COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT
Date: 2011-11-30
Institutions: European Commission
Subjects: audit, auditing, confidentiality, conflict of interest, financial control, legal status, management audit, market supervision, professional secret, quality label

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 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 

{COM(2011) 779 final} 
{SEC(2011) 1385 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 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. 

1.1. 

1.2. 

2. 

Procedural Issues and Consultation of Interested Parties ............................................ 6 

Procedural issues.......................................................................................................... 6 

External expertise and consultation of interested parties............................................. 6 

Policy context and problem definition ......................................................................... 7 

2.1. 

Policy context............................................................................................................... 7 

2.1.1.  Financial Statements of companies and statutory audit ............................................... 7 

2.1.2.  Statutory auditors, audit firms and the audit market .................................................... 8 

2.2. 

2.3. 

Summary of problems .................................................................................................. 9 

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. 

2.5. 

Problems affecting auditors of PIEs and other entities that are required to have an 
audit............................................................................................................................ 21 

Problems in relation to the supervision of compliance by auditors with their 
obligations .................................................................................................................. 22 

3. 

Baseline scenario and Subsidiarity............................................................................. 23 

3.1. 

Baseline scenario........................................................................................................ 23 

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3.2. 

The EU's right to act and subsidiarity ........................................................................ 25 

4. 

5. 

6. 

6.1. 

6.2. 

6.3. 

6.4. 

6.5. 

6.6. 

6.7. 

7. 

8. 

8.1. 

8.2. 

8.3. 

8.4. 

9. 

Objectives................................................................................................................... 26 

Identification of policy options .................................................................................. 26 

Analysis of Policy Options ........................................................................................ 31 

Policy Options to deal with the role of the auditor and the scope of audit ................ 31 

Policy Options to deal with conflicts of interest ........................................................ 34 

Policy Options to improve market conditions for audits of PIEs with a view to 
increasing audit quality .............................................................................................. 38 

Policy Options to deal with / avoid unnecessary additional compliance costs for 
auditors/audit firms in a cross-border context............................................................ 46 

Policy Options to improve the effectiveness, independence and EU-wide consistency 
of the regulation and supervision of auditors............................................................. 52 

Analysis of coherence with other policy initiatives ................................................... 54 

Choice of legal instrument ......................................................................................... 55 

Analysis of impact on stakeholders............................................................................ 56 

Overall impact of the package.................................................................................... 56 

Cumulative impacts and synergies............................................................................. 56 

Impact on different stakeholders groups .................................................................... 57 

Other impacts ............................................................................................................. 59 

Transposition and compliance aspects ....................................................................... 60 

Monitoring and evaluation ......................................................................................... 61 

Annex 1. Summary of responses to the Green Paper "Audit Policy: Lessons from the Crisis"

.................................................................................................................................... 62 

Annex 2. Existing European Union legal framework on statutory audits................................ 99 

Annex 3. Approved statutory auditors and audit firms .......................................................... 106 

Annex 4. Overview of recent 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 stakeholders on preferred policy options ............................ 157 

Annex 10. The provision of non-audit services to the audit client and the question of pure 

audit firms ................................................................................................................ 161 

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Annex 11. Mandatory rotation of audit firms ........................................................................ 171 

Annex 12. Joint audit of Financial 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, tendering and joint audit... 260 

Annex 22. Sanctions regime................................................................................................... 263 

Annex 23. Monitoring and evaluation: detailed plan............................................................. 265 

References .............................................................................................................................. 269 

Acronyms and abbreviations.................................................................................................. 278 

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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,  supervisors  or  central  banks  has  been  questioned  and 
analysed  in  depth  in  many  instances,  little  or  no  attention  had  been  given  to  the  role  auditors 
played  in  the  crisis  –  or  indeed  the  role  they  should  have  played.  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  Commission-approved  measures, 
including  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  accounted  for  39%  of  EU  27  GDP2.  In  this  context,  it  is 
difficult  for  many  citizens  and  investors  to  understand  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 leadership by launching a fruitful and intensive debate 
on this issue also at the international level (close co-operation with its global partners within the 
Financial Stability Board and the G20). Audit, alongside supervision and corporate governance, 
should  be  one  of  the  key  contributors  to  financial  stability  as  it  provides  assurance  on  the 
veracity  of  the  financial  statements  of  companies.  This  assurance  should  reduce  the  risks  of 
misstatement,  and  in  doing  so,  reduce  the  costs  of  failure  that  would  otherwise  be  suffered  by 
both  the  company's  stakeholders  as  well  as  by  the  broader  society.  Robust  audit  is  key  to  re-
establishing trust and market confidence. It contributes to investor protection by providing easily 
accessible,  cost-effective  and  trustworthy  information  about  the  financial  statements  of 
companies. It also potentially reduces the cost of capital for audited companies by ensuring more 
transparency of  information  about financial  statements and their veracity, thereby lowering the 
cost for financial institutions, analysing their financial situation before lending them capital.  

1 
2 

3 

European Commission (2009) and European Commission (March 2010).  
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  billion  (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. 
See  for  instance  Sikka  (2009).  This  paper  notes  that  many  European  and  US  financial  institutions  have 
sought state support within a short period of receiving an unqualified audit opinion. 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) 

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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 fragmentated due to various barriers to 
the integration of the national markets. The creation of a Single Market for audit services would 
be beneficial for audit firms, in particular small and mid-sized firms.  

Taking all the above into consideration, the subject of this Impact Assessment is to analyse the 
prevailing  problems  in  the  audit  market  and  the  potential  impacts  of  a  package  of  intended 
measures, aiming at reconsidering the role of auditors, the quality and scope of the services they 
provide to the market as well as the overall status of the audit profession in the society.  

1. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

1.1. 

Procedural issues 

An  Impact  Assessment  Steering  Group  gathering  all  relevant  departments  within  the 
Commission6 was set up and convened on three occasions: 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. More 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 options and stakeholders views.  

1.2. 

External expertise and consultation 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  processed  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 structure. Even though there was convergence on the general 
principles  (e.g.  there  was  a  strong  endorsement  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 structure 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 the independence of auditors and addressing the conflicts of 
interest inherent to the audit business model: e.g. for instance 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 
5 
6 

7 
8 

European Commission (April 2011a)  
European Commission (March 2010)  
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. 
European Commission (October 2010).  
http://www.youtube.com/watch?v=XUyvBrX-POM See also Woolfe (2011). 

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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-initiative  report  on  this  matter,  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 Economic 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 the Audit Regulatory Committee of 24 June 2011. 

2. 

POLICY CONTEXT AND PROBLEM DEFINITION 

2.1. 

Policy context 

2.1.1.  Financial Statements of companies and statutory audit 

Confidence  in  financial  statements  is  essential  for  all  stakeholders  of  a  company,  in  particular 
those with limited liability11, as a basis to make a judgement on its financial situation. Basic trust 
in the veracity of financial statements is fundamental 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 financial statements is crucial.  

Indeed, the audit of companies' financial statements is a service provided in the public interest. 
The role of the auditor is to contribute to the credibility as well as reliability of these financial 
statements.  Not  only  auditors,  audited  companies,  shareholders  and  potential  investors  have  a 
stake  in  the  veracity  of  companies'  financial  statements,  but  also  a  wide  range  of  other 
stakeholders benefit from audits. These include lenders, trade partners, employees, credit rating 
agencies  or  equity  analysts.  If  investors,  lenders  and  trading  partners  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  requirements  for  statutory  audit  and  defines  'statutory 
audit' as an audit of annual accounts or consolidated accounts insofar  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 requirement 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  regulated  markets  ("listed  companies")  or  financial 

9 
10 
11 

12 

European Parliament (2011).  
European Economic and Social Committee (2011). 
Due  to  their  limited  liability,  companies  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, filing financial statements in a registry is enough, for 
listed  companies  there  is  a  requirement  to  "publish"  audited  financial  statements  so  that  they  reach 
investors. 
For the full details of the legal instruments mentioned in this document, see REFERENCES.  

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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 those, there are around 7400 companies that prepare 
their consolidated  accounts under International 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: 

c)  have  their  accounts 
audited 

a)  publish 
accounts 

their 

Listed 
companies  

Transparency 
Directive (TD) 

Credit 
institutions 

Insurance 
undertakings 

Unlisted 
companies 

Unless TD applies, 
Directive 
86/635/EEC shall be 
applicable 
Unless TD applies, 
Directive 
91/674/EEC shall be 
applicable 

1st  Company  Law 
Directive  and  4th 
Law 
Company 
7th 
Directive 
Company 
Law 
Directive  

or 

b) prepare their accounts 
in conformity with  
Article  4  of  TD:  IFRS  for 
consolidated  accounts  and 
4th 
Law 
Company 
Directive 
annual 
for 
accounts 

Article 4 of TD 

Unless TD applies, 
Dir.  86/635/EEC  shall  be 
applicable 

Unless TD applies, 
Directive 
shall be applicable 

86/635/EEC 

Unless TD applies, 
Directive 91/674/EEC shall 
be applicable 

Unless TD applies, 
Directive 
shall be applicable 

91/674/EEC 

Law 
annual 

Company 
for 

4th 
Directive 
accounts  
7th 
Law 
Company 
Directive  for  consolidated 
accounts  

Law 
annual 

Company 

Company 
for 

4th 
Directive 
accounts 
7th 
Directive 
consolidated accounts 
[except 
companies] 

for 

Law 
for 

small 

d)  be 
accordance with 

audited 

in 

rules 

on 
of 

Audit 
which 

the 
the 
(approval, 

Statutory 
Directive, 
establishes: 
- 
qualification 
auditors 
registration etc.) 
-  principles  on 
the 
independence  criteria  of 
auditors (ethics, conflict 
of interest etc) 
- 
public 
on 
rules 
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  audits  (see  Annex  3  on  approved  auditors  and  firms).  They  are  subject  to 
external  quality  assurance  as  part  of  public  oversight.  In  general,  statutory  audit  services  to 
"public-interest  entities"  (PIEs)17  are  provided  by  audit  firms  rather  than  individual  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 particular, large listed companies is concentrated 
at a national as well as Union level: the so-called "Big Four" audit firms (PWC, KPMG, Deloitte 

13 
14 

15 
16 

17 

See European Commission (October 2011a), section 3.6. 
IFRS are world-wide financial reporting standards. The consistent quality of audits across the EU countries 
is  paramount  to  make  sure  that  accounts  of  EU  listed  companies  are  of  equal  quality,  trustworthy  and 
comparable by international investors  
See European Commission (October 2011b).  
Concerning  certain  types  of  financial  institutions,  other  EU  Directives  specifically  set  the  obligation  to 
have their accounts audited. 
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. 

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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  listed  company perspective,  the  issuer  of  securities  on whose 
accounts and on whose credit worthiness audit and rating opinions are being provided is also 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  statutory  audit  of  PIEs.  Nonetheless,  this  Impact 
Assessment  also  assesses  implications  for  the  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 gap 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 and large companies, (4) additional compliance costs 
due  to  fragmented  national  regulation;  (5)  lack  of  effective  national  and  EU-wide  supervision 
over  audit  firms.  These  problems  are  represented  in  the  problem  tree  depicted  in  figure  2.  A 
detailed explanation of the problems are provided in the ensuing sections (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).  

