeting
PUBLICATION
-Inspection ReportsMore transparency on
AUDIT QUALITYSELECTION 
PROCEDURE-Tendering
-Maximum duration
-Rotation of audit firm
-No big-four only clauses
-Joint audit (financial inst.)APPOINTMENT (1)
-Recommendation by audit committee
Increasedchoice
ESMA  & Other national 
AUDIT SUPERVISORSEnhanced SUPERVISIONReinforced independence
Contribution to financial stabilityAUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
Shareholders Investors
(appointed)
AUDITOR SELECTION & APPOINTMENT OF AUDITOR(S) PERFORMANCE OF STATUTORY AUDIT
CLARIFIED SCOPE OF AUDIT
-Rules on Professional skepticism-Rules on audit tasks-Rules on audit standardsImproved and expanded
AUDIT REPORT
Additional
INTERNAL REPORT
Improved communication 
with Audit Committee
-Reporting on problems
-Regular dialogue
Strengthened and independent
AUDIT SUPERVISORSUPERVISOR of 
financial institutionsQuality Assurance Reviews
& Investigations
-Market monitoring
-Contingency planningEUROPEAN QUALITY
CERTIFICATEPUBLICATION
-Financial information
-Corporate informationLICENCING OF AUDIT FIRMS
-Pure audit firms
-No restriction on ownership
-Single approval within EU
ORGANISATION OF FIRMS
-Enhanced rules on internal org. 
-Enhanced rules on ethics
-Enhanced rules on independence
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firmsBetter quality of AUDIT RESULTSAPPOINTMENT (2)
-Decision by General Meeting
PUBLICATION
-Inspection ReportsMore transparency on
AUDIT QUALITYSELECTION 
PROCEDURE-Tendering
-Maximum duration
-Rotation of audit firm
-No big-four only clauses
-Joint audit (financial inst.)APPOINTMENT (1)
-Recommendation by audit committee
Increasedchoice
ESMA  & Other national 
AUDIT SUPERVISORSEnhanced SUPERVISIONReinforced independence
Contribution to financial stability 
 
EN 228   EN Figure A18.5. Policy options for objective 4.1: facilitate the cross-border recognition of audit 
providers' competence 
LICENCING OF AUDITOR(S) & AUDIT FIRM(S)
Member States 
CooperationNEW
ADAPTATION 
PERIOD (3 YEARS)IMPROVED
APTITUDE 
TESTConditions for audit firm(s) [NEW]
-No ownership restriction
-But firm directed by statutory auditors
-Key audit partner in charge of the audit
MEMBER STATE A
DOMESTIC APPROVAL & REGISTRATION (LICENCING)Applicant
audit firmApplicant
statutory auditorKey audit partner
(statutory auditor)
Conditions for statutory auditors [ NO CHANGE ] 
Educational Qualifications:
-professional competence-theoretical instruction
-practical training
MEMBER STATE B
DOMESTIC APPROVAL & REGISTRATIONPredictabilityof 
Aptitude testChoice for applicantLicenced audit firmLicenced statutory auditor
Mutual Recognition
(but key audit partner
must be approved in MS B)LICENCING OF AUDITOR(S) & AUDIT FIRM(S)
Member States 
CooperationNEW
ADAPTATION 
PERIOD (3 YEARS)IMPROVED
APTITUDE 
TESTConditions for audit firm(s) [NEW]
-No ownership restriction
-But firm directed by statutory auditors
-Key audit partner in charge of the audit
MEMBER STATE A
DOMESTIC APPROVAL & REGISTRATION (LICENCING)Applicant
audit firmApplicant
statutory auditorKey audit partner
(statutory auditor)
Conditions for statutory auditors [ NO CHANGE ] 
Educational Qualifications:
-professional competence-theoretical instruction
-practical training
MEMBER STATE B
DOMESTIC APPROVAL & REGISTRATIONPredictabilityof 
Aptitude testChoice for applicantLicenced audit firmLicenced statutory auditor
Mutual Recognition
(but key audit partner
must be approved in MS B)
 
 
EN 229   EN Figure A18.6. Policy options for objectives 4.2 an d 4.3: streamline standards on audit practice, 
independence and internal contro l of audit firms across the EU  and ensure that statutory 
audit is adapted to SMEs needs. 
PIEs
[irrespective of size]Large 
enterprisesSTATUTORY AUDIT BY SIZE OF 
AUDITED ENTITY & AUDIT STANDARDS
AUDIT REPORTLimited Review
REPORT
Strengthened and independent
AUDIT SUPERVISORIf voluntary or 
required nationallyMEDIUM-SIZED
enterprisesSMALL
enterprisesMICRO 
enterprises
Special rules for
Audit of PIEsNormal auditProportionate and 
simplified auditNo audit required
(EU level)
EU rules
+
Clarified ISAsClarified ISAs
(adopted nationally)Clarified ISAs
(adapted to sizeLimited Review
(where it exists)
Domestic rules on
limited reviewSimplified accounts
Adapted audit standards
Same level of assurance
Adapted supervisionPIEs
[irrespective of size]Large 
enterprisesSTATUTORY AUDIT BY SIZE OF 
AUDITED ENTITY & AUDIT STANDARDS
AUDIT REPORTLimited Review
REPORT
Strengthened and independent
AUDIT SUPERVISORIf voluntary or 
required nationallyMEDIUM-SIZED
enterprisesSMALL
enterprisesMICRO 
enterprises
Special rules for
Audit of PIEsNormal auditProportionate and 
simplified auditNo audit required
(EU level)
EU rules
+
Clarified ISAsClarified ISAs
(adopted nationally)Clarified ISAs
(adapted to sizeLimited Review
(where it exists)
Domestic rules on
limited reviewSimplified accounts
Adapted audit standards
Same level of assurance
Adapted supervision
 
 
EN 230   EN Figure A18.7. Policy options for objective 5: imp rove the effectiveness,  independence and 
consistency of the regulation and supervision of auditors of PIEs. 
Third Countries
Competent AuthoritiesSUPERVISION: AUDIT OF PIEs
ESMA :
-special internal committee on auditCOOPERATION AGREEMENTS
-exchange of info.-but, Art. 47 Dir. applies(transfer of working papers)
EUROPEAN
QUALITY CERTIFICATEPUBLICATION-annual activity report
-annual work programmes-overall results of the quality assurance system
AUDIT SUPERVISOR
independent from profession and with clear and stronger powers
Competent Authority A
3 options:
Authority responsible for
Control of accounts: 24(4(h TD)(e.g. FRC)
Financial Markets Supervisor(e.g. Consob)
Specific Audit Supervisor
(e.g. H3C)Competent Authority B
(optional) :
Supervisor of PIEs, 
for obligations on PIEs
(e.g. tendering etc)MAIN TASKS
(and powers)
Quality assurance 
reviews
Investigations
Contingency planning
Market monitoringStautory auditors
Audit firms
Large audit firms
Market concentration
-need for adoption of
structural measures?PUBLICATION-quality assurance reviewsindividual reports
Supervisors of PIEs
(banking, insurance, 
financial markets etc)
Financial Intelligence Units
(anti-money laundering)
Competent Authority for 
Approval & Registration of
auditors and audit firmsInternational
Organisation and
bodies
Sanctions
Supervisory measures
EGAOB Delegation of tasksColleges of supervisors(e.g. for networks)OBLIGATION TO
COOPERATE
-exchange of information-quality assurance reviews-investigations-on-site inspections
-contingency planning
MediationAudit Supervisor
Member State X 
Audit Supervisor
Member State Y 
Audit Supervisor
Member State Z Domestic
cooperationGuidelinesEU cooperationInternational cooperationTransparencyThird Countries
Competent AuthoritiesSUPERVISION: AUDIT OF PIEs
ESMA :
-special internal committee on auditCOOPERATION AGREEMENTS
-exchange of info.-but, Art. 47 Dir. applies(transfer of working papers)
EUROPEAN
QUALITY CERTIFICATEPUBLICATION-annual activity report
-annual work programmes-overall results of the quality assurance system
AUDIT SUPERVISOR
independent from profession and with clear and stronger powers
Competent Authority A
3 options:
Authority responsible for
Control of accounts: 24(4(h TD)(e.g. FRC)
Financial Markets Supervisor(e.g. Consob)
Specific Audit Supervisor
(e.g. H3C)Competent Authority A
3 options:
Authority responsible for
Control of accounts: 24(4(h TD)(e.g. FRC)
Financial Markets Supervisor(e.g. Consob)
Specific Audit Supervisor
(e.g. H3C)Competent Authority B
(optional) :
Supervisor of PIEs, 
for obligations on PIEs
(e.g. tendering etc)MAIN TASKS
(and powers)
Quality assurance 
reviews
Investigations
Contingency planning
Market monitoringStautory auditors
Audit firms
Large audit firms
Market concentration
-need for adoption of
structural measures?PUBLICATION-quality assurance reviewsindividual reports
Supervisors of PIEs
(banking, insurance, 
financial markets etc)
Financial Intelligence Units
(anti-money laundering)
Competent Authority for 
Approval & Registration of
auditors and audit firmsSupervisors of PIEs
(banking, insurance, 
financial markets etc)
Financial Intelligence Units
(anti-money laundering)
Competent Authority for 
Approval & Registration of
auditors and audit firmsInternational
Organisation and
bodies
Sanctions
Supervisory measures
EGAOB Delegation of tasksColleges of supervisors(e.g. for networks)OBLIGATION TO
COOPERATE
-exchange of information-quality assurance reviews-investigations-on-site inspections
-contingency planning
Mediation
Delegation of tasksColleges of supervisors
(e.g. for networks)OBLIGATION TO
COOPERATE
-exchange of information-quality assurance reviews-investigations-on-site inspections
-contingency planning
MediationAudit Supervisor
Member State X 
Audit Supervisor
Member State Y 
Audit Supervisor
Member State Z Audit Supervisor
Member State X 
Audit Supervisor
Member State Y 
Audit Supervisor
Member State Z Domestic
cooperationGuidelinesEU cooperationInternational cooperationTransparency
 
 
EN 231   EN ANNEX 19. PROPORTIONALITY ASSESSMENT  
This annex presents (1) a summary proportionality  assessment of the whole package of policy 
options, as well as (2) a more detailed assessmen t regarding the proportionality of a few selected 
preferred policy options. This assessment con cerns the options which are perceived by 
stakeholders as particularly intrusive409, namely: regular tendering, mandatory rotation, pure 
audit firms/prohibition on the prov ision of NAS and joint audit. 
(1) The proportionality of the package of measures.  
This impact assessment proposes diffe rent policy options (see section 6 ). Some of these policy 
options, if pursued, would affect  the overall baseline scenari o, having also an impact on 
addressing other problems, which are part of the problem tree but not directly targeted by these 
proposed measures. In turn, it could be argued that if some of the policy options will be 
successfully implemented the need for other policy  measures (affecting especially the statutory 
audit of PIEs) is not demonstrat ed. Taking the above into consider ation, section (1) of this Annex 
will explain why the proposed set of policy measures  is needed as a package and is considered 
proportionate despite the changes, which some of the individual measures can bring to the 
overall baseline scenario. In  this regard, the section (1) demonstr ates that only as a set of policy 
measures can the package achieve fully the identified objectives. Therefore, it also demonstrates 
that each individual policy option is a "sine qua non"  pre-condition for the full achievement of 
the overall objective and in th is way is proportionate.  
The section will focus on the question of the reinforcement of the audit committee and need for 
structural mesures regarding the independence of auditors; the need to request the publication of 
more detail on the content of the audit report or the imp act of the liberalisa tion of the conditions 
for accessing the profession (e.g. recognition of a udit firms etc); and the need for a quality 
certificate.  
The reinforcement of the audit committee and the need for structural measures regarding 
independence of auditors  
The strengthening of the audit committee coul d question the need for other policy options 
regarding objectives 1 (on clarifyi ng the role of the statutory audit) and 2 (on the reinforcement 
of the independence and professional scepticism of  auditors and audit firms). It could be argued, 
for instance, that such a reinforced audit co mmittee could, on its own, en sure that (see figure 
A19.1 ):  
– the auditor/audit firm provides more inform ation on the statutory audit to users (thus 
eliminating the need for the prepar ation of an extended audit report); 
– the auditor/audit firm increases the comm unication with the audit committee and with 
the supervisors of the audited entity (thus el iminating the need for a structured dialogue 
in both cases);  
– the auditor/audit firm does not provide NAS to  the audited entity which could constitute 
a threat to his/her/its independence (e.g. by continuing approving the provision of NAS, 
                                                 
409 The other policy options rather deepen or reinforce existing obligations: e.g. regarding the content of the 
audit report, the existence and powers of the audit committee etc. 
 