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Problem drivers
Problem drivers

Consequences
Consequences

General Problems
General Problems

Expectation gap on the role of the auditor:
Expectation gap on the role of the auditor:
• Expectation gap regarding the scope of 
• Expectation gap regarding the scope of 
audit / lack of awareness of users about 
audit / lack of awareness of users about 
the role of auditors
the role of auditors
• Lack of communication between auditors 
• Lack of communication between auditors 
and supervisors of audited companies 
and supervisors of audited companies 
• The format of auditor opinion and report 
• The format of auditor opinion and report 
does not meet the needs of the users
does not meet the needs of the users

Insufficient existing measures to tackle 
Insufficient existing measures to tackle 
the risk of conflict of interests due to:
the risk of conflict of interests due to:
• Provision of non-audit services to the 
• Provision of non-audit services to the 
same client 
same client 
• Existing system of "auditee selects and pays 
• Existing system of "auditee selects and pays 
the auditor" 
the auditor" 
• "Familiarity threat"
• "Familiarity threat"

High barriers to entry into the market 
High barriers to entry into the market 
of listed companies and financial institutions:
of listed companies and financial institutions:
• Big 4 reputation, also due to low 
• Big 4 reputation, also due to low 
transparency in the market on audit firms' 
transparency in the market on audit firms' 
financials and on audit quality
financials and on audit quality
• Commercial barriers- contract clauses 
• Commercial barriers- contract clauses 
requesting Big 4 audits 
requesting Big 4 audits 
• Low percentage of audit firm switching
• Low percentage of audit firm switching
• Legal barrier- restrictive ownership rules;
• Legal barrier- restrictive ownership rules;

Lack of genuine independence of public 
Lack of genuine independence of public 
oversight authorities from the 
oversight authorities from the 
profession in many Member States:
profession in many Member States:
• Inspections are not independently run in 
• Inspections are not independently run in 
many Member States
many Member States
• Practising auditors participate in the 
• Practising auditors participate in the 
governance of the public oversight in many 
governance of the public oversight in many 
Member States 
Member States 
• Members of the profession play a significant 
• Members of the profession play a significant 
role in investigations and penalties
role in investigations and penalties

Other structural auditor supervision issues:
Other structural auditor supervision issues:
• Underfinanced and/or weak structures 
• Underfinanced and/or weak structures 
of national and EU-wide auditor supervision
of national and EU-wide auditor supervision
• Uncoordinated supervision of audit networks
• Uncoordinated supervision of audit networks
• Lack of consistent supervisory rules, 
• Lack of consistent supervisory rules, 
powers and sanctions across Member States 
powers and sanctions across Member States 

Burdens resulting from fragmented national 
Burdens resulting from fragmented national 
regulation:
regulation:
• Cross border statutory audits allowed only if an 
• Cross border statutory audits allowed only if an 
auditor passes an aptitude test and gets approved 
auditor passes an aptitude test and gets approved 
and registered in another Member State 
and registered in another Member State 
• Lack of common standards across the EU on 
• Lack of common standards across the EU on 
audit practice, independence, internal control 
audit practice, independence, internal control 
of audit firms
of audit firms
• Auditing standards do not take into account 
• Auditing standards do not take into account 
the size of the audited companies 
the size of the audited companies 
in particular SMEs
in particular SMEs

Figure 2 – Problem tree 

Role of the auditor does 
Role of the auditor does 
not meet the expectations 
not meet the expectations 
of the stakeholders
of the stakeholders

Impaired professional 
Impaired professional 
scepticism and undermined 
scepticism and undermined 
independence of the audit firm
independence of the audit firm
in the provision of statutory audit
in the provision of statutory audit

Impaired 
Impaired 
audit quality
audit quality

Limited effective choice in the 
Limited effective choice in the 
audit market of large PIEs, 
audit market of large PIEs, 

Risk of moral 
Risk of moral 
hazard 
hazard 
induced by 
induced by 
« too big to fail »
« too big to fail »
Phenomenon
Phenomenon

Lack of effective national and 
Lack of effective national and 
EU-wide supervision
EU-wide supervision
over audit firms
over audit firms

Additional compliance cost
Additional compliance cost
for auditors and audit firms 
for auditors and audit firms 

No level 
No level 
playing field 
playing field 
for audit 
for audit 
firms and 
firms and 
auditors 
auditors 
across the 
across the 
Union
Union

Compliance
Compliance
burdens 
burdens 

Low business 
Low business 
potential 
potential 
for SMPs
for SMPs

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2.3. 

Problems particularly affecting 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  quality  of  the  audits  of  PIEs.  There  are  a  number  of  ongoing 
investigations  regarding  the  audits  of  banks  in  the  EU/EEA19.  In  addition,  recent  audit 
inspections in EU Member States have indeed revealed audit quality issues in major audit firms 
(for more information on inspection findings see Annex 4): 

in 

firms 

The  auditor  supervisor  in  the  Netherlands  –  Netherlands  Authority  for  the  Financial  Markets 
(AFM)  –  concluded  that  "The  quality  of  audits  must  fundamentally  improve  <…>  at  the  four 
largest  audit 
the  Netherlands:  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 appropriate professional scepticism in the 
conduct of their audits as well as to apply or to apply sufficiently, auditing 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  mentions  that  recent  inspections  show  that  the 
deficiencies  in  audit  quality  are  more  widespread  and  systemic  and  do  not  concern  only  the 
performance of audits of companies in the financial sector but also other sectors 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 requiring significant improvement 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 policies 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  the  impairment  of  goodwill  and  other  intangibles  and  future  cash  flows 
relevant to the consideration of going concern22." 

In  Germany,  a  report  of  the  Auditor  oversight  commission  for  the  period  2007  –  2010  shows 
that,  on  average,  25%  of  inspections  of  audit  firms  having  PIE  clients  led  to  disciplinary 
proceedings, and  the tendency is  negative (19% in 2008, 24% in 2009, 27% in 2010)23. In the 

19 

20 
21 

22 

23 

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 Reporting Council (see FRC (June 2010)). In Iceland, 
PWC,  auditor  of  Landsbanki  and  Glitnir  banks  in  Iceland,  is  being  investigated  by  the  Icelandic  Special 
Prosecutor as at December 2010. This is a criminal investigation. 
AFM (2010a) 
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). 
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". 
Abschlussprüferaufsichtskommission (2010), p.12. 

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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  assessment  of  the  risks  of  breaches  and 
irregularities (fraud), mainly due to a rather pro forma conduct of the audit work25. 

In  addition,  the  same  report  identified  several  major  weaknesses  related  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  appointment,  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 sanctioning 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  engagement  quality  control  review  was  not  made  at 
suitable  points  in  time  during  the  engagement  process  or  did  not  include  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  also  carried  out  by  persons  who  were  themselves  involved  in 
conducting the relevant audit ." 

Also in the US, it is reported that "[t]oo often, PCAOB inspectors find that auditors have failed 
to exercise the required scepticism and have accepted evidence 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  determined  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  recently  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  auditors  concerned  from  associating 
with a PCAOB-registered accounting firm28. 

The next sub-section describes the problems that contribute to this insufficient 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 expectations of stakeholders 

24 
25 
26 
27 
28 

Ibid; page 9. 
Ibid, page 8. 
See Doty (2011a), section III.B.  
US PCAOB (August 2011), p. 5 and seq.  
PCAOB  Announces  Settled  Disciplinary  Orders  Against  Former  Ernst  &  Young  Partner  and  Senior 
Manager  For  Providing  Misleading  Documents  to  PCAOB  Inspectors  And  Altering  Working  Papers 
(Washington, D.C., August 1, 2011). 

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i) Expectation gap regarding 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 finanical statesments were given unqualified (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 information e. g. explaining the methodology used or 
any other description of the work carried out by an auditor. EU rules only require that the auditor 
provides  an  opinion  on  the  veracity  of  the  financial  statements  and  the  ability  of  the  audited 
company to continue as a "going concern"30. This creates some confusion about the scope of the 
auditor's  assessment  and  explains  the  expectations  created  among  certain  stakeholders.  This 
expectation gap raises questions about the existing legal requirements concerning the mission of 
the auditor, the scope of the audit and the type of verification carried out by auditors to confirm 
the auditee's ability to continue 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 critical 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  sufficient  facts  in  their  audit  report33;  the  most  common  audit 
opinion is effectively a “template” clean opinion, especially 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 have an interest in the audited company34.  

iii) There is not enough communication between auditors and supervisors of PIEs. In the specific 
case  of  financial  institutions  and  providers  of  investment  services,  auditors  are  required35  to 

29 

30 

31 

32 

33 

34 

35 

An examiner of the Lehman Brothers bankruptcy stated that "the investing public is entitled to believe that 
a 'clean' report from an independent auditor stands for something." See Valukas (2011). 
Going concern is the company's ability to continue functioning as a business entity (concern being an early-
20th century term for "business" or "enterprise"). 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 statements whether there are any factors that may put the 
company's status as a going concern in doubt. 
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 (March 2011), p. 38 and seq. 
Nyberg (2011). This report does not criticise specific auditors 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. 
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. 
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 IOSCO (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". 
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  paragraph  of  Article  3  of  the  e-money 

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report promptly to the competent authorities any fact or decision which is liable to constitute a 
material breach of laws, affect the ability of the 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 crisis as a dereliction of duty 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 ("the Bank") and Subsidiaries ("the Group"),  which comprise the consolidated 
balance sheet at 31 December 2010 and the related consolidated income statement, consolidated statement of recognised income and expense, 
consolidated statement of changes in total equity, consolidated statement of cash flows and notes to the consolidated financial statements for the 
year  then  ended.  As  indicated  in  Note  1.b.  to  the  accompanying  consolidated  financial  statements,  the  Bank's  directors  are  responsible  of  the 
Group's consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and 
the other provisions of the regulatory financial reporting framework applicable 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 accordance with the audit regulations in force in YYY 
which  require  examination,  by  means  of  selective  tests,  of  the  evidence  supporting  the  consolidated  financial  statements  and  evaluation  of 
whether their presentation, the accounting principles and policies applied and the estimates made comply with the applicable regulatory financial 
reporting framework. 

In our opinion, the accompanying financial statements for 2010 present fairly, in all material respects, the consolidated equity and consolidated 
financial position of XXX Group at 31 December 2010, and the consolidated results of its operation and the consolidated cash flows for the year 
the  ended,  in  conformity  with  International  Financial  Reporting  Standards  as  adopted  by  the  European  Union  and  the  other  provisions  of  the 
regulatory reporting framework applicable to the Group. 

The  accompanying  consolidated  directors'  report  for  2010  contains  the  explanations  which  the  Bank's  directors  consider  appropriate  about  the 
Group's situation, the evolutions of its business and other matters, but it is not an integral part of the consolidated financial statements. We have 
checked  that  the  accounting  information  in  the  consolidated  directors'  report  is  consistent  with  that  contained  in  the  consolidated  financial 
statements for 2010. Our work as auditors was confined to checking the consolidated directors' report with the aforementioned scope, and did not 
include a review of any information other than that drawn 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  corporate  governance  in  financial  institutions39  to 
improve the dialogue between supervisors and auditors, as there is a broad acceptance that the 
knowledge gathered by external auditors 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  Solvency  II  Directive.  See  also  Article  20  of  the  MIFID  Implementing 
Directive. 
A qualified audit report indicates that a company's financial statement gives a true and fair view subject to 
certain qualifying remarks. 
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. 
Ibid. §161. 
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). 
See for instance Dewing and O'Russell (2011), FSA and FRC (2010).  

36 

37 

38 
39 

40 

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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' independence: 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 interest than the others. On the contrary, 
they are considered to have a cumulative effect on the overall independence of auditors. At the 
same  time,  in  at  least  one  of  the  cases  ("auditee  selects  and  pays  the  auditor"),  the  conflict  is 
inherent in the existing business model for the provision of audit services. 

i) Conflict of interest arising from the provision of statutory audit and other non-audit services. 
Providing  non-audit  services  (NAS)  while  auditing  a  company  presents  a  potential  source  of 
conflict  of  interest  arising  from  or  within  the  audit  firm:  i.e.  the  audit  firm  has  an  interest  to 
secure additional revenue from the provision of other (non-audit) services41. In instances where 
the revenues from NAS become substantial 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 audited entity – would naturally be compromised42.  

There  is  currently  no  EU-wide  ban  preventing  auditors  from  offering  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  informed  third  party  would  conclude  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  far  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 restrictive and the provision of NAS by auditors to the 
companies they audit remains commonplace44. 

41 

42 

43 

44 

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  assurance  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  the  statutory  auditor  (of  accounts)  in  place  to  also 
provide those additional assurance services (which, strictly 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.  
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. 
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 network 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. 
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 financial 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  combined  audit  and NAS fees, 

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The  importance  of  NAS  for  audit  firms  is  growing:  the  share  of  NAS  provided  to  their  (not 
necesssarily audit) clients relative to audit services is increasing both globally and in the Union45. 
Audit is no longer the dominant revenue 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 received 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 appropriateness of the provision of non-audit 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 prohibition 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  procedures,  required  in  any  event  in  the  audit, 
provide the necessary degree of safeguard. They must accept that non-audit services should not 
be provided where safeguards cannot appropriately mitigate threats 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  services  to  be  provided  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  procedures  that  senior  audit  staff  at  some  firms 
continue  to  believe  that  success  in  the  selling  of  non-audit  services  to  audited  entities  is  a 
significant  contributory  factor  to  promotion  and  remuneration  decisions"50.  Recently,  the  US 
oversight  body's  reviews  found  examples  of  "seemingly  unrestrained  enthusiasm…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  the  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 and 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). 
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).  
Casta et Mucol (1999) explain that the big audit firms, 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 service. This repositioning regarding the profession itself 
has not been done without creating potential ethical problems. 
House of Lords (March 2011), p. 24.  
House of Commons (2009).  
FRC (July 2010). 
FRC (July 2011), p. 21. 
See Doty (2011a), section II.  

45 

46 

47 
48 
49 
50 
51 

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them at the annual general meeting52. This fact creates a serious distortion within the system in 
that it undermines auditor independence in reporting findings and providing negative feed-back 
about the performance of the management (CFO and /or CEO) of the audited company.  

In  this  framework,  Audit  Committees  are  expected  to  counter-balance  the  influence  of 
management, acting as independent agents of investors within the audited entities. However, the 
current practices and functioning of Audit Committees 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  Directive  does  not  require  complete 
independence  of  the  Audit  Committee  members  and  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 the 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, and  self-regulation  regarding 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  audit  firm  for  decades.  For  example,  a  new  audit 
partner of the same audit firm will likely feel obliged to live with the decisions and agreements 
made by the former partner; he may have little flexibility to reopen them57. Only in is Italy the 
situation different58.  

In a 2006 study, more than half of the respondent companies reported that their auditor had served the company for 
more than 7 years, and 31% reported that the auditor had served for more than 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  250  the  average  is  36  years.  It  is 
noteworthy that Barclays has been audited 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 

53 

54 

55 

56 

57 
58 

59 
60 
61 
62 

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. 
See  European  Commission  (June  2010)  and  European  Commission  (April  2011b),  section  1.1.1.  on 
Professional diversity. 
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  conference  (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 discipline the auditor in case of an unsatisfactory result of 
the audit. Cf. Börsen-Zeitung, 04.05.2011. 
Article 41 of the Statutory Audit Directive requires that "at least one member of the audit committee shall 
be  independent  and  shall  have  competence  in  accounting  and/or  auditing",  allowing  Member  States 
discretion to decide on stricter independence/competence rules for the remaining members. 
Familiarity  threats,  which  may  occur  when,  because  of  a  close  relationship,  a  professional  accountant 
becomes too sympathetic to the interests of others (IFAC code of ethics). 
Doty (June 2011b), section II. 
Italy enforces the mandatory rotation of audit firms every 9 years, in order to enhance the independence of 
the auditor from the audited PIE. See Annex 11 for further detail on this issue. 
See London Economics (September 2006). 
See House of Lords (March 2011). 
Source: German public register of companies. 
Aubin (2011). 

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This lack of change in auditors creates a perverse 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 advance 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  financial  statements  from  their 
auditors  changed  auditors  more  often  than  entities  that  received  audit  opinions  with  no 
observations65. 

Cause 

Effect 

Barriers to entry into the statutory audit market for PIEs 

Limited effective choice of auditor for large PIEs  

Changing  the  auditor  could  contribute  to  addressing  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 large listed companies and large financial institutions 
has  been  progressively  limited  to  the  Big  Four  audit  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 number of barriers preventing new audit firms from 
entering  (or  existing  ones  from  growing  within)  the  audit  market  for  large  PIEs66:  (1)  there  is 
asymmetric  information  related  to  the  quality  of  auditors  in  the  market67,  which  results  in,  the 
reputation of the Big Four audit firms becoming the most important factor for auditor choice; (2) 
contract clauses that effectively require Big Four audits: (3) companies rarely change their audit 
firm and there is hardly any opportunity to compete 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 other hand, therefore protecting large 
audit firms from competition from medium-sized firms. 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 concluded 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 

64 
65 
66 

67 

68 

69 
70 
71 

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  scepticism  if  audit  teams  believe  that  by  demonstrating 
scepticism they risk having an 'unhappy client'". 
See Doty (2011a), section II.  
Prat et Hauret (2003). 
Other factors could also influence the inability of audit firms to grow: insufficient trained or qualified staff, 
lack of sufficiently developed international network etc. 
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.  
See also OFT (2010). The OFT has provisionally decided that there are competition problems in the audit 
market that pass the statutory test for referral to the Competition Commission. 
Oxera (April 2006), page i. 
See London Economics (September 2006), table 5, pages 22-23.  
For more information on the history of market concentration see Annex 7(1). 

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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 (in terms of global revenues) of 24 international 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 firms is much higher than in the markets 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). 

Baker & McKenzie (law)

2112

Standard & Poor's (credit
rating)

2610

BlackRock (investment
management)

4700

McKinsey & Company
(management
consultancy)

PricewaterhouseCoopers
International (audit &
consultancy)

6600

26100

0

5000

10000

15000

20000

25000

30000

Figure 5. Global revenues of biggest service providers in 2009 (in million USD)74 

72 
73 

74 

Accountancy Magazine, June 2010, page 37, table Top 25 international networks. 
Total revenues from audit and non-audit services provided to public interest entities and other individuals 
or companies. 
Sources:  Accountancy  Magazine  June  2010;  http://www.forbes.com/lists/2010/21/private-companies-
http://www.wikinvest.com/stock/BlackRock_(BLK)/Filing/10-
10_McKinsey-Co_IPPW.html; 
K/2010/F46751551; 
http://www.standardandpoors.com/about-sp/key-statistics/en/us; 
http://www.law.com/jsp/tal/PubArticleTAL.jsp?id=1202448484841 

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19 

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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 companies 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 audits. In some important market segments, the 
degree of concentration is even greater: for example, 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  companies  (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  share  by  providing  audit  services  to  several  CAC  40 
companies84. 

A  particular  feature  to  underline  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  Deloitte  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 

76 
77 
78 
79 

80 
81 
82 
83 

84 

85 

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). 
London Economics (September 2006), table 5, pages 22-23.  
London Economics (September 2006), table 12, pages 32.  
For some commentators, we are facing an oligopoly situation. See Billard et al. (2011).  
AMF (2010), p.8 and AMF (2010), p. 9. It should be noted that Mazars also audit 6 of these companies, as 
joint auditor. 
Oxera (April 2006), p.i. See also Chambers (2011). 
House of Lords (March 2011), Chapter 3. 
For the information on Germany, see London Economics (2006), table 5, p. 22.  
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. 
In  France,  two  additional  firms  held  13  (joint)  mandates  (Mazars  [12]  and  Corévisie  [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. 
See European Parliament (2011), §49.  

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firm  failing86  and  on  the  other  hand  the  "too  big  to  fail"  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  institutions  in  dealing  with  US  based  KPMG  LLP 
regarding its sale of tax shelters88 may indicate such a problem.  

2.4.  Moreover,  such  market  concentration  also  results  in  high  prices89:  one  of  the 
notable  phenomena  of  the  current  market  structure  is  that  Big  Four  audit  firms 
generate higher profit margins than other international networks. 2010 data from 
the UK market shows that the average profit margins in Big Four audit firms were 
50% higher than the next four audit firms (27% versus 18%). The levelling out of 
Big Four profit margins to those of the next 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 "in the period 2002-2006 the premium paid for 
being  audited  by  a  top-tier  auditor  was  around  20%".91Problems  affecting 
auditors of PIEs and other entities that are required to have an audit 

Cause 

Effect 

Burdens resulting from fragmented national regulation  

Additional compliance cost for auditors and audit firms  

i) Provision of statutory audits in a different Member State is possible 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  approval  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 Directive). The approval and aptitude test requirements 
result in additional compliance costs across the Union.  

ii) Cost-burden to auditors and audit firms resulting from a lack of common standards across the 
Union on audit practice, independence 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  one  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  Member  State  and  may  be 
disproportionate to the size of the businesses, thus  being a bigger hurdle to small  and medium 

86 

87 
88 

89 

90 

91 

E.g. resulting from a liability problem. There is also a reputational problem, 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." 
The effects would not be comparable, it is true, to a similar situation in the banking sector. 
The US Justice Department and the Internal Revenue Service in 2005 announced 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 firm. <…> 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).  
See  Oxera  (April  2006),  p.  v,  explaining  that  the  results  of  an  econometric  analysis  on  the  relationship 
between market structure and audit fees show that market 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. 
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.  
See Kittsteiner and Selvaggi (April 2008), Chapter 4.6 "Big-N premium", p. 26. 

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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  commissioned  by  the  European  Commission92  has  assessed  and 
compared  the  costs  and  benefits  of  applying  international  standards,  the  so-called  'clarified 
ISAs'93 as common standards throughout the Union. The study estimates the total recurring net 
benefits of 2 billion euros per year from the expected reduction in the cost of capital for audit 
clients as a result of the application 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.  excessive  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 SME 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 

Effect 

Representatives  from  the  audit  profession  and/or  practicing  auditors  are  actively 
involved in the public auditor oversight in many Member States 

Public oversight authorities are not "genuinely" independent from the profession in 
many Member States 

The  presence  of  practicing  auditors  in  the  governance  of  the  public  oversight  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  inspections  systems  which  are  run 
and executed by the staff of the public oversight authorities, at least with regard to the audit of 
PIEs96. However, in most Member States, professional associations and/or practicing auditors are 
still involved in the execution of external quality assurance reviews. Also, there were instances 
where the system of investigations and penalties was run under the substantial influence of the 
profession and failed to implement its mandate97. 

92 
93 

94 

95 

96 

97 

Köhler et al. (June 2009). 
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"). 
In  France,  the need  to  adapt the  application  of  the  auditing  standards  to the  size  of  small  companies has 
been recognised. See Annex 16. 
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  
These  authorities  may  delegate  their  inspection  tasks  to  the  professional  bodies,  even  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. 
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 

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Cause 

Underfinanced and/or weak structures of national and EU-wide auditor supervision 

Effect 

Lack of effective national and EU-wide supervision of audit network firms 

There  are  many  differences  among  the  national  audit  regulators  in  terms  of  the  structures, 
mandate  or  administrative  capacities.  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  regulators.  Some  Member  States  have  devoted 
considerable resources to an effective public oversight over the profession. This is the case of the 
Netherlands, France or Bulgaria, where inspections are carried out by bodies both independent 
from the profession  and from  political influence. In other Member  States, the oversight bodies 
are relatively weak due to either budgetary constraints 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  expert  group  chaired  by  the  European  Commission, 
does not have appropriate means to ensure the convergence of supervisory rules, powers and the 
system of investigation and penalties. The supervisory framework is not commensurate with the 
integrated structures of audit firms 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 "national" component of the network is supervised at a national level).  

With respect to effective supervision, the empirical evidence (feed-back received from EU MSs 
supervisory  bodies)  shows  that  some  of  the  national  banking  supervisory  authorities  have  the 
right under national law to "veto" the appointment of statutory auditors for financial institutions, 
although information is not publicly available as to how frequentlly this right has been exercised 
by  supervisors.  Also,  to-date,  no  auditor  of  the  failed  banks  been  sanctioned  for  issuing  clean 
audit reports to banks, which failed shortly after 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 related legal acts (see Annex 2 for the 
existing legal framework), respective national legislation, as well as self-regulatory codes.  

Continuing under the existing framework would preserve the expectation gap regarding the role 
and  value  of  audit.  Maintaining  the  current  format  of  the  audit  report  risks  exacerbating  the 
uncertainty among market agents about the real contribution of auditors as well as the capacity of 
the audited entity to continue as a going 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 Authority’s findings and the associated sanctions.  

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Furthermore,  the  lack  of  a  streamlined  and  well  developed  dialogue  between  auditors  and 
supervisors, especially in the case of systemic financial institutions 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 current structure will not 
be  in  a  position  to  perform  its  independent  monitoring  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 organisation of audit firms do not address the threat 
of familiarity  resulting from  the audited company 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 after a certain period will further entrench the statu 
quo.  

This situation is not likely to improve in a significant 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 debate launched by the Commission Green Paper, most 
of  the  audit  profession  has  reverted  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 business 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  harmonised  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 aptitude 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,  national  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  current effectiveness is 
questionnable. Moreover, individual recommendations after inspections can supplement but not 
replace a modern legal framework for auditing services. As a result, supervisory action under the 
current circumstances is likely to exacerbate the problems of patchy audit quality in the internal 
market. 

98 

99 
100 

101 

See for instance Chambers (2011), p.33: "Measures to address the folly of an oligopoly that has monopoly 
rights to practice upon a captive client base are overdue." 
Expression borrowed from Bos (2011). 
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 […]" 
See for instance Valukas (2011) on the role of the auditor in the events preceding the collapse of Lehman 
Brothers: "So to review the bidding, Lehman's senior executives 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  executives.  But  the  public  –  who  relied  on  the  financial 
statements – who do they get to rely on?" 

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3.2. 

The EU's right to act and subsidiarity  

EU  rules  have  partially  regulated  statutory  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 related supevision and a few specific 
provisions  on  the  audit  of  PIEs.  The  Statutory  Audit  Directive  is  based  on  the  freedom  of 
establishment  provisions  of  the  Treaty102.  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 statutory 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 adoption of the Statutory Audit Directive in 2006, 
self-regulation  continued  to  exist  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. These objectives cannot be achieved by the Member 
States either as important differences 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  interconnected  nature  of 
securities  markets  and  financial  actors,  it  is  important  that  there  is  a  harmonised  framework 
within  which  audit  is  conducted  across  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.  Legislation  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 coordinated approach at the level of the Union, 
supplemented by international support, would also lower the risk of regulatory arbitrage. 

102 

103 

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; 
[…]." 
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." 