EN 232   EN thus eliminating the need for the prohibiti on of the provision of NAS to the audited 
entity);  
– the selection of the auditor/audit firm is fair (thus eliminating the need for better 
framing the procedure for the a ppointment of auditors) and  
– the work of the auditor/aud it firm would be monitored (t hus eliminating the need for 
mandatory rotation of audit firm). 
AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR Strengthened audit Committee: without additional measures
AUDIT 
REPORT
Unstructured
Communication: 
No internal report Unstructured and 
intermitent dialogue
SUPERVISOR of 
financial institutionsAudit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
No additional rules on the 
appointment of auditor:
-audit committee prepares
a recommendation which
or not be followed
Monitoring of 
statutory audit Review and monitor the 
Independence of the auditor,
in particular, the provision of NAS  AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR Strengthened audit Committee: without additional measures
AUDIT 
REPORT
Unstructured
Communication: 
No internal report Unstructured and 
intermitent dialogue
SUPERVISOR of 
financial institutionsAudit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
No additional rules on the 
appointment of auditor:
-audit committee prepares
a recommendation which
or not be followed
Monitoring of 
statutory audit Review and monitor the 
Independence of the auditor,
in particular, the provision of NAS  
 
Figure A19.1 – Strengthened audit committee without additional measures 
This question, however, raises the issue of whether behavioural solutions (based on the 
persuasion of the audit committee) should be prefe rred to structural ones (framing the activity of 
the audit committee).  
More responsible audit committees composed of more qualified members are certainly needed. 
However, further reliance on the audit committee w ould result in a large shift of responsibility 
towards its members, which appears disproporti onate and unfair. Audit committee members are 
not employees of the audited ent ity nor are their assignments full -time ones. Therefore, it is 
questionable whether the audit committee would have  sufficient time to devote to all issues.  
 
EN 233   EN Over-reliance on the audit committee, even if a strengthened one, is not a long term sustainable 
solution to address the threats to independence.  Outcomes would largel y depend on behavioural 
solutions and therefore on the quality of the persons appointed. Structural solutions would 
facilitate the tasks of the audit committee, whic h could focus more on the substance of the audit 
work (i.e. monitoring the financial reporting channe ls within the audited entity and the work of 
the external auditor with regard  to audit) and on having more influence on the selection of the 
auditor) rather than on making case-by-case assessments as to whether there are threats to 
independence (e.g. those that could arise from th e provision of certain NAS or those resulting 
from the familiarity threat). 
Such over-reliance on the audit committee would put audit committee members under pressure 
to obtain certain results (e.g. influencing management in rela tion to the selection of auditors, 
more information by auditors to shareholders or the audit committee itself) which may or may 
not be achieved, since auditors and management ha ve different interests from those of the audit 
committee members. Therefore, such results would depend on the persuasive force of the 
members of the audit committee. Hence, different  audit committees will have largely different 
outputs. Nevertheless, thos e identified results can be easily framed by structural solutions: i.e. 
rules requiring management to explain to shar eholders whether managers depart from the 
recommendations made by the audit committee or requiring auditors to provide more 
information. Therefore, structural solutions ensu re that certain conduct w ill be carried out, thus 
allowing the audit committee to focus on the review of the substantive audit work. 
Therefore, the strengthening of the audit comm ittee needs to be completed with structural 
measures to support its functioning and ensure  that results are de livered (see figure A19.2 ). 
 
EN 234   EN AUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR Strengthened audit Committee: with additional measures
Improved and expanded
AUDIT REPORT
SUPERVISOR of 
financial institutionsAudit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
Strengthening
oversight roleInternal additional
REPORTNew rules on the
Selection of auditors:
- reinforced recommendationof the audit committee
-managers to explain whether
they follow the audit committee-shareholder to make
a choice between two
recommended options
Structured and
Regular dialogue
Prohibition of the 
provision of NASStructured
communicationRotation of 
audit firmAUDITED
ENTITY (PIE)
Strengthened
AUDIT COMMITTEEGeneral Meeting
ShareholdersInvestors
(appointed)
AUDITOR Strengthened audit Committee: with additional measures
Improved and expanded
AUDIT REPORT
SUPERVISOR of 
financial institutionsAudit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Audit firm 1
(Big Four) 
Audit firm 2
(Mid Size) 
Audit firm…n
(…) Competing audit firms
Strengthening
oversight roleInternal additional
REPORTNew rules on the
Selection of auditors:
- reinforced recommendationof the audit committee
-managers to explain whether
they follow the audit committee-shareholder to make
a choice between two
recommended options
Structured and
Regular dialogue
Prohibition of the 
provision of NASStructured
communicationRotation of 
audit firm
 
Figure A19.2 – Strengthened audit committee with additional measures 
The need to request the publication of more  detail on the content of the audit report  
It could be argued that a more competitive mark et created by the removal of barriers to access 
(see policy options regarding objectiv e 3) could make the requirement  to provide more and better 
information in the audit report unnecessary, since th is result would be de livered voluntarily by 
market participants.  
However, several factors point in a different dire ction. There is already le gislation in place with 
regards to the content and format of the audit report. The result is template reports. From one 
year to the other, only the date changes. Inve stors have no means to understand what work is 
behind the audit report. 
Only in France are reports longer and contain more  detail. However, this is the result of national 
requirements rather than voluntarily developments  in France. Despite the existence of inter-
connected networks of audit firms, it has not resulted in this "best pr actice" being extended.  
Fear of liability certainly stands as a key concer n for audit firms preventing them from disclosing 
more information.  
 
EN 235   EN Therefore, it is highly unlikely that audit firms would voluntarily  disclose more information in 
the audit report in the absence of a change in legislation. Therefore, requiring the extension and 
improvement of the audit report appe ars proportionate in this regard. 
The need for a quality cer tificate considering the impact of the liberalisation of the conditions 
for accessing the profession (e.g. recognition of  audit firms etc) and the enhancing of the 
supervisory rules  
It could be argued that a pan- European quality certification sy stem (policy option regarding 
objective 3.2) would no longer be necessary becaus e the process for mutual recognition of audit 
firms is improved and the regulatory and superv isory requirements increasingly harmonised (see 
policy options regarding objectives 4 and 5) 
However, it should be noted that the quality certif ication would essentially be a tool to address 
the reputational deficit from which non-Big Four audit firms suffer.  
The mutual recognition of a national licence will not address the reputational problem, in the 
same manner as the nationa l licence does not address it  either. It is not becau se a firm is allowed 
to provide services in more than one country th at the perception (by mark et participants) of the 
quality of its services will  necessarily be increased.  
The strengthening of supervision co uld indeed result in similar e ffects to a quality certification. 
But the outcome of supervision is less observabl e for the outside world than a certification on 
quality, which can (and should) take account of th e publicly-available outcomes of supervision.  
The alternative to the quality certification system  would be to establish a special licence for the 
audit of PIEs. However, this would result in a barrier to growth and development of audit firms 
that audit small PIEs. For instance, when an  unlisted company becomes listed, if a special 
licence for the audit of PIEs is required, this co uld imply that the audito r of this company could 
no longer be able to provide its services and au tomatically banned from the market for PIEs.  
Therefore, a voluntary certificati on system has the advantage of addressing the reputational issue 
while not becoming a barrier to entr y/growth for smaller audit firms. 
(2) Assessment on the proportiona lity of selected policy options  
These preferred policy options are the minimum necessary to achieve the following objectives: 
• (a) On the one hand, objectives 2.1 (prevent any conflict of interest arising from the 
provision of non-audit services to PIEs) and 3.3 (increase the choi ce of audit providers 
for PIEs); and 
• (b) On the other hand, objectives 2.3 (mitigat e the risk of any pot ential conflict of 
interest due to a "familiarity  threat" and 3.1 (faci litate switching of an audit firm). 
Indeed, these preferred po licy options have cumulative effects resulting in positive synergies for 
more than one objective (see also Section 8.1). Figure A19.3  provides an overview of the impact 
of such policy options re garding those objectives.  
 
EN 236   EN Figure A19.3 Effectiveness 
Objectives 
 
 
 
Policy option  Objective 3.1: 
facilitate 
switching of 
an audit firm Objective 3.3: 
increase the 
choice of audit 
providers for 
PIEs Objective 2.1: 
prevent any 
conflict of 
interest arising 
from the 
provision of 
non-audit 
services to PIEs  Objective 2.3: 
mitigate the risk 
of any potential 
conflict of interest 
due to "familiarity 
threat"  Conver-
gence Cost-
effecti-
veness 
Baseline scenario (general principles 
on the provision of non-audit services; 
high market concentration for the audit 
of large PIEs; single firm audit; long 
audit firm tenure and rotation of key 
audit partner within audit firm;) 0 0 0 0 0 0 
  
Pure audit firms + ++ ≈ + + 
Joint audits + ≈ ≈/+ + +/- 
Joint audits by pure audit firms  
  + ++ ≈/+ + +/≈ 
  
Prohibition on the provision of any 
non-audit services to the audited 
entities  ≈ +/++ ≈ + +/ ≈ 
  
Regular tendering +/  ≈ +/ ≈ +/ ≈ ≈ 
Mandatory rotation of an audit firm +  ++ + + 
Mandatory rotation of an audit firm 
via tendering ++   
++ + +/++ 
 
(a) Objectives 2.1 (prevent any conflict of interest arising fr om the provision of non-audit 
services to PIEs) and 3.3 (increase the choice of audit providers for PIEs). 
In the case of objective 2.1, the baseline scenario  (general principles on the provision of non-
audit services) is not a credible alternative. As  described in Section 6.2, the prohibition of any 
non-audit services to the audite d entity by the audit firm would be effective in prevening 
conflicts of interest but could ha ve undesired effects regarding the availability of eligible audit 
firms for the audit of large PIEs, thus not addressi ng objective 3.3. It must be  noted in this regard 
that statutory audit is carried out in the public interest, whil e non-audit services are not.  
Therefore, the option of pure audit firms app ears to be the only one that produces positive 
combined effects on both objectives, and therefor e proportionate from that  perspective. Joint 
audits would present positive impacts mostly as  regards objective 3.3, in so far as it would 
provide opportunities to smaller firms to get e xposure, demonstrate thei r capability and build 
reputation over time, so that they become real competitors to the current Big Four audit firms 
both in size and expertise. Joint audits would al so have positive effects on the reinforcement of 
the professional scepticism (see above Annex 12 ), therefore preventing the emergence of 
conflicts of interest. Also, the conflict of inte rest problem leading to undermined independence 
of the auditor (as described in the problem definition), cannot be solved if there is a limited choice on the market. The opti on of introducing join t audit would increas e the choice. Joint 
audits would produce similar results whether combined with pure audit firms or not.  
At the same time, it must be recognised that market concentration, which is the problem 
addressed by objective 3.3, is lower regarding the a udit of PIEs of smalle r dimension. Therefore, 
in terms of proportionality, it w ould appear appropriate to limit both the joint audit and the pure 
audit firms policy options to the st atutory audit of either  large PIEs or Financial Institutions only 
 
EN 237   EN (see below). This way, negative eff ects of both options would be avoided, in particular: cost of 
joint audit for smaller PIEs410 and possible entry barrier effect for smaller audit firms (which do 
not audit PIEs or audit very few PIEs) re sulting from the pure audit firm requirement411. 
As already explained in Annex 16  regarding the impact on SMEs, th is adjustment could be done 
as follows: 
– Joint Audit : this option would only be foreseen for the statutory audit of large PIEs or 
only large PIES in the financial sector (in case of mandatory requ irement) or for all 
PIEs if introduced on a voluntary basis . Large PIEs should be understood as those 
having a market capitalisation (or balance sheet  total if the PIE is not listed) above €1 
billion.  
– Pure audit firms : the pure audit firm requirement would only apply to firms that obtain 
at least one third of thei r audit fee revenues from large PIEs (see above for the 
threshold).  Below this threshold, only the proh ibition on the prov ision of non-audit 
services would apply. Specific safeguards w ould need to be applied in this regard. 
It should be noted that, although they may have  a small positive effect compared to the statu quo  
in addressing objectives 2.3 and 3.1 (notably because of the effect of joint audit on the 
reinforcement of the professional scepticism), pure audit firms and join t audit do not really 
address by themselves objectives 2.3 and 3.1. 
Concerning joint audit, another issue arises regarding the level of detail that EU legislation 
would require to ensure that a jo int audit rule could be smoothly applied. In France, where joint 
audit is legally required, there is a specific pr ofessional standard that  takes account of the 
specificities of joint audit. Similarly, it woul d be necessary that the European supervisory 
authorities develop technical standards on this issue,  so that the joint audit rule could be properly 
enforced.  
(b) Objectives 2.3 (mitigate the risk of any poten tial conflict of interest  due to a "familiarity 
threat") and 3.1 (facilitate switching of an audit firm). 
The option of tendering without ro tation of an audit firm would hardly have any impact, or a 
marginal one only, if the audited entities decided to sy stematically prolonge audit mandates. At 
the same time, if rotation of the firm is not en sured, it would be necessary to organise regular 
tendering procedures within relativ ely short timeframes (e.g. five year s or less), so that audited 
entities reassess their position regularly and a judgement  of the risk of familiarity threat is made 
(e.g. at least every 5 years). Th is would result in increased costs associated with tendering 
procedures. Additionally, if  tendering does not result in change  of auditor, tendering costs may 
be disproportionate c onsidering the results.  
                                                 
410 The cost of audit (not necessarily joint audit) for sm aller PIEs is, in proportion to turnover, higher than for 
a large PIE. The additional cost of joint audit (estimated at 10% of a standard audit) could be felt by 
smaller PIEs as disproportionate to them, considering their size and impact in the financial markets. For 
instance, concerning issuers of shares admitted to trad ing in regulated markets, issuers with less than €1 
billion capitalisation account for more than two thirds of the listed companies in number but their combined 
capitalisation hardly amounts to 7% of total capitalisation. See Annex 16(2.1) .  
411 Smaller audit firms whose revenues are largely au dit and non-audit fees from non-PIEs may find little 
interest in trying to audit PIEs if they have to convert into pure audit firms, thus losing part of their 
revenues from non-PIEs. 
 