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The  Commission  also  endeavours  to  co-ordinate  its  work  and  that  of  Member  States'  with  its 
international partners. To get international solutions 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 audit 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 

General objective
General objective

Contribute to the efficient functioning of financial and non-financial markets by strengthening the market role 
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, 
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 companies
meaningful and timely information at an acceptable cost about the veracity of financial statements of companies

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1. Clarify and define 
1. Clarify and define 
the role of the statutory 
the role of the statutory 
auditors generally as well 
auditors generally as well 
as with specific 
as with specific 
regard to PIEs
regard to PIEs

2. Reinforce the
2. Reinforce the
independence and
independence and
professional scepticism
professional scepticism
of statutory auditors 
of statutory auditors 
and audit firms in
and audit firms in
the  provision of 
the  provision of 
statutory audit to PIEs
statutory audit to PIEs

3. Improve market 
3. Improve market 
conditions for audits of 
conditions for audits of 
PIEs with a view  to 
PIEs with a view  to 
increasing audit quality
increasing audit quality

4. Avoid unnecessary 
4. Avoid unnecessary 
additional compliance 
additional compliance 
costs for audited 
costs for audited 
SMEs as well as 
SMEs as well as 
for audit providers 
for audit providers 
in a cross-border 
in a cross-border 
context 
context 

5. Improve the 
5. Improve the 
effectiveness, 
effectiveness, 
independence and 
independence and 
consistency of the 
consistency of the 
regulation and 
regulation and 
supervision of 
supervision of 
auditors
auditors

1.1. Improve business 
1.1. Improve business 
preparers/market 
preparers/market 
understanding about the
understanding about the
scope of  audit generally
scope of  audit generally

2.1. Reduce and mitigate
2.1. Reduce and mitigate
the risk of any conflict 
the risk of any conflict 
of interest due to the
of interest due to the
provision of non-
provision of non-
audit services to PIEs
audit services to PIEs

1.2. Improve the 
1.2. Improve the 
information that the 
information that the 
auditor provides to users
auditor provides to users
and audited entities (PIEs) 
and audited entities (PIEs) 

2.2. Reduce and mitigate 
2.2. Reduce and mitigate 
the risk of any conflict of 
the risk of any conflict of 
interest due to the existing 
interest due to the existing 
system  of "auditee selects
system  of "auditee selects
and pays the auditor"
and pays the auditor"

1.3. Improve the 
1.3. Improve the 
communication channels 
communication channels 
between auditors and 
between auditors and 
supervisors of PIEs
supervisors of PIEs

2.3. Reduce and mitigate 
2.3. Reduce and mitigate 
the risk of any conflict 
the risk of any conflict 
of interest due to 
of interest due to 
"familiarity threat"
"familiarity threat"

Figure 6. Objectives. 

3.1. Facilitate 
3.1. Facilitate 
switching of 
switching of 
an audit firm
an audit firm

3.2. Facilitate an 
3.2. Facilitate an 
objective choice 
objective choice 
of an audit provider
of an audit provider

4.1. Facilitate the 
4.1. Facilitate the 
cross-border recognition 
cross-border recognition 
of audit providers' 
of audit providers' 
competence
competence

4.2. Streamline and
4.2. Streamline and
harmonise standards on 
harmonise standards on 
audit practice, independen-
audit practice, independen-
ce and internal control of
ce and internal control of
audit firms across the EU
audit firms across the EU

3.3. Increase the 
3.3. Increase the 
choice of audit 
choice of audit 
providers for PIEs
providers for PIEs

4.3. Ensure that 
4.3. Ensure that 
statutory audit is 
statutory audit is 
adapted to SMEs needs
adapted to SMEs needs

5.1. Ensure 
5.1. Ensure 
independence and
independence and
effectiveness of 
effectiveness of 
supervision of national
supervision of national
statutory auditors
statutory auditors
and audit firms
and audit firms

5.2. Set-up an 
5.2. Set-up an 
effective EU-wide
effective EU-wide
supervisory cooperation
supervisory cooperation
mechanism that would
mechanism that would
also ensure an
also ensure an
effective supervision
effective supervision
of supranational 
of supranational 
audit firm structures
audit firm structures

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  description  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  selection  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  discarded.  Firstly,  it  could  be  conceivable  to  require  that  the  statutory 

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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  implementation  of  such  an  alternative  model  present 
doubts  as  to  the  capacity  of  public  national  bodies  to  undertake  the  huge  task  of  providing 
statutory  audit  services  to  thousands  of  audited  entities  and  the  desirability  to  create  a  public 
monopoly for the provision of statutory 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  has  been  analysed  is  the  option  to  abandon  the 
requirement  to  have  the  companies'  accounts  audited  and  to  replace  it  with  an  obligation  to 
insure  the  financial  statements104.  Under  this  option,  insurance  companies  could  provide 
coverage  for  investors  in  the  audited  company  against  losses  suffered  as  a  result  of  problems 
with the company's published financial statements. Insurance companies, in order to lower their 
own  risk,  would  then  appoint  and  pay  audit  firms  to  certify  the  accuracy  of  the  financial 
statements.  Thus,  the  auditor  would  no  longer  provide  a  direct  service  to  the  audited  entity, 
which  would  reinforce  his/her  independence.  The  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 without difficulties.  It would imply creating a new 
insurance market which currently does not exist. Doubts 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  strengthening  the  sanctioning  regime  has  also  been 
considered. However, it is estimated that if this were done in isolation and 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  supervisory  authorities  are 
not  always  sufficiently  independent  from  the  profession,  in  particular  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  audit  report  result  in  very  short  reports  with  standard 

language, no requirements for the provision of additional information to the audited entities.  

104 

105 

This  option  is  examined  in  US  GAO  (2008),  p.  58.  See  also  House  of  Lords  (2011),  §74  and  Chambers 
(2011), p.33. 
See also House of Lords (2011), §74, in fine. 

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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. 
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. 

3. 

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 breach 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 that such dialogue takes place effectively in all circumstances. 

Specific  objective  2:  Reinforce  the  independence  and  professional  scepticism  of  statutory 
auditors and audit firms in the provision 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 services 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 non-audit services to audited entities.  

2.2  Policy  options  to  reduce  and  mitigate  the  risk  of  any  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 independence 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 due 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 overseeing the work of the statutory auditors/audit firms. 
3.  Establishing additional requirements on the internal organisation and governance of audit firms. 
4.  Combination of options 1 to 3. 

Specific  objective  3:  Improve  market  conditions  for  audits  of  PIEs  with  a  view  to 
increasing audit quality. 

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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 objective 1.3) are likely to fail to achieve specific objective 1. 
Regular  tendering.  Audited  entities  will  invite  a  minimum  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). 

1. 

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. 

1. 

2. 

3. 

4. 

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. 
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). 
Increase  transparency  on  audit  quality  and  on  audit  firms.  Audit  firms  auditing  PIEs  will  disclose  their 
financial  statements  and  more  information  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.  
Establish an audit quality certification. A pan-European system that certifies that an auditor or firm meets 
some quality requirements enabling them to carry out high quality statutory audits of PIEs. 
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  perceived  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 firms who will be allowed to provide only audit services 

(same as option 3 under objective 2.1). 
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. 
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 should be clearly defined. Both audit firms will have joint responsibility 
for the audit. 
Joint audits for all large PIEs conducted by pure audit firms.  

1.2 

1.3 

1.4 

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 

2. 

3. 

106 

audit on a voluntary basis.  
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.  
Establish  market  share  ceilings  for  large  audit  service  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). 

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  lack  of  effective  choice  of 
auditor for large PIEs and the independence problems. 

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Specific  objective  4:  Avoid  unnecessary  additional  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 aptitude test in each Member State in which they want to 
perform audits. 

1.  Mutual  recognition  of  audit  firms.  An  audit  firm  approved  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 increased 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 standards may differ in Member States. 
1. 
2. 

Introduction of clarified ISAs. With possible national add-ons but no carve-outs  
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 

2. 

States to ensure a proportionate and simplified audit for SMEs. 
Introduce  limited  reviews  for  SMEs  instead  of  statutory  audit.  Audits  could  be  replaced  by  "limited 
reviews", which are less costly, but provide a lower level of assurance compared to a statutory audit. 

Specific  objective  5:  Improve  the  effectiveness,  independence  and  EU-wide  consistency  of 
the regulation and supervision of auditors  

5.1. Policy options to ensure independence and effectiveness 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  independent  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 authorities. The mandate, powers and independence requirements 

for audit supervisors will be set at EU level, but supervision carried out nationally. 

5.2 Policy options to set up an effective EU-wide supervisory cooperation mechanism that would also ensure 
an efficient supervision of supranational 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 cooperation with EBA and EIOPA, ESMA takes the responsibility 

for EU-wide cooperation on auditor supervision matters for audits of PIEs. 

3.  New European Authority of audit supervisors. New authority specifically devoted to the supervision of the 

audit market. 

EN 

30 

   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 concern the statutory audit of PIEs; while 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  impact  as  compared  with  the  baseline  scenario  (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  the  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 business preparers/market understanding of the 
scope of audit generally 

Figure 6 

Effectiveness 

Convergence 

Cost-
effectiveness

Objectives 

Objective 1.1 

Policy option  
0. Baseline scenario 
1. Clarify and specify the scope of statutory audit to reduce the expectation gap  
2. Redefine the scope of statutory audit to fill the expectation gap 

0 
+ 
- 

0 
+ 
+ 

0 
≈  
- 

Under  the  baseline  scenario  the  expectation  gap  would  remain.  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 audit without enlarging it and specify the role of the auditor by 
requiring that auditors/ firms apply their professional scepticism throughout the performance of 
the audit. Establishing clear rules and disclosing more information on the 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;  currently  the  scope  of  statutory  audit  is  largely 
dependent on self-regulatory audit standards. Furthermore, 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  expectation  gap.  However,  the  scope  of  an  audit 
would not include the assurance on the future viability of the audited entity. Nevertheless, this 
does  not  exclude  an  assessment  of  the  "going  concern"  as  part  of  the  opinion.  This  option  is 

107 

EN 

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. 
website 
(http://www.fee.be/news/default.asp?library_ref=2&content_ref=1363). 

available 

briefing 

papers 

FEE 

The 

are 

at 

31 

   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  would  enlarge  the  scope  of  statutory  audit  to  encompass  the 
assessment  of  forward  looking  information  provided  by  the  company  and  to  provide  an 
economic and financial outlook for the company beyond the examination of the "going concern". 
This  option  is  supported  by  some  representatives  of  the  profession,  whereas  public  authorities 
and  preparers  strongly  disagree110.  Although  option  2  would  contribute  to  the  convergence  of 
rules, it is generally perceived, (at least by many respondents to the Green Paper), as not adding 
value  to  stakeholders.  Management  is  primarily  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 increase costs for audited entities without 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 

Objectives 

Policy option  
0. Baseline scenario 
1. Improve and expand the content the audit report disclosed the public 
2. Preparation of a longer and more detailed report for the audited entity 
3. Increase the communication between the auditor and the audit committee  
4. Combination of options 1 to 3. 

Effectiveness 

Objective 
1.2  
0 
+ 
++ 
++ 
++ 

Objective 
5 
0 
+ 
++ 
++ 
++ 

Convergence  

Cost-
effectiveness

0 
+ 
++ 
++ 
++ 

0 
≈ / + 
≈ /+ 
≈ /+ 
≈ / + 

Current  practice  (baseline  scenario)  is  to  prepare  template  audit  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  that  objective  1.2.  would  be  achieved  through  voluntary  efforts  by 
auditors  and  audited  entities  to  prepare  more  meaningful  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 auditors 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  perceived  as  low  by  stakeholders.  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 statutory audit. The longer report (option 2) and the increased 
communication  between  the  auditor  and  the  audit  committee  (option  3)  would  also  result  in 

108 

109 
110 
111 

112 

113 

114 

Including professional bodies, associations linked to the profession, investors, public authorities, preparers 
and others (some representatives of the profession, however, maintain that the expectation gap is unlikely 
to be closed). There is wide support as well for reinforcing professional scepticism. 
See European Parliament (2011), §16. 
The European Parliament suggests studying this issue. See European Parliament (2011), §10. 
Only in France, due to a legislative requirement, do audit reports systematically provide more information 
than the current minimum requirement in the EU rules. 
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. 
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. 
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 

32 

   EN 

 
                                                 
greater  incentives  for  higher  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  also  contributing  to  achieving  the  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  audit  report,  of  auditors 
focusing more on substance rather than on form and of enhanced dialogue between the auditor 
and the audit committee115. 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 audit committee and the supervision 
of auditors' performance. Enhanced monitoring and supervision of the audit work would lead to 
improved  quality  and  added  value  of  the  statutory  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 

Convergence 

Cost-
effectiveness

Objectives 

Objective 1.3  Objective 5 

Policy option  
0. Baseline scenario 
1. Enabling (in law) and recommending regular dialogue between 
auditors and supervisors of PIEs (banks and insurance companies) 
2. Requiring the establishment of regular dialogue between auditors and 
supervisors of PIEs (banks and insurance companies) 

0 

+ 

++ 

0 

++ 

++ 

0 

+ 

+ 

0 

+ 

+ 

The  current  situation  and  financial  crisis  (baseline  scenario)  shows  that  structured  dialogue 
between  regulators/supervisors  of  PIEs,  in  particular  financial  institutions  (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  and  supervisors  (objective  1.3)  and  EU-wide 
supervision  over  auditors  (objective  5).  Establishing  dialogue  between  supervisors  of  banking 
and  insurance  supervisors  and  the  auditors  of  banks  and  insurance  companies  received 
substantial support in the public consultation. The European Parliament also supports two-way 

115 
116 

117 

118 

See European Parliament (2011), §§9, 11 and 18. 
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  committee  members).  This  increase  may  vary  largely 
from company to company.  
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 structured dialogue with the auditors of banks.  
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 obtain 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 carries out additional direct supervisory activity. It is 
the banking supervisor who inspects the auditors work with regard to the audits of banks.  