EN 238   EN On the other hand, rotation of audit firms w ithout tendering would have a real impact per se  in 
addressing these objectives. The drawback is that, with regard to the selection of the new audit 
firm (cf. objective 3.1 on the switching of an audit firm) its impact is more limited: as such, the 
rotation of firm does not contribut e to facilitating the emergence of  new entrants and in addition 
it does not contribute either to an objective sel ection of an audit firm (thus does not have 
synergies with objective 3.2). 
However, as explained in sect ions 6.2 and 6.3, the combination of mandatory rotation of audit 
firms and tendering would have very positive syne rgies. Thus, the benefits resulting from the 
combination of these options would compensate  for the costs incurred, particularly those 
regarding tendering.  
In this context, it is crucial to find the right balance between the appropriate duration of the 
mandate of the auditor to ensure that dispropo rtionate costs due to very short mandates are 
avoided412 (including the cost related to the fact that getting to know a company requires high 
initial investment by the auditor), while addressing the familiarity threat. To the extent that the 
rotation of audit firms would be ensured after a certain period, it could be possible to reduce the 
frequency of tendering procedures and allow for longer, more stable  periods. Therefore, 
tendering procedures could coincide with the tim ing of the rotation of firms. Currently the 
Statutory Audit Directive sets th e rotation of key audit partners (within the audit firm) every 7 
years and in Italy the rotation of audit firms is every 9 years. A similar duration for the rotation 
of the audit firm could be considered. Theref ore, a rotation of aud it firm (and tendering 
procedure) every 7 to 9 year s would appear proportionate413.  
As a result, the combination of mandatory rotati on and tendering appear proportionate to address 
objectives 2.3 and 3.1. 
At the same time, recognising the cost of tende ring procedures for smaller PIEs, it would be 
proportionate to alleviate such cost at least fo r the PIEs which are SMEs. Thus, PIEs which are 
SMEs should not be obliged to tender for thei r audit service (although th ey may do so) and may 
directly negotiate with a potential service provider. Waiving the obligation to invite at least one non-Big Four audit firm during th e tendering procedure would not have negative effects: smaller 
PIEs are likely to address smaller audit firms anyway rather than Big Four audit firms. See 
Annex 16
.  
However, the rotation of audit fi rms would need to apply in all circumstances as otherwise the 
above objectives are not achieved. 
Figure A19.4 provides a summ ary of the proportionality  assessment. It also takes account of 
issues address in Annex 16 regarding SMEs and Annex 13  regarding the definition of PIEs. 
                                                 
412 Tendering procedures with short ma ndates may have uncompetitive effects, as described in Billard et al. 
(2011). 
413 The combination of tendering and rotation would thus contribute to reduce the costs otherwise entailed by 
regular mandatory tendering within shorter timeframes: e.g. instead of every 5 years, tendering could take 
place every 9 years.  
 
EN 239   EN Figure A19.4 – Summary of the proportionality assessment 
Audited entities 
(PIES) 
Audit Committee 
Extended audit reports and internal 
audit reports 
Rotation of audit firm 
Tendering 
Voluntary joint Audit  
Prohibition on the provision of non-
audit services to audit client 
Pure audit firm 
Organisational requirements for 
firms 
Transparency Report for audit 
firms 
Access to European Quality 
Certificate Auditor/  
 audit firm 
 
Large PIE in the 
Financial sector*  
3  
3  
3  
3  
3  
3  
3     
 
Large PIE*  
3  
3  
3  
3  
3  
3  
3  
3  
3  
3  
Large  
audit firm*** 
Medium-sized PIE 3 3 3 3 3 
Small PIE** 2 
**** 3 3 2 3  
3  
2  
3 
obligation 
adapted to 
size of 
firm  
3 
obligation 
adapted to 
size of 
firm  
3  
Smaller  
audit firm 
* PIEs with more than €1 billion market capitalisation (if lis ted company) or balance sheet (if unlisted financial institutions )  
** PIEs which are SMEs (i.e. less than 250 employees, balance sheet not exceeding €43 million an d annual turnover not exceeding  €50 million) or, for listed companies, companies 
with a reduced market capitalisation within the meaning of the prospectus directive (market capitalisation not exceeding €100 m illion) 
*** Audit firm which obtains at least one third of its audit fees from large PIEs. 
 
EN 240   EN **** Certain types of financial entities are excluded from the obligation to have an audit committee because of their nature: e .g. investment funds (whether UCITS or alternative 
funds), issuers of asset-backed securities or certain types of non-quoted banks which only issue high-value denominated debt se curities. 
 
EN 241   EN ANNEX 20. SUMMARY ESTIMATES OF THE COSTS AND FINANCIAL BENEFITS OF THE 
PREFERRED POLICY OPTIONS (INCLUDING ASSESSMENT OF ADMINISTRATIVE 
BURDEN ) 
This annex presents estimations of the costs an d benefits of the pref erred policy options. In 
some cases the new legal obligat ions (to be introduced by the preferred policy measures) will 
entail some additional administrative costs for business entities in  providing additional 
information to public authorities or to private parties. These administrative costs are estimated 
under the respective policy options , while the cost estimates fo r the individual policy options 
are presented under the resp ective specific objective.  
The annex comprises 3 sections: 
• Section (1) introduction; 
• Section (2) describes the costs and benefits  for each of the preferred policy options; 
and 
• Section (3) presents a summary assessment. 
(1) Introduction  
Costs 
There are 23 policy options addressing the 5 sp ecific objectives and 14 operational objectives. 
– For 10 of these options, quantitative estima tions are presented regarding costs in 
section (2) of this Annex. This is partic ularly the case regarding the two measures 
that result in higher costs for PIEs and audit firms: tenderi ng and joint audits. This is 
also the case regarding the measures rega rding audit reporting or that involve a 
strengthened audit committee. 
– For the remaining 7 options, a qualitative as sessment is done, due to difficulties in 
the collection of data or to quality thereof. This is particularly the case as regards the cost implications for national authorities, which depend very much on the structure in 
place and the size of markets. 
– In the case of 6 options, there are no direct costs implications (e.g. the clarification of 
the rules do not result in additional costs)  or the costs would have been incurred 
anyway by audit firms. 
Having said this, due to the lack of comparable  data and to some quality data considerations, 
it is not possible to provide a reliable estima tion of the aggregate costs of the package. 
Therefore, the costs are in most cases estimated at the level of an average PIE or an average 
audit firm. 
Benefits 
Concerning the benefits of the package, th eir quantification is not an easy task. 
 
EN 242   EN The main expected benefit of the package of me asures is the increase in audit quality, which 
in turn should lead to increased investor trust in the financial statements of the PIEs. It is, 
however, almost impossible to provide a quantit ative estimate of the benefit of such an 
increase in trust.  
The cost of capital is lower fo r companies with well audited and reliable accounts. Therefore, 
the benefits could be estimated as an average re duction in the cost of capital. However, other 
factors influence investors' decisions: first of  all, the perspectives of the audited company 
itself. Statutory audit is indeed  ancillary to the main busine ss activity. Therefore, we cannot 
quantify the possible reduction in the cost of cap ital for the audited entity due to the increase 
in audit quality. 
Moreover, audit quality is not synonymous w ith profits generated by the audited entity. 
Indeed, the likelihood of issuing or the number of going concern opinions issued by auditors 
is often used by academic literature as a proxy to measure audit quality. Therefore, it could 
also be argued that the benefits  of audit quality could instead be estimated as the savings on 
future losses that will not be incurred thanks to increased audit qualit y. These losses could be 
investors' losses due to fraud (e.g. a Mado ff-type scenario) or due to underperforming 
businesses (e.g. a Lehman Brothers- or Fortis-typ e scenario); or genera l losses incurred as a 
result of the financial crisis: e .g. cost to the taxpayers due to th e need to inject money into the 
economy (e.g. the rescuing of banks scenario) or costs of lost output (e .g. reduction of GDP 
etc).  
Commission approved measures to support banks during the crisis, including aid schemes and 
ad hoc interventions, amounted to EUR 4 588. 9 billion for the period between October 2008 
and October 2010. For 2009, aid approved account ed for 39 % of EU-27 GDP. The large 
amounts of support to banks approved under scheme s can be explained by the fact that some 
Member States adopted blanket guarantee sc hemes which covered all their banks’ debt. 
Member States relied mainly on guarantee measures. 
The case of the impact of derivatives in the financial crisis 
The European Commission services414 explained that one way to estimate the 
economic impact of OTC derivatives on the fi nancial crisis is to look at the economic 
costs of the financial crisis first. The costs of a financial crisis were measured by 
evaluating the fiscal costs or  the costs of lost output.  
Since OTC derivatives have pl ayed a role in the financ ial crisis, the Commission 
considered that, as such, at least part of th e costs of the crisis can be attributed to 
them. The Commission services made a very  conservative assumption on the share of 
the costs (i.e. 1%). This meant that more th an €10 billion of costs could be attributed 
to OTC derivatives. 
The benefits arising from the harmonisation due to the introduction of the ISAs are quantified 
in section (2) of this Annex.  
For a summary assessment on benefits, see nevertheless section (3) of this Annex. 
                                                 
414 European Commission (September 2010), Annex 7. 
 
EN 243   EN (2) Cost and benefits of the preferred policy options  
Specific objective 1: Clarify and define the ro le of the statutory auditors generally as 
well as with specific regard to PIEs  
Clarify and specify the scope of statutory audit in the EU rules (without enlarging it) to reduce 
the expectation gap.  
There are no direct cost implications arising fr om the clarification of the scope of statutory 
audit.  
The requirements regarding the important tasks to be undertaken when performing the audit 
work (i.e. appointment of adequate staff; organi sation of audit file; mark et integrity and fraud 
prevention; responsibility of gr oup auditors; internal  quality control or record keeping) are 
largely a codification of existing practice framed by the auditing standards.  Therefore, it is not 
expected that audit firms w ould incur additional costs. 
In terms of benefits, this measure should resu lt in increased audit quality (see above on the 
question of measuring the in creased on audit quality). 
Improve and expand the content of the audit report disclosed to the public. 
Since the information contained in  this report is the result of the audit work itself, the only 
direct cost arising from this obligation would be the administ rative cost of preparing the 
report. This would be a cost for the audit fi rm auditing the PIE (costs are assumed to be 
transferred partially or in full to the audited client). 
Considering that most of the information will be based on the additional internal audit report, 
the administrative cost of prep aring the audit report is estima ted to be low: around 8 hours for 
a single audit report. 
If these 8 hours are charged at a udit partner rate, the total cost of  a single audit report can be 
estimated at 4,800 euro  (the cost of an average part ner hour is estimated at 600 euro) . 
Require the preparation of a longer and more de tailed report for the audited entity (additional 
internal report). 
Since the information contained in  this report is the result of the audit work itself, the only 
direct cost arising from this obligation would be the administ rative cost of preparing the 
report. This would be a cost for the audit fi rm auditing the PIE (costs are assumed to be 
transferred partially or in full to the audited client). 
Based on the feed-back from Germany, where such  a report is legally enforced, it could be 
estimated that the administrative burden from the preparation of the report, depending on the 
size of the audited entity  would be as follows: 
– For a mid-size company the preparation of su ch a long form report takes about 40 hours for 
annual accounts and 30 hours for the consolidat ed accounts. The use of electronic support 
programmes and sample long form reports could reduce the time; 
– For smaller and less complicated engage ments this can go down to 6 hours; 
 
EN 244   EN – In the case of large audited entities and financial institutions, the administrative burden 
could increase to about 80 hours. 
Table A20.1 summarises the potential costs per type of entity if these hours are charged at 
audit partner rate.  
Table A20.1 
Type of PIE Estimation of 
hours Estimation of 
hourly rate (€) Total cost per 
PIE 
(€) 
Small PIE - uncomplicated 
engagement 6 600 3.600 
Mid-size company 40 600 24.000 
Large PIE 80 600 48.000 
 
Strengthening of the audit committee* 
* The audit committee is directly involved in  four policy options: enhanced communication 
between the auditor and the Committee (under ob jective 1); procedure for the appointment of 
the auditor and monitoring of the audit work  (under objective 2); and tendering procedure 
(under objective 3). 
The strengthening of the Audit Committee to enable it to successfully fulfil its enhanced tasks 
under the policy options mentioned above will imply additional costs to be covered by PIEs. Those costs will result from the need to increa se the involvement of the supervisory board 
members (additional expert days) as well as from increased remuneration costs due to the hiring of more audit committee members with relevant techni cal profiles. In addition, the 
requirements under these policy options will also involve an increased engagement by key audit partners and audit managers. These cost s would not arise for those audited entities 
which already today have robust and efficient audit committees. 
It is difficult to quantify precisely the overall cost since the in crease in remune ration and input 
of expert days will depend very much on the specifics of the PIE. These differences are mainly due to the divergent remuneration rates applied for audit partners/ audit committee member as well as due to the specifics of the PIE (it will require a different number of working hours to enforce these policy opti ons in different type of PIEs).  
However, an indicative estimate of the overall  additional cost has been made (based on 
official data provided by FSA as well as th e informal feed-back received from other 
stakeholders on costs regarding the participa tion of audit committee members). Based on the 
data from FSA, it is estimated that in the case of  large PIEs the participation cost for one audit 
committee member would be about 1.000£. The available data from the FSA
415 also shows 
that in the case of important PIEs, the cost of organising a meeting between audit committee 
members and auditors would cost about 4.000£ for the aud it partner, 2.280£ for the audit 
                                                 
415 FSA Market and regulatory failures, benefits and costs. 
 
EN 245   EN manager, 900£ for the PIE management cost, and 1.000£ for the PIE Audit Committee 
member (feed-back from other EU stakeholde rs supports this assumption, while it could be 
estimated that such cost ranges from 1000 to 150 0 euro). The basis for calcualting these costs 
is 6 working hours per meeting (2h meeting + 4h preparation). The hourly rates charged are 
respectively 675£ for the audit partner, 380£ for the audit manager, 200£ for the audit 
committee member, and 150£ for the PIE management cost. 
Using the same indicative number of working hours,  translated into the average costs for the 
EU (estimated average rates per hour are respect ively; audit partner- 600 euro, audit manager- 
300 euro, PIE management416- 100 euro, audit committee members- 200 euro), we can 
estimated that the average cost for a single meeti ng would be about 7,200 euro . At the same 
time, it could be considered that a normal dialogue between auditors and audit committee 
members would entail 2 or 3 such meetings per year, whose total co st would range from 
14,400 to 21,600 euro. Obviously, those costs could be higher if more regular meetings are 
held. It can be assumed that these costs will eventually be passed on to the PIE through audit 
fees.  
In addition to above mentioned co sts, it is estimated that there will be an additional cost 
related to the increased involve ment of audit committee members in monitoring the tender for 
the selection of audito rs as well as the va lidation of the choosen audit firms. For this 
estimation, it is considered that audit committ ee members will spend as an average about 20 
extra working days on studying tender documenta tion, preparation of the opinion of the audit 
committee on the selection of the audit firm, anal ysing the reports from auditors as well as 
any additional input needed  to fulfil their tasks.  
Table A20.2 summarises the estimated additiona l cost for individual PIEs, resulting from 
enlarging and deepening of the role of the audit committee (the se costs would not arise for 
those audited entities which already today ha ve robust and efficient audit committees). 
Table A20.2 
Type of cost units Estimation (€) Total cost per PIE 
(€) 
Regular (additional) meetings between auditors 
and audit committee memb ers on yearly basis  3 7.200 21.600 
Additional number of expert days for audit 
committee members 20 1.600 32.000 
Total   53.600 
Enabling (in law) and recommending regular di alogue between auditors and supervisors of 
PIEs: no breach of confidentiality rules if auditors engage in  a regular dialogue with the 
supervisors of PIEs.  
The type of costs and estimated rates mentione d under the previous point also apply to the 
enforcement of this policy option.  
                                                 
416 The rate for PIE management reflects only the cost, while audit firm's hourly rates include profits as 
well. 
 
EN 246   EN Using the estimated rates presented under the prev ious point, it could be estimated that a 
bilateral meeting between audi tors and supervisors would co st 5.400 euro. This estimate 
covers only costs for the audit partner and audit manager. The costs on the side of the supervisor are not taken into accout since they  will not be passed on to PIE and would be 
business as usual for the respec tive supervisors. Taking this into account, it could be 
estimated that the enforcemen t of this policy option would have a minimum cost of 10.800 
euro (cost of 2 bilateral meetings) , while the cost of the trilateral meet ing is covered under 
previous option. 
The above costs could be larger  if more than two meetings are organised per year and/or 
additional ways of communicati on are established. As under the previous option, it can be 
assumed that these costs will be eventually  passed on to the PIE through audit fees.  
These costs, however, would not arise for those financial institutions and auditors which are 
today engaging in regular dialogue with the financia l supervisors. 
Specific objective 2: Reinforce the independence and profession al scepticism of statutory 
auditors and audit firms in the pr ovision of statutory audit to PIEs  
Prohibition of the provision of any non-audit services to the audited entities 
This policy option will have no di rect cost on the aud itor or on the audited entity. There could 
be some indirect costs for the audited entity since it could face higher costs for either the audit 
or the NAS. There could also be an indirect financial impact for the auditor due to the 
potential loss of expected  revenue regarding NAS.  
However, these indirect costs cannot estimated since they largely depend on the overall 
restructuring of the market segments of stat utory audit and NAS as a result of the whole 
package of policy options. It could also be expe cted that consolidating the market segment for 
NAS would result in an overall decrease in the prices for NAS for PIEs. In the same way, the 
fractional loss of revenue for audit firms no long er able to provide NAS to the audit client 
could be compensated by expanding their market  share of NAS to non-a udit clients (provision 
of NAS to other clients is still possible). It should be mentione d that due to potential conflicts 
of interest the provision of NAS to audit clie nts is already prohibite d in the Member State 
(partially or in full).  
Pure audit firms (approved audit firms should only be allowed to pr ovide statutory audit 
services and be unconnected to firms providing ce rtain non-audit services to audited entities)  
It is expected that the application of this measure will result in a restructuring of the audit 
market, while companies will have to split thei r activities, respectivel y adapting their cost 
structure and focusing on the prov ision of either statutory aud it or non-audit services. The 
direct cost for audit firms will be mainly related to legal and associated costs that result from 
splitting the firm. 
Therefore, audit firms will not lose revenue from the NAS business (revenues from NAS 
account for about 40-50% of the revenues of Bi g 4 and Mid-tier audit firms), because these 
revenues will go to the new entity. The indirect co st for the audit firm is the loss of synergies 
with the NAS side of the firm.  
 
EN 247   EN Mandatory rotation of an audit firm: audit fi rms would step down after a certain number of 
years of engagement and would only be allowe d to take a new engagement with the same 
audited entity after a cooling-off period. 
The change of statutory auditor will entail the cost of organising the tender and costs on the 
side of both the auditor and PIE due to the ini tial investment needed for the in-coming auditor 
to familiarise themselves with the audited client. This will norm ally result in costs on both the 
side of audit firm and PIE (additional resources to support the auditor mainly during the first year of the assignment). The cost of tenderi ng has been presented under the policy option on 
tendering (see also analysis on tendering under objective 3).  
As far as the initial cost of the investment by the incoming auditor in understanding the entity 
to be audited is concerned, it should be noted that it will be significantly off-set by the 
requirement for the out-going auditor to prepare a detailed hand-over file for the new auditor. In addition, it could also be estimated that th ere will be a positive synergy in costs in this 
respect, since the new auditor will have the opportunity to accu mulate an initial knowledge 
about the PIE during the preparation of the tende r. Taking into account th at such costs would 
largely depend and vary upon size of the PIE and the sector of activity, it is not possible to 
quantify such potential costs.  
Establishing additional require ments on the internal organisa tion and governance of audit 
firms. 
Due to the fact that audit firms already have such procedures/policies, this measure reflects 
somewhat existing practices. Therefore, it s cost (if any) will  be only marginal.  
Specific objective 3: Improve market conditi ons for audits of PIEs with a view to 
increasing audit quality.  
Regular tendering (with mandatory rotation) . Audited entities would invite a minimum 
number of auditors/firms to participate in a tendering procedure, in cluding an audit firm 
which is not among the four bigge st players in the market.  
It is considered that there will be some initia l costs for audit firms in the first year of a 
statutory audit mandate to better understand their new audit client as we ll as the costs for both 
PIEs in organising a tender and audit firms in preparing/ submitting the bid.  
From the information provided by different stak eholders, the Commissi on services conclude 
that in the vast majority of cases tendering costs for audit firms  would range (at current rates) 
from 0.1 to 1 million euro. Those costs depend on the size of the PIEs, the complexity of 
tender documentation and client requirements, as well as the need to cover a range of preparatory activities in volving key audit partners communi cation (partner hours and travel 
costs) with PIEs (Audit Committ ee and/or CFO – CEO). These cost s on the side of audit firms 
can be higher, when preparing tenders for ce rtain PIEs. For a very large multinational 
company (with a market capitalisation in excess of €40 billion) it is reported that the price 
was in excess of €5 million (5,000 partner/hours at the estimated average cost of 1,000 €/h). 
The cost for an extremely large and complex fina ncial institution with substantial operations 
in most countries in the world, was around 7 million euro (7,000 partner/hours at the 
 
EN 248   EN estimated average cost of 1,000 euro/h)417. On the basis of the scarce data available to 
Commission services tendering co sts could be estimated at aro und 5% of annual audit fees.  
Under the assumption that companies would have  to organise a tender periodically, the annual 
tendering cost for the majority of PIEs would be less than 1% of the audit fees if audit 
tendering takes place every 9 years. The longer the engagement period, the lower the impact of the cost of tendering on the audit firm. 
There are also matching costs on the PIEs side
 (preparation of tender documentation and 
carrying out of the tender). Our cost estimates in respect of PIEs are based on data provided 
by BUSINESS EUROPE. It presented cost simu lations for 13 case studies of PIEs across 
Europe, all with different sizes and represen ting different sectors. Although the total costs 
presented varied based on the specifics of each  company (mainly its size and the number of 
subsidiaries in different jurisdictions), it could be estimated that a listed entity with a turnover 
of about 2 billion euro would need about 150- 200 working days to prepare and implement a 
tender process. If we apply the maximum hour ly wage envisaged by ESTAT for the category 
of managers (50 euro/ hour in cluding overheads- 400 euro/ worki ng day), this would result in 
a cost range of 60.000- 80.000 euro. The maximu m cost mentioned by a company in the 
simulation is about 1.000 working days, which would result in a total cost of 400.000 euro 
(total cost could be slightly higher if more senior manageme nt working days are involved).  
Based on the information provided in the different  case simulations, it is noted that some of 
the PIEs have acknowledged their limited experien ce in organising tenders due to the fact that 
there has been no such obligati on. Therefore, we should expect a reduction of these costs for 
consecutive tendering procedures. This woul d be the result of accumulating practical 
experience and know-how in organising tenders for audit services, which will streamline the 
process and the preparation of tendering docum entation. Respondents also reported reductions 
of audit fees as a result of a first tender ex ercise. In one case there was a reduction of 15-20% 
of the audit fees, which off-set the opportunity cost of the preparation of the tender. Although 
it cannot be expected that each re-tendering woul d have such an effect on the audit fees, it 
could be assumed that the first rounds of tende rs will have important mitigating effects on the 
costs to PIEs.  
Table A20.3 summarises the estimated additional  costs on both sides (PIE and audit firm), 
resulting from the introduction of mandatory  tendering (preparation and undertaking of the 
tender process). Cost estimates are cumulated an d presented at the leve l of individual PIE for 
three cathegories of PIEs, which are concerned by the measure. Data in the table takes also 
account of the frequency of tendering (every 9 years). 
Table A20.3: cost for individual tender 
Type of PIE/cost Cost on the PIE side (€)  Cost on the audit firm side (€) 
Very Large PIE  400.000 
[44.444 on an annual basis]  From 5M to 7M 
[600.000 on an annual basis] 
                                                 