EN 

33 

   EN 

 
                                                 
communication between auditors and supervisors of financial institutions119. Of the two options 
presented, option 1 has the advantage of giving supervisors more flexibility as to whether they 
should hold such dialogue or not depending on the different size and 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 effectively 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  bureaucratic  obligation.  The  expected  benefits  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 conflict of interest arising from the provision 
of non-audit services to PIEs 

Figure 9 

Objectives 

Objective 2.1  

Policy option  
0. Baseline scenario:  
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  

0 
+ 

++ 

++ 

Effectiveness 

Objective  3.3.  Increase  the  choice 
of audit providers for PIEs 

Convergence 

Cost-
effectiveness

0 
≈ 

- 

+ 

0 
+ 

+ 

+ 

0 
+/ ≈ 

+/≈ 

+ 

A significant proportion of the profession consider that the existing situation (baseline 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 geographical coverage of big audit firms on the 
other  hand.  This  is  the  option  supported  by  the  European  Parliament125.  Some  stakeholders 
(authorities, investors) could also accept it. This option could be supplemented with a cap on the 

119 
120 

121 
122 

123 
124 

125 

See European Parliament (2011), §§13 and 42 to 44). 
See Annex 20 for the cost estimates for this option as well as the cost estimates for such meetings – FSA 
(2011). 
Only France and Belgium have developed lists of authorised and non-authorised services. 
The  blacklist  could  include  services  such  as  preparing  accounting  records  and  financial  statements, 
bookkeeping  services,  designing  and  implementing  financial  information  technology  systems,  etc.  See 
Annex 8. 
Belgian and French lists are not identical, for instance. 
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 interests at the level of a given subsidiary, even if the 
legislation in the country of the subsidiary is stricter.  
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 

34 

   EN 

 
                                                 
NAS fees compared to the total audit fees for a given client126. However, recent evidence from 
the US127 shows that it is unlikely that option 1 would be sufficient to fully address the issue of 
audit  firm  independence128.  Option  2  would  prevent  a  potential  conflict  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 
client130.  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 longer 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 facilitate 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 deprive 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 perception, 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  the  perception  of  the 
independence  of  the  auditor.  At  the  same  time,  this  option  would  not  result  in  a  reduction  of 
eligible  audit  firms133  and  therefore,  has  positive  effects  regarding  the  audit  of  large  PIEs, 
particularly from the perspective of objective 3.3 (see below, also regarding the proportionality 
assessment and the need to adapt this option to the size of audit firms). From the point of view of 

126 

127 

128 

129 

130 

131 

132 

133 

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. 
This option is currently the situation in the US after the enactment of the Sarbanes-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. 
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-evaluations,  in  their  supervisors'  evaluations  of  their 
performance, and in agreed performance goals – for selling services to audit clients."  
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  the  corporate  or  legal  structure,  assets,  liabilities  or 
activities of that rated entity or related third party. See Regulation (EC) No 1060/2009.  
The incentive for the audit firm to rename a non-audit service so as to avoid being captured by the black list 
would disappear. 
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  argued,  however,  that  if  talented  staff  is  recruited  to 
provide NAS rather than audit services, this would have no direct effect in raising audit quality. 
For instance, information provided by Assonime, the association of Italian listed companies, suggests that 
large  Italian  PIEs,  when  implementing  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. 
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 […]". 
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 such 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 

35 

   EN 

 
                                                 
convergence, it has similar positive effects as the other 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 auditor. A combination of options 2 and 3 could 
be possible, depending on the size of the audit firm, and is the preferred policy option.  

Objective 2.2: Sub-policy options to mitigate the risk of any potential conflict of interest due to 
the existing system of "auditee selects and pays the auditor" 

Figure 10 

Objectives 

Objective 2.2:  

Policy option  
0. Baseline scenario 
1.  Stricter 
the 
appointment of auditors with an increased role for a 
strengthened Audit Committee 
2. Appointment of auditor by a third party 

the  procedure 

rules  on 

for 

0 
++ 

++ 

Effectiveness 

Objective 3: improve market 
conditions for audits of PIEs 
0 
+ 

Convergence 

Cost-
effectiveness

0 
+ 

0 
≈/+ 

+ 

≈/+ 

≈/- 

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 the independence of auditors. Improving the capacity of the audit 
committee to take informed decisions during the selection 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 provision 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  recruiting  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  majority  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 challenging as the selection 
process would be difficult to streamline across the EU. Option 2 could be considered for PIEs 
with systemic importance (e.g. some financial institutions), where the choice and performance of 
the  statutory  auditors  could  have  a  big  influence  on  preserving  market  stability  and  where 
banking  and  insurance  supervisors  have  an  interest  in  closely  monitoring  the  audit  work. 
However, it is questionable whether 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 appears 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 preserving the rights of the PIE shareholders. The introduction of 
such  a  veto  at  a  Union  level  appears  to  be  a  preferable  approach137.  Option  1,  maintaining  the 

134 

135 
136 

137 

Strengthening the requirements for the selection of audit committee members would mean that at least one 
member shall have an audit qualification and at least 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. 
It received, however, some support from public authorities for certain specific situations. 
Veto rights exist in at least the following countries: 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. 
This option could be accepted by some stakeholders, including investors, authorities and the profession. 

EN 

36 

   EN 

 
                                                 
 
possibility  for  banking  and  insurance  supervisors  to  veto  the  appointment  of  an  auditor,  is  the 
preferred policy option.  

Objective 2.3: Sub-policy options to mitigate the risk of any potential conflict of interest due to 
a "familiarity threat" 

Figure 11 

Effectiveness 

Objectives 

Objective 2.3 

Policy option  
0. Baseline scenario 
1. Mandatory rotation of an audit firm 
2.  Strengthening  the  role  of  the  audit  committee  in 
overseeing the work of the statutory auditors/audit firms 
3. Establishing additional requirements on the internal 
organisation and governance of audit firms 
4. Combination of options 1 to 3  

0 
++ 
+ 

+ 

++ 

Objective 3.1: facilitate 
switching of an audit firm
0 
++ 
+ 

n.a. 

++ 

Convergence 

Cost-
effectiveness 

0 
+ 
+ 

+/ ≈ 

+ 

0 
+ 
≈/+ 

≈ 

+ 

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  independence  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  supported  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 main arguments for and against the rotation of audit firms, 
including  the  Italian  experience).  The  baseline  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  naturally  remains  under  pressure  not  to  lose  the 
client139.  The  audit  committee,  at  its  current  level  of  low  effectiveness  (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 and requiring the rotation of audit firms (option 1) 
is  likely  to  have  a  positive  effect  on  mitigating  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 assignment). These costs could, however, be contained by 
enforcing clear rules on access to information and 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 

139 
140 

141 

See  European  Parliament  (2011),  §26.  On  the  contrary,  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). 
See above Section 2.3.2. 
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,  significantly  enhance  the  auditor's  ability  to  serve  as  an 
independent gatekeeper." See US PCAOB (August 2011), p. 9. 
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  suggests  that  audited  companies  could  be  allowed  to 

EN 

37 

   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  periodically,  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 oversee 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 effectiveneess 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 conflicts of interest. Since such policies/procedures already exist in a number 
of  audit  firms,  mainly  resulting  from  self  regulation  or  national  standards,  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  proportionality,  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  undermined  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 there 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 

Policy option  
0. Baseline scenario 
1. Regular tendering 

Objectives 

Objective 
3.1:  

0 
+/ ≈ 

Effectiveness 

Objective 2.3: mitigate the risk of 
any potential conflict of interest 
due to "familiarity threat" 
0 
+/ ≈ 

Convergence 

Cost-
effectiveness

0 
+/ ≈ 

0 
≈ 

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 new 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 Assonime to the Green Paper.  
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 place every 5 years, there stock exchange supervisor is 
considering to extend this period to 10 years. See CVM (2011). 
On the audit committee, see generally ECODA (2011). 
Investors,  public  authorities  and  academics  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.  
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  lack  of  effective  choice  of 
auditor for large PIEs and the independence problems. 

142 

143 
144 

145 

EN 

38 

   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  addressed,  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  thus  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 broadly 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  tendering  procedure  for  reasons  other  than  quality  or  price.  Less 
certainty would also mean less willingness for audit firms to invest resources 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 new audit contracts would become available 
in the market148. Requiring mandatory rotation of audit firms on its own would not ensure that 
non-Big Four firms would gain a higher market share149, but it would increase competition both 

146 

147 

148 

149 

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.  
See European Parliament (2011), §59, supporting tendering with a strong role for the audit committee in 
the tendering procedure and the requirement to invite at least two non-Big Four audit firms. 
Audited entities insist that the company should decide in certain circumstances to keep the same auditor if 
benefits of continuity are demonstrable.  
This is evidenced by the Italian experience. 

EN 

39 

   EN 

 
 
                                                 
among Big Four audit firms and also with other existing or potential non-Big Four entrants into 
the market. Mandatory rotation of audit firms would 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 supporting its enforcement (see Annex 11). 

Option 3 (the combination of mandatory rotation with tendering) is the most effective option for 
the  market  of  audits  of  PIEs:  (i)  mandatory  rotation  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 participants that every year a certain percentage 
of  PIE  audit  mandates  will  be  subject  to  competition;  (ii)  the  tendering  rules  will  require  that 
non-Big Four audit firms are also invited to tender and that a transparent 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 "familiarity threat" (see 
option 1 under objective 2.3): audit quality should improve due to the absence 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 audit firms (preparation of the bid and 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 their 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  the  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  sensitive  commercial  information.  However,  we  were 
provided informal information that, for example, responding to the tender for the audit of a large 
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 billion, the cost 
reported was in excess of €5 million. In the case of medium-sized PIEs, tender costs would be 
significantly  lower:  on  average  €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, costs would be amortised to almost a tenth of the 
above amounts), the annual tendering cost would be less than 1% of the total audit fees152. On 

150 

151 
152 

See European Parliament (2011), §59, supporting tendering 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 meeting 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.  
See the analysis regarding the policy options under objective 6.2. 
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 the potential reward: in France, the average 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 

40 

   EN 

 
                                                 
the side of PIEs, the feed-back from stakeholders 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  audited  entities.  For  firms,  increased  and  repeat 
experience with tenders will streamline 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 fees for the audited entity may be higher than the 
costs  incurred  in  organising  the  tender.  However,  since  one  of  the  objectives  of  the  tendering 
procedure  is  to  ensure  that  the  selection  of  the  auditor  is  based  on  expected  audit  quality,  it 
cannot  be  assumed  that  audit  fees  will  systematically  be  lower.  In  any  case,  in  terms  of 
proportionality,  it  is  important  to  ensure  that  rotation  and  tendering  do  not  lead  to 
disproportionate costs for audited companies 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  tendering  would  entail  (see  Annex  20),  a  period  of  9  years  between 
tendering  procedures (and implying  rotation  of  the  audit  firm)  appears reasonable. It would be 
appropriate to adjust the tendering obligation to the size of PIEs (see Annex 19). Option 3 is the 
preferred policy option. 

If  incentives  will  be  created  for  PIEs/  audit  firms  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 joint audit scheme could rotate at different 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 negative impact on the cost of audit and thus option 3 would be a cost-
effective  only  in  the  case  of  large  PIEs  or  systemically  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 costs 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  
0. Baseline scenario 
1. Prohibit contractual clauses limiting the choice of audit firm  
2. Increase transparency on audit quality and on audit firms 
3. Establish a pan European audit quality certification 
4. Combination of options 1 to 3 

Effectiveness 

(objective 3.2) 

Convergence 

Cost-
effectiveness 

0 
+/ ≈ 
+ 
+ 
++ 

0 
+ 
+ 
+ 
+ 

0 
+ 
+ 
++ 
++ 

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 the objective choice of an 
audit provider. Option 1 would have a preventive role, to avoid this practice (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 audit 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). 
Oxera (April 2006), figure 5.2, page 71. 

153 

EN 

41 

   EN 

 
                                                                                                                                                             
described under objetive 2.2: indeed, 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.  The  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 Green Paper as well as 
by  the  European  Parliament154.  Under  option  2,  more  information  would  be  available  on  the 
audit  quality  and  financial  health  of  audit  firms.  The  Statutory  Audit  Directive  required  the 
establishment of independent auditor supervisors and inspection systems. While there are some 
imperfections  in  the  regime  (see  above  section  2.5),  reinforced  inspection  mechanisms  would 
allow strengthened national audit supervisors (see below section 6.5) to monitor the actual, rather 
than perceived, quality of audits. The information resulting from reinforced inspections systems 
would be better disclosed by competent authorities and used by the relevant parties such as audit 
committees in the selection of an audit firm. Moreover, the disclosure of financial information by 
statutory auditors and audit firms (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  statutory  audit  in  question.  A  voluntarily  pan-
European  audit  quality  certification  (option  3)  would  be  a  cost-effective  option  to  increase  the 
visibility,  recognition  and  reputation  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  secondary  legislation  (i.e.  technical  standards  prepared 
by  ESMA)  would  be  necessary  to  develop  the  details  of  the  certificate.  Additionally,  such  a 
voluntary system would avoid creating a barrier to entry for small audit firms with a small base 
of  PIE  clients158.  The  question  of  visibility,  recognition  and  reputation  of  audit  firms  cannot 
readily be addressed by national licences or the cross-border 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 take the results of inspections into account. Therefore, it will consolidate 
the  inspection  findings  (and  other  information),  also  on  a  cross  border  basis.  There  will  be 
additional  costs  for  audit  firms  in  applying  for  and  obtaining  the  certificate,  but  these  will  be 
negligible  for  any  audit  firm  network  operating  across  the  Union  since  there  will  be  the 
possibility of issuing one certificate 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 available to market participants. This would in turn 
facilitate the objective choice of the statutory audit provider161. 

154 
155 
156 
157 
158 

159 

160 
161 

European Parliament (2011), §§56 and 57. 
This option is supported by the European Parliament. Ibid., §35. 
This option is supported by the European Parliament. Ibid., §58. 
See objective 5.2. 
A compulsory certification system, or even more, a special licence for the 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 compulsory certification or licence. 
This certification should not be assimilated to a national 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 perception of the quality of its services will necessarily increase.  
See objective 5.1. 
See also European Parliament (2011), §§53 on the need to better judge the quality of audit services. 

EN 

42 

   EN 

 
                                                 
Objective 3.3: Sub-policy options to increase the choice of audit providers for PIEs  

Figure 15 

Objectives 

Objective 
3.3:  

Policy option  
0. Baseline scenario 
1.1. Pure audit firms 
1.2. Mandatory joint audit 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 ownership of audit firms 
3. Establish market share ceilings for large 
audit service providers 

0 
+ 
+ 

+ 

+ 

+ 

+ 

+ 
+/- 

Effectiveness 
Objective 2.1: prevent 
any conflict of interest 
arising from the 
provision of non-audit 
services to PIEs 
0 
++ 
≈ 

Objective 2.3: 
mitigate the risk of 
any potential conflict 
of interest due to 
"familiarity threat" 
0 
≈ 
≈/+ 

≈ 

++ 

≈ 

++ 

-/≈ 
≈ 

≈/+ 

≈/+ 

≈/+ 

≈/+ 

≈ 
≈ 

Convergence 

Cost-
effectiveness

0 
+ 
+ 

+ 

+ 

+ 

+ 

+ 
+ 

0 
+ 
+/- 

+/- 

+/≈ 

++ 

+ 

+ 
-- 

Under  the  baseline  scenario  the  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-audit) services to non-PIEs. The obligation to convert to pure audit firms 
might deter these firms from entering into (or remaning in) the PIE audit market163, which would 
be  in  contradiction  with  the  intended  objective  to  enlarge  the  choice  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  provide  exemptions  from  the  pure  audit  firm 
obligation to take account of the size and dimension of the activities of the audit firms. In terms 
of costs, further to the synergies lost (see above), there would be costs resulting from the need to 
split  audit  firms.  While  this  option  is  effective  in  ensuring  auditor  independence  and  audit 
quality,  the  potential  downsides  mentioned  above  should  be  carefully  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 

163 
164 

165 

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." 
E.g. the provision of NAS might constitute a very significant proportion of their revenues. 
This sub-option differs from the French joint audit. While it also combines at least two audit firms, it would 
require that at lest one of them should not have a substantial 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. 
Not unsurprisingly, this option is supported by mid-tier firms and SMPs.  

EN 

43 

   EN 

 
 
 
 
 
 
 
 
 
                                                 
competitors  to  the  current  Big  Four  audit  firms  both  in  size  and  in  expertise166.  The  French 
experience shows that joint audits (despite the fact that the French model does not intend, and 
therefore it is not designed, to address market concentration) 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 positive 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  auditor  is  clearly  defined.  In  addition,  joint  audits 
would  contribute  to  higher  audit  quality  through  complementary  and  combined  audit  work, 
applying  the  four-eyes  principle  in  the  strategic  preparation  of  the  joint  audit  as  well  as  in  the 
analysis  of  the  findings.  This  is,  in  particular,  one  of  the  strengths  of  the  French  joint  audit 
model169, 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 audits 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  French  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 additional work that joint audit 
entails could result in audit costs increasing from 5% to 10% of total audit fees171. On the other 
hand,  large  audit  firms  are  generally  more  expensive  than  other  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 lower than those that would be otherwise 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 described caracteristics presented above with the only 
difference that it will have a more limited scope since it will be onlty applied to large PIEs in the 
financial  sector.  This  option  could  be  considered  as  being  more  proportionate  to  the  problem 
tackled  taking  into  account  that  it  will  be  applied  on  the  most  systemically  important  entities, 
representing  a  higher  risk  for  the  whole  economy  as  shown  by  the  financial  crisis  (for  more 
information on enforcement, possible exemptions and the role of ESMA see Annex 8). 

166 

167 

168 
169 
170 
171 

This  is  particularly  important  for  sectors  such  as  financial  services,  where  there  are  few  audit  firms 
providing services. Additionally, sufficient safeguards would be needed so that competition is not distorted. 
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 related 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. 
See European Parliament (2011), §54. 
Joint audit is currently required in France for the audit of consolidated accounts, whether PIEs or not.  
Joint audits were recently abolished in Denmark.  
See Annex 20. 

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44 

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Sub-option 1.6 considers the introduction of joint audit as a voluntary measure by only creating 
incentives  for  auditied  entities  to  use  it  as  a  way  to  increase  audit  quality  and  auditors' 
independence.  This  sub-option  takes  into  account  the  existing  uncertainty  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  comprehensive  data  on  the  cost  side  of  the  joint  audit  does  not  provide 
sufficiently  strong  arguments  justifying  its  mandatory  introduction,  since  it  could  result  in  an 
excessive  cost  burden  for  certain  PIEs.  Therefore,  also  considering  that  joint  audit  is  used  by 
PIEs in the finacial sector on a voluntary basis in certain countries like Austria and Sweden, it 
could  be  considered  more  economically  prudent  and  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 use 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-options in each case. In addition, joint audit 
would  help  smaller  audit  firms  to  compete  against  large  pure  audit  firms  focusing  on  audit 
services only. In terms of proportionality, however, joint 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  ownership  structures  of  audit  firms  (option  2)  will  eliminate  the 
privileged position held by statutory auditors regarding the ownership of audit firms: currently, 
audit firms can expand into non-audit business but non-auditors cannot easily enter the statutory 
audit market172. It will also allow smaller and medium-sized firms to rapidly grow and take up 
the  challenges  and  opportunities  created  by  the  mandatory  rotation,  tendering  and  joint  audit 
rules. While the provision of statutory audit services is not a capital intensive business activity, 
organic growth through capital injections by partners does not ensure, on its own, that small and 
medium-sized  audit  firms  will  have  enough  means  to  grow.  A  vast  majority  of  investors 
supported  a  review  of  the  ownership  structures.  The  replies  to  the  Green  Paper173  noted  that 
changes in ownership structures might facilitate greater competition and choice in the market. A 
few  investors  made  the  Commission  aware  that  changes  might  increase  the  risks  relating  to 
independence  and  audit  quality  and  asked  for  appropriate  safeguards  on  independence174.  The 
European  Parliament  also  believes  that  the  partnership  model  is  the  appropriate  one  for  audit 
firms, since it protects their independence175. Many other investors believed 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 managed 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  period  of  time,  however,  this  option  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 with further limitation of choice. Moreover, due 
to the fact that audit markets are national and market 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  economies  of  scale  would  be  lost,  suggesting  that 
option 3 is not likely to be proportionate. 

172 

173 
174 
175 

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  concerned  from  accessing  the  market  for 
consultancy services, thus eliminating the problem of regulatory asymmetries explained in Annex 6.  
See also IOSCO (2010), p. 16 and seq. for stakeholders' views on this issue. 
For a critical view against lifting the restrictions on ownership rules, see also Jean (2011). 
European Parliament (2011), §37. 

EN 

45 

   EN 

 
                                                 
Options  1  (sub-option1.7)  and  2  are 
individually  cost  effective,  complementary  and 
proportionate  to  each  other  in  achieving  objective  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  unnecessary  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 

Policy option  

Objectives 

Objective 
4.1:  

0. Baseline scenario 
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 

0 
++ 
++ 

+ 

Effectiveness 

Objective 5.2: Set-up an 
effective EU-wide 
supervisory cooperation 
mechanism  
0 
≈ 
- 

≈ 

Convergence 

Cost-
effectiveness

0 
++ 
++ 

+ 

0 
++ 
++ 

+ 

If  the  current  regime  remains  in  place  (baseline  scenario):  the  additional  costs  and  barriers  for 
auditors  and  firms  would  remain  since  they  will  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  burden  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 structure in every Member State and therefore lower operating costs. It 
should  be  neutral  concerning  the  quality  of  the  statutory  audit  work,  since  locally  approved 
auditors  would  carry  out  the  work  in  any  case.  This  automatic  recognition  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 statutory 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  between  supervisors.  A 
similar  option  for  statutory  auditors  (option  2)  would  be  effective  as  regards  the  reduction  of 
costs  associated  with  the  approval  of  the  auditor  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  stakeholders  (profession,  investors). 
However, most public authorities are reluctant to accept the passport. Such a mutual recognition 

176 

177 

178 

179 

180 

It  is  not  evident  that  a  valid  legal  basis  in  EU  law  could  support  such  an  option.  Therefore,  it  could  be 
subject to legal challenges, which may in turn result in legal uncertaintly. 
This results in few auditors seeking approval in other 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. 
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. 
Supervision  is,  in  principle,  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. 
See European Parliament (2011), §61. 

EN 

46 

   EN 

 
 
                                                 
system for individuals qualified as statutory auditors would raise 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  harmonisation  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 

47 

   EN 

 
 
Those arguments against the mutual recognition system are, however, weaker in the case of the 
occassional  cross-border  provision  of  services.  In  this  case,  the  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  qualifications  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 supervision of a locally approved auditor or an aptitude test, to 
obtain approval  in another Member State. Using the option of  adaptation  period would largely 
facilitate such approval. The adaptation period scheme would facilitate the cross-border approval 
of  experienced  auditors  who  would  become  familiar  with  local  requirements  through  regular 
practice rather than through formal tests. Concerning the supervision of auditors approved under 
an adaptation period, changes would be neutral since contrary to option 2, the adaptation period 
acts as a procedure to verify the auditor’s knowledge 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  transparent  national  requirements 
should  result  in  more  predictable  aptitude  tests.  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-border provision of services under option 2184. 

Objective  4.2:  Sub-policy  options  to  streamline  and  harmonise  standards  on  audit  practice, 
independence and internal control of audit firms across the EU 

Figure 18 

Effectiveness 

Objectives 

Objective 4.1. Facilitate 
the provision of cross-
border audit services 

Objective 4.2  

Convergence 

Cost-
effectiveness 

Policy option  
0. Baseline scenario 

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  

0 

++ 

+/≈ 

0 

++ 

+/≈ 

0 

++ 

+ 

0 

++ 

+/≈ 

Under  the  baseline  scenario,  there  is  no  guarantee  of  convergence  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 objectives 4.1 and 4.2: the adoption of clarified 

181 

182 

183 
184 

185 

Adoption  of  the  clarified  ISAs  (see  policy  options  regarding  objective  4.2)  and  the  use  of  international 
accounting standards by the audited entity would contribute to closing the national knowledge gap. 
In  the  cross-border  provision  of  services  situation,  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 statutory auditor him/herself as far as the conditions for 
access to the profession and organisational requirements are concerned. Hence, it would need to rely on the 
home Member State supervisor (of the country from which the service is provided).  
More convergence on these issues will increase the trust among supervisory authorities.  
This  is,  mutatis  mutandis,  the  regime  for  the  recognition  of  professional  qualifications  in  Directive 
2005/36/EC. 
See FEE (September 2011). 

EN 

48 

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ISAs implies the substitution of various national auditing standards by a uniform set of auditing 
standards within the Union and their consistent application, which would lead 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 receives very broad support among stakeholders187 
and also from  the European Parliament188, although there is not always 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 provisions 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 national legal requirements relating to the scope of 
the statutory audit of annual or consolidated accounts, meaning that those requirments are not be 
covered  by  the  ISAs.190  Option  2  would  be  less  effective  regarding  the  convergence  objective. 
Allowing Member States to freely adapt and modify the clarified ISAs to the specificities and the 
requirements  of  individual  jurisdictions  or  to  carve-out  from  the  clarified  ISAs  would  better 
respect  the  specificities  of  the  different  audit  markets  and  the  requirements  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 situations. 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  auditors  in  understanding  what  an  audit  comprises 
(because  carve-outs  would  severely  undermine  the  comparability  of  audits).  Allowing  for 
national carve-outs would be detrimental 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 financial 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  option  has  been  discarded  as  it  risks  reducing  the 
harmonisation  effect  expected  from  the  adoption  of  a  sole  set  of  auditing  standards.  The 
preferred option is option 1. 