417 Data provided by stakeholders  
 
EN 249   EN Table A20.3: cost for individual tender 
Type of PIE/cost Cost on the PIE side (€)  Cost on the audit firm side (€) 
Large PIE  60-80.000 (on the basis of 150-200 
working days estimated at average 
rate of 400 euro/ day) 
[8.889 on an annual basis]  From 1,06M to 1,08M 
[120.000 on an annual basis] 
Medium PIE Up to 60.000 euro (on the basis of 
150 working days estimated at average rate of 400 euro/ day) 
[6.667 on an annual basis]  About 160.000 (according to 
estimation provided by EGIAN) 
[17.778 on an annual basis] 
 
Prohibit contractual clauses limiting the audit firms choice (e.g. clauses between the audited 
entity and a third party (such as a bank) requi ring that the statutory audit is performed by a 
"Big-Four firm” only). 
This option should not result in direct costs. 
Increase transparency on audit quality and on  audit firms: Audit firms auditing PIEs will 
disclose their financial statements and more info rmation in their transparency reports that they 
are currently required to publish annually. They  will also report information on fees to 
supervisors. Competent authorities will disclose  the results of inspection reports by firm.  
More information in the transparency report  and publication of audit firms' financial 
statements. The direct costs (administrative bu rden) will result from: the preparation of the 
additional information for the transparency repo rt and the preparation and the publication of 
the audit firms' financial statements. Thes e costs will be moderate. Concerning the 
transparency report, the additional information is limited, therefore leading to a marginal 
increase. Concerning the financial statements, a udit firms in many cases (e.g. if organised as 
limited liability companies) already prepare and disclose audited accounts418; or, at least, 
prepare them even if they are not audited and disclosed. Regard ing the publication, the 
requirement is only for publication on the audit firm's website. Audit firms are currently required by the Statutory Audit Directive to publis h their transparency re port on their website. 
Therefore, the cost of publica tion would be marginal since th e financial statements would 
only be required to be easily a ccessible on the audit firm's website. 
Provision of information to audit regulators on the fees received from PIE clients. This is 
limited information that supplements the transpar ency report. It would only imply a marginal 
administrative burden, which can be estimated at: 8h/year/audit firm. 
Concerning the publication of the inspection repo rts, the overall admini strative burdens would 
be the cost of publication on the authority's we bsite (the oversight authority would have to 
prepare the inspection report anyway, whether published or not). This publication cost is 
                                                
 
418 In the UK, publication of annual accounts by audit firms is done regardless of their legal form. 
 
EN 250   EN marginal, as publication can be done on-line. It is estimated that such costs could be 
8h/inspected audited PIE). 
Establish an audit quality certification. A pan-Eu ropean system that would certify that an 
auditor or firm meets some quality requirements enabling them to carry out high quality 
statutory audits of PIEs. 
Direct costs of this proposa l will affect both audit firms and competent authorities. 
This audit quality certificate will involve two ty pes of costs for the applicant audit firms:  
– 1) adapting to the conditions for obtaining the certificate; and  
– 2) the administrative cost of submitting the application.  
However, with regard to the costs of adapting to the conditions for obtaining the certificate, it 
has to be taken into account that such c onditions would normally match the EU and ISA 
requirements. Therefore, the adaptation cost w ould be marginal or non-existent as it would 
have been incurred anyway as a result of other measures. 
Additionally, this certification wi ll be voluntary. Therefore, cost s may be avoided by the audit 
firms which will not attach va lue to such a certificate. 
The audit quality certificate will involve admini strative costs for the competent authorities 
involved in providing the certifi cate, whether ESMA or at na tional level (examination of 
applications etc).  
In any event, the details of the cost of this measure will depend on secondary legislation to be 
prepared by the European Supervisory Authorities.  Therefore, it will be more appropriate to 
estimate the costs at the time of preparati on of the secondary legislation by ESMA  
Concerning the benefits, it is estimated that th is audit quality certification will contribute to 
improving the reputation of audit fi rms that obtain this certificate in the market and facilitate 
the opening of the European market to firm s. This improved reputation is, however, not 
measurable.  
Joint audits: cost estimates in terms of additio nal costs for the audited entity concerned are 
valid regardless of whether joint audits are introduced on a mandatory or voluntary basis. 
The estimation of the potential increase in costs due to the enforcement of joint audit is based 
on the two cost simulations submitted by CNCC and the case-studies provided by the French audit firm Mazars (based on real examples of jo int audits of CAC 40 PIEs in which they have 
participated).  
Although more than 1 auditor is performing the statutory audit, this does not result in a 
doubling or tripling (in case of 3 audit firms) of its  cost. This is due to th e fact that the 4-eyes 
principle is only applied on certain  areas of the audit, mainly re lated to strategic preparation 
of the audit and the analysis of its results. Increased comm unication and coordination costs 
(between audit firms) are the second source of cost increase. According to data provided in 
the Mazars case studies,  increases due to increased coor dination costs ranges from 2,5% to 
 
EN 251   EN 5% of total audit costs, (overall audit co sts increase by 10-15% wi th coordination costs 
accounting for ¼ to 1/3of this increase).  
This increase of coordination cost is mainly due to joint work performed on activities related 
to: 
• Understanding the PIEs environment; 
• Assessing the level of risk that fi nancial statements contain errors; 
• Determining materiality thresholds; 
• Defining and documenting the audit approach to ensure concerted audit approach, 
when conducting analytical procedures; 
• Reviewing the procedures performe d by the partner joint auditor; 
• Ensuring the information provided at the tim e the financial statements are approved 
presents a true and fair view of the a udited entity and is consistent with those 
financial statements.  
The feed-back from CNCC broadly supports the data provided from Mazars, where it 
considers potential cost increases from 5% to 10% of the total audit cost. For this cost estimation we have taken the more conser vative figure of a 10% increase. The above 
estimation is based on the assumption that the aud it fees of the two partners remain at similar 
levels compared to the fees of the incumbent au ditor. For a large PIE, the incumbent auditor is 
likely to be a Big Four audit firm or another large audit firm. Big Four audit firms, however, 
are generally more expensive than other networks (see section 2.3
, in fine , of this impact 
assessment). Therefore, if a mid-size audit firm is part of the audit consortia, the audit fees 
charged by this firm could be lower than thos e that would be otherwise charged by a large 
audit firm. Although, possible savings from lower fees rates are difficult to estimate, it could 
be expected that audit fees charged by non-big 4 audit firms w ould be as low as 60% of the 
fee rate charged by the larger audit partner.  
Lift restriction on ownership of audit firms. Lifting any restrictions currently preventing 
investors from non-audit backgrounds to buy shares and invest in audit firms.  
This measure should not result in direct costs. 
Concerning benefits, it will improve the chance s of growth of mid-sized and smaller audit 
firms and contribute to a more comp etitive and efficient audit market.  
Specific objective 4: Avoid unnecessary additi onal compliance costs for audited SMEs as 
well as for audit providers in a cross-border context  
Mutual recognition of audit firms: an aud it firm approved in a Member State would 
automatically be approved in all Member Stat es, provided that the ke y audit partner leading 
the audit is approved as an audito r in the Member State concerned  
This measure should not result in direct costs. 
 
EN 252   EN Concerning benefits, savings will result from the avoidance of the administrative costs of 
applying for a new licence in each Member Stat e where the firms wants to provide services. 
In addition, it will create a true access to audit market s in 27 Member States.  
In terms of indirect benefits, audit firms could more easily c onsolidate with other firms at 
cross-border level, thus facili tating the development of stronger and larger actors. Also, for 
existing groups, the need to keep different le gal persons in each Member State is avoided. 
Therefore, this could lead to some savings in the administrative structur e of the audit firm and 
to a more efficient organisation.  
Also, it should be easier for audit firms to provide  services in a cross-border context, which 
should lead to increased choice for audited entities re garding audit firms. For instance, it 
could be easier for an SME to keep its audit fi rm in case the SME creates a subsidiary abroad. 
Mutual recognition of statutory auditors approve d in a Member State (for auditors providing 
occasional cross-border services) 
This measure should not result in direct costs. 
Concerning benefits, savings will result from the avoidance of the administrative costs of 
applying for a new licence in each Member State where the auditor wants to provide services. 
In addition, it will create a true access to audit markets in 27 Member States. In terms of 
indirect benefits, auditors could avail of a dditional business opportuni ties. Audited companies 
could benefit from more competition. 
Introduction of an adaptation period scheme and increased convergence, transparency and 
predictability in the aptitude test.  
This measure should not result in direct costs for the auditor seeking to establish in a new 
Member States compared to the base line scenario (apt itude test only). 
It may result in costs for the competent author ities that need to impr ove the aptitude test. 
However, this is estimated to be a business as usual cost for those authorities. Therefore, no quantification of thes e costs is provided.  
Concerning benefits, this measure will open new ma rkets to statutory auditors since it will be 
significantly easier for them to be  approved and provide services in other Member States. This 
will also benefit the statutory auditors employed by audit firms (e.g. possibility of relocation 
within audit firms).  
Introduction of clarified ISAs: ensure that au diting standards are the same across the EU. 
National additions would be acceptable, where necessary.  
An external study commissioned by th e Commission and published in 2009419 undertook an 
assessment of the possible costs and benefits aris ing from the adoption of the ISAs in the EU. 
A number of possible adoption strategies may be considered. The possible advantages and 
disadvantages of each approach  are set out in Table A20.4. 
                                                 
419 See Köhler  et al. (June 2009). 
 
EN 253   EN Table A20.4  
Type of Option Description 
1. Baseline- No policy 
change No change. Each MS is free to requ ire auditors to conduct an audit in 
accordance with the national auditi ng standards or may have to 
comply with the clarified ISAs, in ternational standards of auditing 
developed by the International Assurance and Auditing Standards Board (IAASB), an independent standard-setting board under the auspices of the International Fe deration of Accountants (IFAC).  
 
2. Introduction of 
Clarified ISAs with 
possible add-ons  Legal enforcement of the "clarified ISAs" to make sure that audit 
standards are the same across th e EU. Member States would be 
allowed to add new requirements. 
3. Introduction of 
Clarified ISAs with possible carve-outs Legal enforcement of the clarified ISAs. Possibility for individual MS 
to carve out parts of ISAs. 
In assessing the costs and bene fits of ISA adoption by means of a binding instrument, the 
above-mentioned study concludes that, on balance,  an adoption of the ISAs in the EU would 
result in quantitative and quali tative benefits for companies,  investors and regulators.  
For this study, the recurrent benefits w ould outweigh increases in audit costs: 
– On one hand, the recurring costs of an aud it could increase by approximately 6% to 
10% per engagement. Nevertheless, the act ual changes would vary widely depending 
on the individual audit firm, audit engagement  (and in particular by audit client type) 
and member state. In total, they ar e estimated at about €246 M per year.  
– On the other hand, market participants w ould benefit from improvements in audit 
quality, a lower cost of capit al and increased business oppo rtunities at international 
level. From an economic point of view, an adoption of the ISAs by the EU can be treated as an investment – that is, the tota l recurring benefits can  be regarded as a 
return on the adoption of the ISAs by the EU. Such recurring benefits cannot be 
substituted by any action taken by other pa rties, including audit firms. The total 
recurring benefits would be about €2,248 bn.   This is the sum of the net benefits from the regulation effect regarding PIEs covered by the Forum of Firms (1,763 euro), PIEs covered by firms not in the Forum of Firms in jurisdictions with ISA compliant auditing standards (96 million euro), PIEs covered by firms not the Forum of Firms in jurisdictions without ISA compliant 
auditing standards (143 million euro).  
– On balance, the total recurring net
 benefits from the adoptio n of the clarified ISAs by 
the EU for the EU economy as a whole th rough lower costs of capital are estimated 
to likely exceed €2 billion (€2,248bn - 246M). Since these net benefits are recurring, 
the present value of the net benefits in perp etuity can be estimate d at €40 billion (if 
using an assumption of a long-te rm discount rate of 5%).  
 