Objective 4.3: Sub-policy options to ensure that statutory audit is adapted to SMEs needs 

Figure 19 

Objectives 

Policy option  
0. Baseline scenario 

Effectiveness 

Objective 5: Improve the 
effectiveness, independence 
and EU-wide consistency of 
the regulation and 
supervision of auditors of 
PIEs 
0 

Objective 
4.3:  

0 

Convergence 

Cost-
effectiveness

0 

0 

186 
187 

188 
189 

190 

Köhler et al. (June 2009). 
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  contributes  to  a  greater  acceptance  of  audit  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. 
See also European Parliament (2011), §§21 and 61. 
The  European  Parliament  would  favour  the  adoption  of  the  standards  by  a  European  Commission 
regulation. Other stakeholders prefer a non-binding approach. 
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 

49 

   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 requirements would only apply to medium-sized 
and  larger  companies  (although  Member  States  would  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  achieving  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  level  of  assurance  on  the  medium-sized  companies'  financial 
statements198  (compared  to  the  larger  companies)  and,  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 voluntary 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 
192 

193 
194 

195 

196 

197 
198 

199 

200 

European Commission (October 2011b). 
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).  
In the case of PIEs, the requirement to have the accounts audited applies irrespective of size. 
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. 
Medium sized companies are those which do not qualify 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).  
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 reduction 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). 
European Parliament (2011), §21. 
Indeed, stakeholders are generally attached to the level of assurance 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). 
The  experience  with  small  companies  goes  into  that  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  company  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, 
Therefore guaranteeing that "an audit is an audit". 

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   EN 

 
                                                 
small company or upon request by national legislation201. In order to ensure coherence with the 
preferred policy option under objective 4.2 (introduction of ISAs with 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 ensuring that the ISAs, which are scalable by nature202, 
are  applied  in  a  proportionate  manner  (following  professional  guidance)203  and  that  the  audit 
oversight  bodies  accept  the  proportionate  and  simplified  audits  as  a  valid  application  of  the 
auditing  standards.  Since  this  option  grants  certain  discretion  to  Member  States  in  how  the 
standards should be applied, it will not lead to increased convergence 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, the discretion granted to Member States takes 
into account the fact that small and medium-sized companies generally 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/simplified  audits  should  also  be  neutral  as  regards  supervision.  It 
may  lead  to  an  initial  investment  for  supervisors  (e.g.  training  of  inspectors/reviewers)  to 
understand the particularities of the proportionate audit of medium-sized companies, but in any 
event  this  investment  would  be  marginal  (considering  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 statutory 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 assurance provided (cf. replies to the Green Paper): 
a limited review is an assurance service, less exhaustive 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 subject to a "limited review". Also, the concept 
of  "limited  review"  is  not  harmonised  and  international  standards  on  this  issue  are  not  widely 
applied207. Therefore, in the absence of substantial harmonisation, its cross-border value would 

201 

202 
203 
204 

205 

206 

207 

The cost advantage of the proportionate audit is particularly important from the perspective of maintaining 
the attractiveness of statutory audit for small companies 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.  
See IAASB (2009).  
There is already international guidance on this matter. See IFAC (2010). 
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.  
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.  
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 sufficient 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). 
See FEE (2009) explaining the difference between two sets 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 available in the UK and Switzerland. 

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be  limited.  From  the  perspective  of  supervision,  the  issues  would  be  similar  to  the  ones 
mentioned  in  option  1.  The  combination  of  a  proportionate/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  impact  on  the  reputation  of,  and  therefore  the  value 
attached to, the proportionate/simplified audit. As a result, option 1 is the preferred option208.  

6.5. 

Policy  Options  to 
consistency of the regulation and supervision of auditors  

improve  the  effectiveness, 

independence  and  EU-wide 

Objective 5.1: Sub-policy options to ensure the independence and effectiveness of supervision 
of national statutory auditors and audit firms 

Figure 20 

Effectiveness 

Subsidiarity 
respected 

Costs 

Cost-
effectiveness 

Objectivees  

Policy option  
0. Baseline scenario  
1. Establishment of an EU oversight authority 
2.  Strengthening  national  audit 
authorities 

supervisory 

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0 
-- 
0 

Yes 
No 
Yes 

0 
- 
-- 

0 
+ 
+ 

The baseline scenario has so far failed to ensure the robustness and independence of all national 
audit  supervisors.  The  external  quality  assurance  and  supervisory  practices  are  still  very 
divergent between Member States: this does not ensure a level playing 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  structure),  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  given  the  number  of  auditors  and 
firms (see Annex 3), an EU oversight authority would be disproportionate 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  audit  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 Member States which have established robust and 
independent  (from  the  profession)  oversight  systems,  other  Member  States  will  have  to  invest 
time and resources to upgrade their audit supervision systems. However, these costs should be 
proportional  to  the  size  of  the  audit  market.  For  example,  Member  States  with  smaller  audit 
markets  could  consider  integrating  their  auditor  supervisor  into  the  existing  structures  of 

208 

209 

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 assurance service for small companies 
instead of a full audit, the Member State would be allowed to do so. 
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 

52 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
financial supervision in order to obtain economies of scale and synergies. Option 2 is therefore 
the preferred option.  

Objective  5.2:  Sub-policy  options  to  set-up  an  effective  EU-wide  supervisory  cooperation 
mechanism  that  would  also  ensure  an  efficient  supervision  of  supranational  audit  firm 
structures 

Figure 21 

Policy option 

Objectives 

0. Baseline scenario  
1. Level 3 Lamfalussy Committee type structure 
2. EU-wide cooperation on auditor oversight within ESMA 
3. New European Authority of Audit Supervisors 

Effectiveness 

e
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Cost-
effectiveness 

Costs 

0 
- 
≈/- 
- - 

0 
- 
++ 
+/ ≈ 

The continuation of the status quo (baseline scenario) on EU-wide cooperation poses a threat to 
the development of effective cooperation 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 Commission 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  the  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 costly 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  Members,  while  the  contribution  of  the  EU  budget 
would not be guaranteed210. While a Level 3 Lamfalussy committee-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 European 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 generally 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 perspective of audit supervision, taken in isolation, option 3 would be the 
most  effective  proposal.  A  European  Supervisory  Authority  specifically  devoted  to  the  audit 
market would ensure that cooperation on the oversight of the audits of non-listed companies is 
strenghten and streamlined. It would have similar a mandate and powers to those of the ESAs, 

210 

211 

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. 
Article 54(2) of the ESMA Regulation. 

EN 

53 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
thus  enlarging  the  number  of  European  supervisory  authorities  in  financial  markets.  However, 
compared  to  the  ESMA  (ESAs)  structure  (option  2),  option  3  presents  the  disadvantage  that  it 
would require a high level of coordination 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 disproportionately costly compared to 
option 2. In the case of ESMA (ESAs), the administrative structures and premises are already in 
place:  only  the  staff  resources  devoted  to  policy  development  would  be  needed  (these  staff 
resources  may  be  reallocated  from  other  activities).  In  the  case  of  a  new  Authority,  the  cost 
would be significantly higher: specific premises and an administrative organisation (e.g. board, 
chairman,  executive  director,  administrative  staff)  would  be  required  in  addition  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 statutory audit. Hence, option 2 would be the most appropriate 
structure  to  enhance  EU-wide  cooperation  on  audit  supervision.  This  is  supported  by  the 
European Parliament212. Option 2 is the preferred 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  framework  and,  in  doing  so,  enhancing  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 said, it is important to distinguish audit from 
other  domains  to  the  extent  that  audit  is  a  statutory  obligation  for  companies;  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  financial  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  initiatives  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 accurate financial statements are produced.214 

External to the Company 

212 

213 

214 

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." 
When  preparing  this  impact  assessment,  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). 
When preparing this impact assessment, account has been taken of Commission proposal to replace the 4th 
and 7th Company Law Directives. See European Commission (October 2011a) and European Commission 
(October 2011b). 

EN 

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Credit rating: for issuers of 'tradeable' debt an external rating 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, normally 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,  they  are  complementary  and  to  some  extent 
interconnected. Any failure in corporate governance, 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 whether the existing concept of "public-interest entity" 
should  be  extended  beyond  banks,  insurance  companies  and  issuers  of  securities  admitted  to 
trading in regulated markets to also encompass other financial institutions. The importance of the 
shadow financial system for financial stability has grown in recent years. This has been reflected 
in  new  (e.g.  directives  on  alternative  investment  funds,  payment  institutions,  e-money 
institutions) or modernised (e.g. UCITS directive or MIFID as regards investment firms) rules. 
Therefore,  it  appears  appropriate  that  auditors  conducting  the  statutory  audit  of  the  financial 
statements  of  certain  types  of  financial  institutions  be  subject  to  the  stricter  requirements 
applicable to the audit 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  explained  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  address  all  the  problems 
described  above.  The  objectives  presented  in  section  4  can  only  be  achieved  with  a  legally 
binding  instrument,  either  a  regulation  or  a  more  detailed  directive.  The  advantages  and 
disadvantages of a regulation or a directive 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  possible  confidence  of  the  relevant 
stakeholders as to the content of the rules to be respected and that the rules followed in practice 
are closely aligned with the objectives 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  detailed, the  population concerned 
by  the  rules  is  relatively  small  (PIEs,  auditors  of  PIEs)  and  a  high  level  of  harmonisation 
possible; (ii) a modification of the existing directive is a suitable and proportionate solution for 
the policy options relating to the approval and registration of statutory auditors and audit firms (a 
regulation would not be an appropriate legal instrument because of the 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 framed at the national level; (iii) both instruments 
are equally effective, certain and provide a similar harmonisation level concerning the adoption 

EN 

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   EN 

 
of  international  auditing  standards;  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  

effectiveness 

certainty 

common framework 

Policy option  
Policy options relating to the audit of PIEs, including supervision 

Regulation 
Directive 

++ 
+ 

++ 
+ 

Policy options relating to the audit of SMEs 

Regulation 
Directive 

+ 
+ 
Policy options relating to the approval and registration of statutory auditors and audit firms 
-- 
+ 

Regulation 
Directive 

≈ 
++ 

-- 
+ 

Policy options relating to the 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. investors, analysts etc); audited 
entities (PIEs and SMEs); and providers of statutory audit services (i.e. Big 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  statutory  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 impact 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 for each of the five general objectives 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 impacts 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  policy  options  (see  Annex  18  for  an  overview  of  the  cumulation  of  the 
measures). The package of preferred policy options has been developed 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 more reliable, transparent, meaningful and timely 
information at an acceptable cost about the veracity of financial statements of companies".  

EN 

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   EN 

 
 
It  is  expected  that  some  of  the  measures  (mandatory  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  statutory  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.  The  providers  of  NAS  would  no  longer  have  to 
compete with firms with captive audit clients. It is expected that 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  firms  will  be  encouraged  to  build  up  additional 
capacity and will eventually be able to serve the 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 coordination at EU level, as well 
as the regular dialogue between auditors of large financial institutions and their supervisors, will 
ensure a more efficient flow of information, 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, especially for large PIES in the financial sector; it is at this level that 
the  impact  of  negligently  or  poorly  audited  financial  statements  would  be  most  severe  on 
investors,  on  financial  stability  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  identified  objectives,  both  individually215  and  in  combination  (see 
Annex 19 for a more detailed examination of the proportionality of the measures). Conversely, 
actions will be adjusted to the size and dimension of the “smaller” actors, be it auditors/firms or 
PIEs (see Annex 16). Regarding the measures that would apply to both the audit of non-PIEs and 
of  PIEs,  the  proposed  actions  remain  principle-based,  building  on  existing  legislation  and 
continuing to grant discretion to Member States in adjusting rules to the national situation. 

8.2. 

Impact on different stakeholders groups  

i) Investors and other users of financial statements. Investors will benefit substantially from the 
implementation  of  the  preferred  measures.  The  benefits  will  result  from  the  enhanced  role  of 
auditors  in  meeting  the  expectations  of  relevant  stakeholders,  in  particular,  the  availability  of 
more  information  on  the  audit  findings  as  well  as  the  rationale  for  confirming  the  “going 
concern”  hypothesis  underlying  the  audit  opinion.  Investors  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 enforcement mechanism would be critical to ensure 
that the benefits of changes are realisable.  

215 

See above for each policy option. 