EN 254   EN The study provides further data and evidence. 
Adapt audit standards to the size of the audite d entity: request Member States to ensure a 
proportionate and simplified audit for SMEs. 
This measure could result in direct costs fo r a public authority or a professional body to 
establish guidance at national level on proportiona te application of th e applicable auditing 
standards. Since there is alrea dy guidance on the application of th e ISAs to SMEs, the cost of 
this measure is considered rather moderate or even marginal.  
There is likely to be a cost for the auditors/audit firms resulting from the need to familiarise 
themselves with this guidance and the associated training. Thes e costs would be of a one-off 
nature. We consider them, however, to be part of  the costs associated with the introduction of 
ISAs (see above) and, therefore, we do not estimate them again in detail here. 
An additional indirect cost is the likely diminution of audit fees received by auditors from 
companies subject to the audit obligation. 
In terms of benefits, the propor tionate application of audit st andards to the size of SMEs 
should result in cost savings for the audited entity without a diminu tion of audit quality. 
These savings are difficult to estimate as the pr actical application of the standards would be 
done on a case-by-case basis and will depend on the size and complexity of the business of 
the audited company. As explained in Annex 16 , the French experience with small companies 
shows that potential savings in audit fees for a given co mpany could be around 40% on 
average. However, these figures cannot be ex trapolated as such to the medium-sized 
companies which are subject to the auditing obligation under EU law and which are much 
bigger than the companies targeted by the French  experience. As a result, we do not provide a 
quantification of thes e potential benefits. 
Another benefit is the possibility  for the auditor to provide be tter value for money to audit 
clients. This is likely to entail a diminution of  audit fees received from companies which are 
subject to the audit obligation (s ee above). However, it may also  allow the auditor to try to 
convince smaller companies, not subject to the auditing obliga tion, to nevertheless have an 
audit.  
Specific objective 5: Improve the effectiveness, independence and EU-wide consistency 
of the regulation and supervision of auditors  
Strengthening national audit supervisory authorities.  
There will be additional costs for some national authorities. This is difficult to estimate as 
costs would depend on the current structure and dimension of the authorities. Some of the 
larger ones (considering the size of their fina ncial markets and therefore the number of PIEs 
concerned: e.g. in FR, IT, NL, ES, UK) have established robust and independent (from the 
profession) oversight systems. Therefore, such additional cost s should not be  significant. 
Other authorities, however, will have to inve st time and resources to upgrade their audit 
supervision systems. It is likely that some author ities will need to increase their staff. At the 
same time, it is expected that these costs would be proportional to the size of the audit market: 
for example, Member States with smaller au dit markets could consid er integrating their 
 
EN 255   EN auditor supervision into the existing structures  of financial supervis ion in order to obtain 
economies of scale and synergies.  
In terms of benefits, independe nt, robust and effective nationa l supervisory practices (and 
their coordination at the EU le vel) should give companies assu rance that the audits provided 
to them are of high quality and should lead to increased trust in the audited financial 
statements. This should contribute to ensuring an efficient functio ning of markets for audits of 
PIEs. This should have a positive impact on aud it quality and ultimatel y will be conducive to 
financial stability. 
EU-wide cooperation within ESMA, in cooperation with EBA and EIOPA.  
There will be direct costs for ESMA (and to  a lesser extent EBA a nd EIOPA). Taking into 
account that facilities already exis t, it is considered that the e quivalent of 2 persons would be 
enough to cover the additional ta sks in an initial period: i. e. organising the cooperation 
between the national authorities and the preparation of techni cal standards re garding joint 
audit, and subsequently, guidelines on other issues420. These two positions should normally be 
drawn from existing resources w ithin the European Supervisory Authorities and/or from the 
staff expansion foreseen in these initial years. 
There will be indirect costs for national author ities if the cooperation is  reinforced as more 
resources may need to be de voted to this cooperation. 
In terms of benefits, the EGAOB will disappear . This represents annual savings in terms of 
organisation of meetings (costs of  the meeting room, interpretation421 and secretariat) and the 
expenses associated with the national repres entatives (the Commission pays the travel 
expenses and some allowances for one represen tative per country). In 2009, the expenses for 
the national representatives, for 3 EG AOB meetings, were €27,854.47. The resources 
allocated by the Commission to the EGAOB (secr etariat etc) will not be saved, but rather 
transferred since the Commission services would al so be involved in th e activities of ESMA.  
(3) Summary assessment  
Better audits and more informative audit reports  will enhance confidence in the markets while 
also informing stakeholders of any problems with regards to any particular ent ity. The direct 
beneficiaries of such confidence will not only include investors and creditors but also the company itself (as well as its employees). Th ere would also be more differentiation with 
regard to the quality and reliability of the financial information presented by the audited entities. This would have an  impact on the cost of doing  business e.g. working capital 
requirements for companies: a creditor would be  more willing to extend better terms to a more 
reliable entity. 
Costs 
                                                
 
420 This assessment does not estimate the possible resources needed to set up a quality certificate. Such an 
estimate would be done when developing the technical standards defining the procedure for the granting 
of the quality certificate.  
421 The cost of the meeting room and interpretation are not estimated.  
 
EN 256   EN Measures such as the strengthe ning of audit committ ees, more extensive audit reports and a 
formal internal report, the tendering of audit services, the rotation of audit firms will entail additional costs on the audited entities .  
Although difficult to put exact figures to these m easures, we broadly estimate that for public-
interest entities with a market  capitalisation or a balance sh eet total in excess of €100 million, 
such costs, depending on the size of the company and the audit committee, could range from €90 thousand to €150 thousand per annum.  
For smaller public-interest entities audited en tities (including those which are SMEs), the 
additional costs would be less than €10 thousand per annum especially as there would be no 
obligation to either have audit committees or to tender for auditors. Mandatory rotation of the 
audit firm would normally entail initial additiona l costs for the incoming audit firm. To what 
extent they will be passed on the au dited entity is difficult to gauge. 
Public interest entities with a market capitalisa tion or a balance sheet total of more than €1 
billion would be required to engage joint a uditors. Based on the French experience, it is 
estimated that the additional work required by join t audit could result in a 5% to 10% increase 
in audit fees if the two audit firms charge a similar rate; however, the combination of a top tier and a next tier firm should facilitate a certa in convergence of the respective higher and lower 
rates charged by top and next tier firms.  
Table A20.5 summarises the estimated additional direct costs for individual PIEs, resulting 
from the enforcement of the set of prefered po licy options. There are fo ur categories of PIEs 
considered for the estimation: 
• Very Large PIE (total tur nover more than 40 billion euro
422); 
• Large PIE (total market capitalisation of more than 1 billion euro/ total turnover 
more than 2 billion euro);  
• Medium PIE (total turnover more than 50 million euro) 
• Small PIE (total turnover less than 50 million euro) 
Table A20.5 
Additional direct costs (€) Type of cost 
Very Large 
PIE Large PIE  Medium-
PIE Small PIE  
Strengthening of Audit Committee (including 
enhancing its technical capacity and workload & 
cost of participation in regular meetings - These costs would not arise for those audited entities which 
already today have robu st and efficient audit 
committees)* 53.600 53.600  53.600** ** 
                                                 
422 E.g. Unilever Plc with a turnover of 44,262 billion euro 
 
EN 257   EN Table A20.5 
Additional direct costs (€) 
Cost of 2 Bilateral meetings with supervisors (only 
for PIEs which are financial institutions; these 
additional costs would not arise if financial 
institutions are already holding bilateral meetings with supervisors) 10.800 10.800 10.800 10.800 
Mandatory rotation learning curve cost (see section 
on mandatory rotation above) Not 
quantifiable 
 Not quantifiable Not 
quantifiable 
 Not quantifiable 
 
Tendering costs for PIEs (tendering every 9 years) 44.444 
[400000 
every 9 
years] 8.889 
[80000 
every 9 
years] 6.667 
[60000 
every 9 
years] N.A. 
Preparation of additional internal re port 48.000 48.000 24.000 3.600 
Improved and expanded audit report  4.800  4.800  4.800  4.800  
Joint Audit***( This cost will be applicable only for 
large PIEs in the financial sector)  900.000  170.000 N.A. N.A. 
Overall Estimated Cost Increase on a yearly basis 
(if PIE is a financial institution) 1.061.644 296.089 99.867 19.200 
Overall Estimated Cost Increase on a yearly basis 
(if PIE is NOT a financial institution) 1.050.844 285.289 89.067 8.400 
* Audit Committee:  it is assumed that the audited entity has an Audit Committee.  
** No request in legislation to have an aud it committee if less than 100€ capitalisation 
*** Joint Audit:  In the case of Large PIEs, the 10 % increase in cost is applied to total audit fees (Audit fees 
represent about 0,085%, applied on 2 billion turnover). Ther efore, total audit fees for a large PIE are estimated at 
1.700.000 euro with a respective increase of 170.000 euro. In the case of very large PI Es, the proportion of fees 
to total turnover is lower, therefore the 5% increase is applied (e.g. Unilever 18M eu ro audit fee is 0,042% of 
44,262 billion turnover; 5% audit fee increase due to join t audit would be 0,9M). These figures do not take into 
account that if a mid-size audit firm is part of the consortium, the audit fees charged by this firm could be lower 
than those that would otherwise be char ged by a large audit firm (see above).  
Concerning the direct costs for audit firms , the impact of the tendering rule could be high, 
especially in jurisdictions where there has be en no statutory requirement to have regular 
tendering (see table A20.6). It  has been particularly  difficult to gather information from audit 
firms and audited companies since they are reluctant to unveil what they consider sensitive commercial information. However, we were provi ded informal information that, for example, 
responding to the tender for the audit of a la rge PIE (with a market capitalisation above €1 
billion) cost €1 million; for a particularly complex and geographically extended company with a market capitalisation in excess €40 b illion, the cost reported was in excess of €5 
million.  
Given that a tender for a given company would take place every 9 y ears, costs would be 
amortised to almost a tenth of the above amounts. Of course not all responses to a tender would result in a mandate and to this extent so me of these costs would prove fruitless. This 
may sound like a step increase in jurisdictions with little tender ing over the past decades but 
 
EN 258   EN will in effect only be bringing the audit world in to line with normal business practice in other 
fields including other financial services.  
In any case, marketing costs such as tendering costs have to be seen in the context of the 
potential reward: in France, the average annu al audit fees for CAC40 companies for 2009 / 
2010 were around €17 million. For the most complex companies, audit fees were above €40 million. In the UK, the average audit fees for FTSE 100 companies in 2008/2009 were around £5.5 million; the fees for some companies exceeded £30 million.  
In the case of medium-sized PIEs, tender cost s would be significantly lower: on average €160 
thousand (roughly €18 thousand per annum). To put this into perspectiv e, it is worth noting 
that the average audit fees for such comp anies are £766 thousand (FTSE 250 companies in 
2009) in the UK and €700 thousand for French liste d companies in the B and C segments of 
the French stock exchange (2010). 
The above indication of costs does not take into account any mitigating aspects for both 
'clients' and auditors: tendering will obviously re sult in competitive biddi ng; this may in turn 
temper any additional costs for audited entities . For firms, increased and repeat experience 
with tenders will streamline and institutionali se the process thus lowering the costs of 
preparing tenders.  
Table A20.6  
costs (€) Type of cost 
Very Large 
PIE Large PIE  Medium-PIE  Small 
PIE  
Tendering costs for audit firms, per bid (yearly basis, 
assuming a frequency of tendering of 9 years)* 600.000 
[total costs 
estimated at 
5.400.000] 120.000 
[total costs 
estimated at 
1.080.000] 17.778 
[total costs 
estimated at 
160.000] N.A 
* Those costs do not necessarily result in additional costs for the PIE itself: firstly, bidding cost may or not be 
directly reflected in the bid, depending on the marketing strategy of the audit firm; secondly, the tendering 
process may lead to lower audit fees compared  to today's ones (see explanations above).  
Benefits 
Although no single component of th e financial system can be sole ly blamed for the financial 
crisis, it is important to ensure  that each component is examined in detail to ensure that 
improvements are brought with a view to the fu ture. The predominance of 'clean audit reports' 
for banks through a crisis during which the Union committed €4.6 trillion between October 
2008 and October 2010 to support banks, such ai d amounting to 39% of the Union's GDP for 
2009, renders a serious overhaul of the existing syst em inevitable. 
In terms of benefits, the main benefits will be  higher quality audits; these in turn will create 
confidence in the market in general while also alerting the market to any deficiencies in the 
audited company.  
It has to be noted that as a result of the vari ous measures more players will emerge at the top 
end of the market. It is difficult to predic t if they will compete mainly on price thus 
moderating some of the cost increases referred to above or whether th e current charge out 
 
EN 259   EN rates will be preserved with the competiti on being exercised exclusively on grounds of 
quality. 
More informative audit reports will reinforce confidence in robust companies and the latter 
will eventually enjoy a lower cost of capita l and access to better business opportunities when 
compared to a company where the audit reveals deficiencies. Moreover, such benefits will be 
of a recurring nature.  
There is also the attractive prospect of positive spillover effects of the restrictions on the 
provision of non audit services  by auditors for ot her service providers, mostly SMEs, e.g. 
lawyers, consultants, IT providers, tax advisors , etc. who are currently losing out business to 
audit firms because of the latter's captive bus iness window through audit. We expect such 
firms to be able to compete on a like for like basis. This more competitive environment should result in lower prices for companies buying such services. 
The introduction of common auditing standards at the level of the Union should result in total 
recurring net
 benefits for the EU econo my as a whole through lowe r costs of capital, which 
are estimated to likely exceed €2 billion ( €2,248bn - 246M). Since these net benefits are 
recurring, the present value of the net benefits in perpetuity can be estimated at €40 billion (if 
using an assumption of a long-te rm discount rate of 5%).  
The removal of existing cross border obstacles within the Union via the mutual recognition of 
audit firms or the audit quality certificate, will  reduce the currently administrative burdens for 
the provision of audit services in other Member States. It will give a udit firms complying with 
the necessary requirements the possibility to  provide services in all 27 Member States. 
Administrative burden of SMEs will also be re duced, in particular because Member States 
will have to adapt audit standards to the size of  the audited entity and ensure a proportionate 
and simplified audit for SMEs. 
 
EN 260   EN ANNEX 21. TRANSITIONAL ISSUES REGARDING ROTATI ON OF AUDIT FIRMS AND TENDERING  
The introduction of the rules on mandatory audit firm rotation and tendering for new audit 
contracts will raise two important issues in the short term: 
• (1) the treatment of contracts for statutory a udit services which will be in force at the 
time of the entry into force of the future  legislation, should such legislation be 
adopted; 
• (2) the impact of the new rules in terms of tim ing: will all (or a vast majority of) PIEs 
be calling for tenders at the same time? 
Concerning the first issue, it woul d be desirable that any future legislation respects existing 
contracts, provided that they were entered into in good fa ith and do not undermine the 
objective of the new legislation. For instance, in France it is normal that audit contracts are 
signed for 6 years. At the same time, there ar e countries (e.g. the UK) where audit contracts 
are normally signed for only 1 year. It would be  strange in both cases that right before the 
entry into force of the future legislati on, audit contracts for 10 years are signed. 
Concerning the second issue, it would be desira ble that the tendering a nd rotation rules apply 
progressively to different types of entities, so that there is  a smooth transition to the new 
system: 
Therefore, a transitional arrangement  could be established. This  arrangement should respect 
the following principles : 
– Existing contracts for the provision of audit se rvices should in principle be respected, 
provided they were concluded in good faith, so as to avoid a retroactive effect of the 
future legal text; 
– A distinction should be made between (i) co ntracts signed before the presentation of 
the Commission proposal; (ii) contracts signed after the presentation of the 
Commission proposal but before the entry into  force of the legal text adopted by the 
Council and Parliament (it is assumed that en try into force of th e text would be the 
day following the publication in the OJ) and (i ii) contracts signed af ter the entry into 
force of the legal text but before the te rmination of the tran sposition/transitional 
period (in principle, two years. This peri od would be needed to ensure that all 
requirements on Member States regarding su pervision are in place). For the second 
type of contracts, the PIE a nd the auditor should have been  in a position to know that 
new rules would be applicable soon. For the third type of contracts, the legal text 
would directly foresee the a pplicable rule, so no retroac tivity issue would arise;  
– When the existing contract comes to an end, the situation could be treated as a 
renewal of the audit contract and the manda tory rotation and joint audit rule would 
not apply immediately. The PIE and the aud itor would be in a position to renew the 
existing contract once (as in the case of a normal c ontract under the proposed 
measures). However, it would be inappropriate  to allow for a renewed 5 year contract 
in all cases, considering that the audito r would normally have been in place for a 
long period.  
 
EN 261   EN – The duration of the renewed contract shou ld therefore be ad apted depending on the 
tenure of the existing auditor: the longer the tenure, the shorter the new contract. This would also allow for a progressive entr y into force of the new provisions on 
tendering and joint audit. 
These principles could, in practice, be applied as follows:  – (1) an audit contract was signed before the date of adoption of the Commission 
proposal and it is still in force when the new legal text enters into force: the contract 
should be respected provided that the contra ct will only remain in force for 4 full 
accounting years after the entry into force of  the new legal text. This should ensure 
that bona fide French contract s (of 6 years) are respected;  
– (2) an audit contract was signed after th e presentation of the Commission proposal 
but before the entry into force of the new legal text: the existing contract should only 
be valid for a maximum duration of 5 full accounting years after the entry into force 
of the new legal text. This should ensure th at bona fide French contracts (of 6 years) 
are respected. However, one should bear in mind that in most cases (e.g. in DE or 
UK) audit contracts are for 1 year only;  
– (3) any contract under (1) or (2) is termin ated: a single renewal of  the contract with 
the same auditor (no tendering) would be pos sible. Such renewed contract should be 
subject to a maximum duration as follows: 
– 1 year: if the auditor has been providing audit services to the audited entity for 
101 or more years; 
– 2 years: if the auditor has been providing audit services to the audited entity for 
51 to 100 years; 
– 3 years: if the auditor has been providing audit services to the audited entity for 
21 to 50 years; 
– 4 years: if the auditor has been providing audit services to the audited entity for 
11 to 20 years; 
– 5 years: if the auditor has been providing audit services to the audited entity for 
10 or less years; 
– By way of derogation from the previous criteria, the contract could remain in 
place until the end of the first accounti ng year ending after the end of the 
transitional/transposition period for the new legal text, so that the tendering 
rules could apply immediately afterwards. 
– (4) when the contract renewed under (3) is terminated, the audit firm rotation, 
mandatory tendering and joint a udit rules would fully apply.  
– (5) a new
 PIE needs to appoint an auditor in the period between the entry into force 
of the legislative text and the end of the transposition/transitional period: the rules of the new text would apply regarding the ma ximum duration of the audit contract, but 
no obligation to conduct a tendering process would arise until the end of such a contract (maximum 9 years).  
 
EN 262   EN By derogation from the rules in (3), it is neces sary to provide for a safeguard mechanism that 
could allow for adjusting, at na tional level, the timing of the tendering to avoid too many 
companies tendering in the same year. Therefor e, competent authorities may allow audited 
entities to extend the duration of the audit cont ract for one more year if necessary for the 
adjustment of the timing of tender procedures.  
The chart below provides a summary view of these situations. 1/1/2011
1/1/2012
1/1/2013
1/1/2014
1/1/2015
1/1/2016
1/1/2017
1/1/2018
1/1/2019
1/1/2020
1/1/2021
1/1/2022
1/1/2023
1/1/2024
1/1/2025
1/1/2026
1/1/2027
1/1/2028
1/1/209
1/1/2030
1/1/2031
1/2/2012 -Commission proposal
1/7/2013 -Entry intoforce of Council and EP legaltext
1/1/2015 -end of transitionalperiod
1/1/2016 -pure audit firmsonly(3) Renewal of contract with same auditor possible :
-1 year: if same auditor was in place for 100 or more years
-2 years: if same auditor was in place for 51 to 100 years
-3 years: if same auditor was in place for 21 to 50 years-4 years: if same auditor was in place for 11 to 20 years-5 years: if same auditor was in place for 10 years or lessIn any case, until the end of the first accounting year endingafter the end of the transitional period
existing
audit 
contractsRotation, tendering and joint audit :
at the latest from this date onwardsRotation, tendering and joint audit Earliest scenario
(assuming that: 
the original contract exhausts the 
4 or 5 years grace period; and 
there is a contrct renewal)
Rotation and tendering :
Longest scenario: 4+5 years
asuming renewal of contract
[shorter scenario: 2+1 years]:NEW PIE
Renewal of contract with same auditor :
-according to new rules(5 years maximum and no more than 9 years in total)(1)
(2)(1)
Tendering and joint audit1/1/2011
1/1/2012
1/1/2013
1/1/2014
1/1/2015
1/1/2016
1/1/2017
1/1/2018
1/1/2019
1/1/2020
1/1/2021
1/1/2022
1/1/2023
1/1/2024
1/1/2025
1/1/2026
1/1/2027
1/1/2028
1/1/209
1/1/2030
1/1/2031
1/2/2012 -Commission proposal
1/7/2013 -Entry intoforce of Council and EP legaltext
1/1/2015 -end of transitionalperiod
1/1/2016 -pure audit firmsonly(3) Renewal of contract with same auditor possible :
-1 year: if same auditor was in place for 100 or more years
-2 years: if same auditor was in place for 51 to 100 years
-3 years: if same auditor was in place for 21 to 50 years-4 years: if same auditor was in place for 11 to 20 years-5 years: if same auditor was in place for 10 years or lessIn any case, until the end of the first accounting year endingafter the end of the transitional period
existing
audit 
contractsRotation, tendering and joint audit :
at the latest from this date onwardsRotation, tendering and joint audit Earliest scenario
(assuming that: 
the original contract exhausts the 
4 or 5 years grace period; and 
there is a contrct renewal)
Rotation and tendering :
Longest scenario: 4+5 years
asuming renewal of contract
[shorter scenario: 2+1 years]:NEW PIE
Renewal of contract with same auditor :
-according to new rules(5 years maximum and no more than 9 years in total)(1)
(2)(1)
Tendering and joint audit
 
Figure A21.1 
 
EN 263   EN ANNEX 22. SANCTIONS REGIME  
In terms of compliance with the rules, it appears appropriate to provide for a specific 
sanctioning regime  as regards the measures which specif ically concern the audit of PIEs and 
are directly applicable423. Given that the rules on the audi t of PIEs would be directly 
applicable, it appears appropriate that  the sanctioning regime is harmonised. 
Such regime, without prejudice to  the provisions of criminal la w, would include rules on:  
– the identification of the key violations; 
– the identification of th e types of sanctions that, at a minimum, should be applied (by 
the authorities charged with the supervisi on of the audit market  or other national 
authorities); 
– the supervisory measures that, at a minimu m, should be available to the competent 
authorities charged with the supervision of the audit market. Certain supervisory 
measures are particularly important to res pond adequately to ke y violations of the 
rules. It should, therefore, be ensured th at all competent authorities have at their 
disposal those powers: e.g. th e possibility to te mporarily prohibit the auditor from 
carrying out statutory audit of PIEs; requiri ng the auditor or the PIE to bring an 
infringement to an end; declare that the au ditor does not meet the legal requirements; 
require auditors to amend their transpar ency report; refer matters for criminal 
prosecution to the relevant  national authority;  
– the minimum level of the maximum amount of administrative fines: the amount of 
fines which can be applied to the key violations should be sufficiently high to ensure that the fine has a deterrent effect. The levels of fines provided for in national 
legislation vary across Member States and may be too low in some Member States 
compared to the benefits that could be re alised by infringing the rules, for example 
carrying out an audit when the independen ce requirements would otherwise prohibit 
it; 
– the criteria to determine the sanctions to  be imposed in a particular case: some 
criteria are particularly important to  adapt the sanction to be imposed, and 
particularly the level of the administ rative fine, to the seriousness and the 
consequences of the violati on and to the personal condit ions of the author of the 
violation, which would help ensuring the effectiveness, proportionality and 
dissuasiveness of the sanc tions actually applied; 
                                                
 
423 This would be consistent with European Commission (December 2010). In this Communication, the 
Commission presented policy action orientations on how to promote convergence and reinforcement of national sanctioning regimes in the financial services sector. In fact, the review of those regimes carried 
out by the Commission, along with the Committees of Supervisors (now transformed into European 
Supervisory Authorities), has shown a number of divergences and weaknesses which may have a 
negative impact on the proper application of EU legislation, the effectiveness of financial supervision, 
and ultimately on competition, stability and integrity of financial markets and consumer protection. Therefore, the Communication suggested setting minimum EU common standards on certain key issues 
of sanctioning regimes, to be adapted to the specifics  of the different sectors and EU legislative acts in 
the financial services area.  
 
EN 264   EN – the publicity of sanctions: publication of sanc tions is considered to be one of the 
most deterrent tools to prevent violations , particularly because  of the reputational 
damage that the author of the violati on will incur. The introduction of a general 
obligation to publish sanctions would ensu re that sanctions are published on a 
systematic basis in all Member States. 
The following fundamental rights  of the EU Charter are of relevance for these measures: the 
right to an effective remedy and fair trial (A rt. 47), presumption of innocence and right of 
defence (Art 48), freedom to conduct a business (Art 16), data protecti on (Art 8), consumer 
protection (Art 38), and – even though Art. 49 on the legality a nd proportionality of criminal 
offences and penalties may not be  directly applicable to all of the administrative sanctions 
envisaged – the general principles of legal ity and proportionality underpinning the Charter.  
In relation to these fundamental rights, the measures envisaged would ensure that a violation 
of reporting and notificati on requirements would be subject to the same type of administrative 
sanctions across the EU. These uniform rules w ould particularly ensure that the types and 
levels of administrative sanctions that can be imposed are proportion ate to each specific 
violation across all Member States. This option will not harmonise the national liability regimes and will not affect the procedure fo r the imposition of administrative sanctions. 
Therefore, it will preserve Member States’ current arrangements for ensuring compliance with 
procedural rights such as the ri ght to an effective remedy and to a fair trial (Art. 47), the 
presumption of innocence and the right of defence (Art.48). The obligation to publish 
sanctions may have a negative impact on the right to protection of personal data (Art. 8) with 
regard to the individuals concerned. However,  publication of sanctions is an important 
element in ensuring that sanctions have a dissuasi ve effect on the author of the violation and 
is necessary to ensure that sanctions have  a dissuasive effect on the general public. 
This option will not create an administrative burden on auditors, audit firms or PIEs, which 
are currently subject to sanctioning regimes in  all Member States. More uniform sanctioning 
regimes throughout the EU may in fact lead  to reduced compliance costs for market 
participants through the simplif ication of the legal framework for cross-border financial 
institutions.  
 
EN 265   EN Annex 23. Monitoring and ev aluation: detailed plan 
First of all, it should be noted  that some of the policy choice s envisaged would be included in 
a directive requiring the adoption of national tr ansposition measures: i.e. those regarding 
access to audit markets in different Member Stat es; the audit standards to be used, including 
when auditing SMEs; and the s upervisory issues. Other prefe rred policy options would be 
integrated in a directly applicable legal instru ment (i.e. those containi ng obligations for PIEs 
and for auditors of PIEs). However, important transitional issues must be taken into consideration even in the case of a Regulation (e.g. conversion in to pure audit firms, rotation 
of audit firm/auditor for existing contracts; when  to organise a tender for the first time etc). 
See Annex 21
 on this issue. Therefore, a vacatio legis  period would be established for the 
regulation, matching the transpos ition period of the directive.  The monitoring and evaluation 
plan should take account of this situation. 
The monitoring and evaluation plan will consist of 3 steps: 
• (1) a transposition/transitional period plan; 
• (2) the on-going mon itoring activity; and 
• (3) the evaluation of the policy. 
-2
Entry into force0
End of transposition
/transitional period+2
years+4
years+5
years+10
yearsTransposition/transitional period Plan:-Commission: transposition workshops
-ESMA: 
--cooperation group within ESMA
--stakeholder group (within ESMA)
--working group on data needsESMA: ReportNational supervisory
powers and 
resourcesESMA: Preliminary
EvaluationCommission: 
Interim
ReportCommission 
& ESMA:
Evaluation
Monitoring (by Commission):-Transposition (guardian of Treaty) 
-Powers and resources of national authoritiesMonitoring (by national authorities):-Regular Quality Assurance Reviews-Market developments: market concentration levels
-Threats to continuity of operations of large audit firms
-2
Entry into force0
End of transposition
/transitional period+2
years+4
years+5
years+10
yearsTransposition/transitional period Plan:-Commission: transposition workshops
-ESMA: 
--cooperation group within ESMA
--stakeholder group (within ESMA)
--working group on data needsESMA: ReportNational supervisory
powers and 
resourcesESMA: Preliminary
EvaluationCommission: 
Interim
ReportCommission 
& ESMA:
Evaluation
Monitoring (by Commission):-Transposition (guardian of Treaty) 
-Powers and resources of national authoritiesMonitoring (by national authorities):-Regular Quality Assurance Reviews-Market developments: market concentration levels
-Threats to continuity of operations of large audit firms
 
Figure A23.1 
 
EN 266   EN (1) The transposition/transitional period plan.  
A transposition/transitional period plan , running for 2 years after the adoption of the legal 
texts, will be established.  
The transposition/transitional period plan should focus on the following issues: 
– organising transposition workshops  dealing with changes to the rules on: the 
approval of audit firms; the aptitude test and the adaptation period; and on the 
empowering of supervisors; 
– setting up the cooperation group of audit supervisors within ESMA , which shall 
prepare a detailed work programme on regulatory and supervisory cooperation; 
– stakeholders group , which could be set up by the Commission or by ESMA, to 
discuss regulatory issues arising in th e transitional period with stakeholders; 
– a working group , possibly organised within ESMA, which should define, before the 
end of the transposition/transitional period the data needs  for the future monitoring 
of the application of the new ru les and any subsequent evaluation . This group would 
also set a strategy for the collection of su ch data. The interaction with professional 
organisations should be ensured.  
The cooperation of national authorities will be sought, both the policy makers represented at 
the Audit Regulatory Committee and the Audit S upervisors currently within the EGAOB but 
who shall be integrated within ESMA.  
(2) The on-going monitoring activity  
The monitoring of the application of the new rule s is in-built in the preferred policy options 
and would essentially be carried out by the na tional competent authorities and ESMA on an 
ongoing basis. 
Monitoring activities by nation al competent authorities and ESMA . One of the policy 
options is to reinforce public supervision of the audit market . Hence, the national competent 
authorities will be entrusted with and empowered  to undertake this task. This includes the 
following requirements:  
– (i) regularly undertake quality assurance reviews  of statutory audi ts carried out by 
audit firms and statutory auditors (each firm/auditor auditing PIEs should be 
reviewed at least every 3 years). See above Annex 8 , policy options in relation to 
objective 5; 
– (ii) regularly monitor market developments , in particular (but not exclusively) in 
relation to market concentration levels, incl uding at the level of specific sectors; and 
assessing the the need for structural measur es to mitigate any risk arising from high 
concentration, such as: establishing caps on market shares, requiring the 
deconsolidation of audit firms or carving-ou t part of the sectoral expertise of large 
audit firms;  
 
EN 267   EN – (iii) regularly monitor the possible threats to the continuity of operations of large 
audit firms , including the risks arising from high concentration, as they could 
disturb the market and have effects on financial stability ; and requiring large audit 
firms to establish contingency pl ans to address such threats. 
There should be cooperation among authorities at EU level within the ESMA framework, 
where the Commission is also represented.  
The particularly important role of national competent authoritie s is without prejudice to the 
role of the Commission as guardian of the Treaty. The Commission will monitor whether 
Member States transpose the re levant obligations into national law. It will monitor, in 
cooperation with ESMA, whether the competent authorities ar e sufficiently empowered and 
have adequate resources to carry out their tasks since this is one of pillars of the reform.  
ESMA will be requested to prepare a report on this issue (the powers of the compentent 
authorities) within 4 years of the adoption of the legislation (2 years after the end of the 
transposition/tran sitional period). 
(3) The evaluation of the policy  
A full evaluation of the eff ects of the policy choices  could, however, only be undertaken in 
the longer term. Some of the important policy c hoices will need time to have any impact, 
particularly (but not only) as  regards market con centration levels: e.g. conversion of audit 
firms into pure audit firms, maximum duration (9 years) of audit engagements with an 
obligation to change stat utory auditor/audit firm; joint audits etc.  
It would be necessary, therefore, to carry  out such an evaluation in two steps. 
The 2 steps evaluation .  
– (1) Preliminary examination . ESMA will be required to present, 4 years after the 
end of the transposition/tran sitional period, a re port on selected issues : changes in 
audit market structure; changes in th e patterns of cross- border activity (e.g. 
functioning of the aptitude te st and adaptation period, effect  of mutual recognition of 
audit firms); interim assessment of the improvement in audit quality; impact of the 
changes regarding audit of SMEs. Based on this report and a dditional information, 
the Commission could prepare it s own report one year later. 
– (2) Evaluation . This evaluation would need to be  undertaken 10 years after the end 
of the transposition/transitional period to ensure that the effects of the maximum 
duration of audit engagements rule (9 year s) could be evaluated. This evaluation 
would reassess the issues examined in the preliminary examination and also evaluate 
the effects of the policy choices on market  concentration and supervisory activity. 
This evaluation is without prejudice to the monitoring activity described above. 
The second step in the evalua tion could be undertaken by ESMA or conducted externally. 
This choice could be made after the results of the first step (the preliminary evaluation) are 
known. 
 
EN 268   EN Concerning the possible indicators to be used in the evaluation of the policy, some could 
already be identified.  
Possible indicators to be used in the evaluation , to assess: 
– the improvement in audit quality : evolution of qualified a udit opinions; evolution 
of the quality of audit re ports; audit committee satisfac tion (e.g. with the additional 
internal report); assessment of quality assurance reviews by supervisors; 
auditors/firms obtaining the European qua lity certificate; inve stors perception on 
audit quality and the reduction/elimination of the expectation gap; increased 
transparency of audit firms; 
– the levels of market concentration and competition : number of firms able to audit 
large listed companies and financial institutions; 
– supervisory activity : number of sanctions and administrative measures; quality 
assurance reviews carried out and qualitativ e assessment of such work; investigations 
carried out; intra-EU cooperation activity. 
 
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EN 278   EN ACRONYMS AND ABBREVIATIONS  
AB3C – Central Chamber of  Commerce of Finland  
AFM – Netherlands Authority for the Financial Markets  
AIU – Audit Inspection Unit (AIU), part  of the Professional Oversight Board 
AMF – Autorité des marchés financiers APB – Audit Auditing Practices Board Big Four audit firms – PwC, Ernst & Young, Deloitte & Touche, KPMG CAC40 – French stock market index that tracks the 40 largest French st ocks based on market 
capitalization on the Paris Bourse (stock exchange) 
CESR – Committee of European  Securities Regulators  
CEBS – Committee of European Banking Supervisors  CEIOPS – Committee of European Insurance and Occupational Pensions Supervisors 
CEO – Chief Executive Officer CFO – Chief Financial Officer CMVB – Comissão do Mercado de Valores Mobiliários 
CNCC – Compagnie Nationale de s Commissaires aux Comptes  
CNDCEC – Consiglio Nazionale  dei Dottori Commercialisti e degli Esperti Contabili 
CONSOB – Commissione  Nazionale per le Società e la Borsa 
CSSF – Commission de Surveillance du Secteur Financier  DAX 30 – Deutscher Aktien IndeX, formerly De utscher Aktien-Index (German stock index), 
consisting of the 30 major German companies trading on the Frankfurt Stock Exchange 
EBA – European Banking Authority  EIOPA – European Insurance and Occupational Pensions Authority ESMA – European Securities  and Markets Authority  
EESC – European Economic and Social Committee  EGAOB – European Groups of Auditors' Oversight Bodies ESA – European Supervisory Authority 
 
EN 279   EN FEE – Fédération des Experts Comptables Européens  
FTSE 100/ 250/ 350 – 100/ 101st to 350th/ 350 la rgest companies listed on the London Stock 
Exchange 
G8 – The countries of Canada, France, Germ any, Italy, Japan, Russia,  the United Kingdom, 
and the United States 
G20 – The Group of Twenty (G-2 0) Finance Ministers and Ce ntral Bank Governors. The G-
20 is made up of the finance ministers and centr al bank governors of 19 countries: Argentina, 
Australia, Brazil, Canada, China, France, Ge rmany, India, Indonesia,  Italy, Japan, Mexico, 
Russia, Saudi Arabia, South Africa, Republic  of Korea, Turkey, United Kingdom, United 
States of America. The European Union, w ho is represented by the rotating Council 
presidency and the European Central Bank, is the 20th member of the G-20 
H3C – Haut Conseil du Commissariat aux Comptes (French supervisor for audit) 
IAASB - International Auditing and Assurance Standards Board 
IAB – Impact Assessment Board IBEX35 – The official index of the Spanish C ontinuous Market, which is comprised of the 35 
most liquid stocks traded on the market 
ICAEW – Institute of Chartered Ac countants in England and Wales  
IFAC - International Federation of Accountants 
IFRS – International Financial Reporting Standards ISA – International Standards on Auditing LACA – Latvian Association of Certified Auditors  
LCA – Lithuanian Chamber of Auditors  MTF – Multilateral Trading Facility NAS – Non-audit services OFT – The Office of Fair Trading PCAOB – Public Company Accounting Oversight Board PIE – Public Interest Entity QKB – Qualitätskontrollbehörde SCE – European Cooperative Society SEC – Securities and Exchange Commission SIFI – Systemically Important Financial Institutions  
 
EN 280   EN SME – Small and Medium Enterprise 
SMP – Small and medium-sized practitioner TEC – Treaty of the European Community TFUE – Treaty on the functioning of the European Union WPK – Wirtschaftsprüferkammer