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ii) Public interest-entities. Ensuring auditor accountability towards shareholders and those who 
are  charged  with  the  governance  of  the  entity  will  help  refocus  statutory  audit  as  a  “service” 
provided  not  only  to  the  entity,  but  also  to  its  investors,  lenders  and  other  stakeholders. 
Combined with robust and clear independence rules, 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.  The  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  services,  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, tendering procedures or the provision of joint 
audit). Where SMEs which are not PIEs are audited216, Member States will be required to ensure 
that  the  application  of  the  audit  standards  is  adapted  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 stand still, they would 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 under pressure to reduce their profitability levels 
in  line  with  the  levels  of  other  internationally  operating  audit  firm  networks.  However,  the 
changes would create real incentives for restructuring 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 changes will be seen as an opportunity 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  contenders  for  the  very  top  segment  of  the  PIE 
market.  In  any  case,  the  risks  of  failure  of  a  “major”  firm  and  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 economies of scale and synergies would be lost due 
to  the  split  between  audit  and  non-audit  services.  However,  incentives  for  cross-subsidiation 
between audit and non-audit services will be removed. The Big Four audit firms will certainly 
benefit from the measures to facilitate the cross-border recognition of auditors' 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  within  the  network),  from  more 
coordinated and effective supervision as well as the application of common standards on audit 
practice, independence and convergence of firms' internal controls. Big Four audit firms will also 
benefit  from  enhanced  trust  in  statutory  audit  through  better  audit  reports  and  explanations  of 
how they conduct their audits.  

216 

It must be noted that, according to European Commission (October 2011b), only "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. 

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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 provided more with information on audit quality and 
audit  firms,  confirming  that  non-Big  Four  audit  firms  have  the  capacity  to  perform  audits  of 
PIEs. The incentives to apply joint audits by all PIEs could also be beneficial 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 cross-border recognition of auditors' 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 (they are more present in France, where they may be 
the  small  partner  in  an  audit  consortium),  so  the  impact  of  most  of  the  proposals  on  them  is 
limited. In any case, account of their size has been taken for the more demanding measures, such 
as the coversion into pure audit firms 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 the ban on the provision of non-audit services, the 
oversight  and  enforcement  of  independence  rules  would  become  easier  and  less  costly.  When 
performing  inspections  of  PIEs  audits,  adequate  coordination  would  be  needed  to  ensure  that 
audits  throughtout  the  Union  are  conducted  in  compliance  with  auditing  standards  and  other 
applicable rules. The clear cooperation 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 preferred options. Indirectly, however, all the measures would lead to 
a more efficient functioning of the market, which in turn may enhance confidence, foster more 
investment and thus postively affect the level of employment.  

Discussions  at  the  EESC  have  highlighted  the  importance  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  direct  environmental  impact  they  are 
extremely  useful  in  providing  assurance  that  any  liabilities  related  to  environmental  remedial 
work  or  claims  have  been  adequately  identified  as  well  as  quantified.  The  quantification  of 
environmental claims against BP as a result of the oil spill in the Gulf of Mexico is a noteworthy 
example. 

217 

The  imposition  of  the  pure  audit  requirement  with  respect  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. 

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(iii)  Administrative  burden.  Only  some  of  the  proposed  measures  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  burdens.  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 services in other Member States. Administrative 
burden at the level of SMEs will also be reduced, 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 become statutory auditors in the EU; (2) there are 
marginal  improvements  regarding  the  audit  of  consolidated  accounts  (i.e.  with  a  view  to 
facilitating  the  audit  of  consolidated  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  authorities  is  encouraged,  but  the  rules  on  such 
cooperation (e.g. transfer of audit 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 longer 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 directly applicable (i.e. those containing obligations for PIEs and 
for auditors of PIEs), but a vacatio legis period should be established, 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 may 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 legislative measure. Secondly, the rules on tendering and rotation 
should be introduced in a way that would ensure that all changes of auditors do not 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  authorities  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 preferred policy options imply a reinforcement of the 
national  supervisory  authorities.  This  should  facilitate  the  monitoring  of  compliance  with  the 
rules by the statutory auditors/audit firms and also the audited entities. Considering, however, the 
level  of  detail  of  the  preferred  policy  options  that  apply  specifically  to  the  audit  of  PIEs  and 
which would be set out in a directly applicable legal instrument, it appears appropriate to provide 
for a clear and specific sanctioning regime as regards those specific measures219. Such a regime 

218 

219 

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. 
This would be consistent with European Commission (December 2010).  

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would  include  rules  on:  the  identification  of  the  key  infringements,  the  minimum  level  of  the 
maximum amount of the administrative fines, the 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 the 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  rules;  (2)  the  regular  monitoring 
activity by the Commission, as guardian of the Treaty (focusing on the empowerment of national 
supervisors) and the national authorities (on quality assurance reviews of auditors/firms; market 
monitoring,  in  particular  of  market  concentration  levels;  and  threats  to  the  continuity  of 
operations  of  audit  firms).  ESMA  would  prepare  a  report  on  supervisory  issues;  and  (3)  the 
evaluation of the policy.  

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A full evaluation of the effects of the policy choices could, however, only be undertaken in the 
longer  term.  Some  of  the  important  policy  choices  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 therefore to carry out such evaluation in two steps: (i) 
first  a  preliminary  examination  by  ESMA  (possibly  followed  by  an  interim  report  by  the 
Commission), on selected issues: 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  period  (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.  

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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/internal_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-sized enterprises and practitioners 

8. International Co-operation  

220 

Individual responses are also published on the same website. 

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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 issues related to the statutory 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.  This  is  the  highest  level  of  responses  of  any 
consultation  in  the  Internal  Market  and  Services  area  since  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  majority  of  the  responses  are 
from within the European Union, there have been a number of responses from third countries. 

This summary has been prepared to provide a qualitative synthesis of the analyses carried out 
of the various responses. Although there are some very detailed responses, not all respondents 
have  replied  to  all  the  questions.  In  fact,  there  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  consultation,  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  and  rejection  as  well  as  the  stakeholder  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 particular respondent in a category 
as  there  may  well  be  instances  where  the  respondent  could  have  been  included  in  another 
category. In any case, in order to facilitate a trail back to the individual 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' position 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  responses  is  the  substantial  interest  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 interest elicited amongst respondents. 

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Stakeholders 

87%  of  replies  (from  the  total  of  688  replies)  were  received  from  the  European  Union 
Member  States  (see  figure  1).  The  consultation  attracted  groups  representing  either  pan 
European  (19  replies)  or  worldwide  (22  replies)  interests.  Respondents  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). 

Non-EU countries; 
48

World-wide 
interests; 22

EU-wide interests; 
19

Individual EU 
Member States; 
599

Figure 1. Geographical distribution of the replies to the Green Paper 

There were 599 replies received from 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 replies from member states. 

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Member States

Figure 2. Distribution of replies by a Member State [DE: 291 replies] 

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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

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Singapour
Republic of Korea

Figure 3. Responses from non-EU countries 

Non-EU country

In terms of the interest groups, a majority of responses represented the interests of the audit 
profession – 59% of the total number of responses (see figure 4). It should however be noted 
here that there were more than 200 replies identical 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 general (21% of the total number of responses). 
There has also been good representation of public authorities 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. 

Audit committees; 
9

Public authorities; 
57

Users; 22

Academia; 28

Other; 20

Preparers 
(companies); 145

Audit profession; 
407

EN 

65 

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Figure 4. Responses by interest groups 

Among the representatives from the audit profession, sole practitioners and other small audit 
firms  were  the  most  responsive  amounting  to  286  replies  (see  figure  5)  with  German  small 
and  medium  practitioners  being  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 international networks, a vast majority of which form part of the 
European Group of International Audit Firms (EGIAN) or/and of the Forum of Firms, were 
also well represented. 

Professional 
associations; 94

Big Four network 
firms; 4

Mid-tier firms; 23

Small and 
medium size 
practices; 286

Figure 5. Responses representing the interests 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 (see figure 6). The financial industry has been 
the most responsive economic sector (20 replies). There were only two companies identified 
as SMEs, though their views were also reflected by some professional associations. 

Other business 
representatives; 14

Associations of 
companies; 49

Other companies ; 60

Financial services 
provider; 20

SMEs; 2

EN 

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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 interests of employees and analysts, respectively 
3 and 1 replies. 

Trade 
unions/employees ; 
3

Analyst; 1

Investors; 18

Figure  7.  Responses  representing  the  interests  of  the  users  of  audited  financial 
accounts 

GENERAL VIEWS 

There  is  general  acceptance  of  the  Green  Paper.  The  issues  raised,  despite  having  been 
discussed before, are of particular interest in light of the recent financial crisis – a crisis that is 
still affecting the economies of many nations. 

There persists an expectation gap between the actual scope of audit and the 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 requirements 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 auditor more with expectations of 
the general public by enhancing 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 preparers do not see a real need to redefine the 
scope or role of auditors, some of them also agree that improvements could be achieved by 
redefining  the  role  of  audit  regarding  the  veracity  of  financial  statements  as  well  as  an 
increase in the quality of audit. Some respondents find audit too focused on tax issues rather 
than on a true and fair view of the financial statements. 

EN 

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1. ROLE OF THE AUDITOR 

The Profession 

Professional bodies and associations linked to the profession 

The  majority  reply  that  reporting  on  the  financial  health  is  not  the  purpose  of  an  audit  and 
that, currently, audits are not fit for this purpose. The current role is to express 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  more  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  especially  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 replied 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 committees could report more on discussions with 
auditors, e.g. key areas of judgements and audit issues in the financial 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 further clarification and now may not be the right time to introduce 
CSR requirements. In any case, a prohibition 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  damaging  audit  quality.  A  few  suggested  more 
interim reporting. 

Suggestions  to  enhance  audit  quality  include  enhancing  auditor  involvement  with  the  front 
end  of  the  annual  report,  providing  greater  assurance  outside  the  report  and  improving 
communication between auditors, regulators & company. 

Quite  a  number  of  respondents  feel  that  the  role  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 concern and the key risks associated with the entities' business 
model) and the auditor could then provide assurance on this information. 

One respondent proposed an explicit provision in EU Regulation that EU auditors act in the 
public interest when performing statutory audits. 

EN 

68 

   EN 

 
The majority of respondents believe there is a need to better set out the role, purpose, scope 
and  limitations  of  audits.  The  interaction  of  audit  with  other  functions  in  the  corporate 
governance framework should be better understood and awareness of concepts such as going 
concern  and  emphasis  of  matter  should  be  enhanced.  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  audit,  several  topics  run  the  risk  of  negatively 
impacting  audit  quality,  imposing  disproportionate  costs  on  business  and  affecting 
shareholder's  rights.  They  also  alert  the  Commission  on  the  global  implications,  including 
potential  unintended  consequences  of  any  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 accordance with the relevant reporting framework. 

Mid Tier Firms and Small and Medium 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 view 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,  already  includes  forward  looking  information.  In 
order to enhance the value of audits, it is proposed 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  underline  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  valuation  of  assets.  Moreover,  investors  suggested  that  auditors  should 
improve their reporting by explaining what they have done during an audit. 

All investor representatives agree 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  clients.  Mentoring,  junior  staff  training, 
continuing education, reducing the amount of junior staff per audit partner should also be seen 
as  crucial  to  developing  and  reinforcing  scepticism.  The  promotion  system  should  also  be 
well  adapted  to  support  the  use  of  professional  scepticism.  Investors  also  think  that 
independent inspections should focus more on the use of professional scepticism and in this 
regard it is important that review notes are retained by auditors. An audit committee should 
also  be  in  a  position  to  assess  the  professional  scepticism  applied  by  auditors.  Fair  value 
valuation and going concern validations are specific areas where investors believe the use of 
professional scepticism should be improved. 

EN 

69 

   EN 

 
Most investors were of a view that audit reports should be more qualitative 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  audit  terminology  used  in  audit  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  consider  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 accounting standards, but seems never to be applied 
in practice. 

While few thought audit firms could be in a position 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  the  current  role  of  an  auditor  is  an  assurance  concerning 
historical information, not forward looking information. 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  expectation  gap,  to  the  extent 
possible, by explaining the methodology used by auditors to users. More detailed suggestions 
on the matter included: the auditor should explain the purpose of performing 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 those controls. Auditors 
could also explain how they have arrived at certain judgments, evaluations and decisions. It 
was also suggested that an "extended" audit report, which contains further description of the 
methodology  applied  and  which  is  made  available  to  the  audited  entity  and  relevant 
supervisory authority, could be helpful to reduce the expectation gap. 

Most respondents agree that professional scepticism should be reinforced. 

Some respondents proposed greater transparency 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 gather 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 Member State levels are evidenced by an assessment 
of the economic impacts that demonstrates that the benefits exceed the costs. 

EN 

70 

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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  assessing  the  future  solvency  of  companies. 
However, they support improving the communication of the auditor towards stakeholders on 
this  issue:  further  discussion  on  improving  the  explanatory  notes  to  the  going  concern 
assessment would be welcomed. 

There could be benefits in auditors better explaining audit methodology to users, but this may 
not necessarily reduce the expectations gap. They agree that there is room for improvement on 
professional  scepticism.  CEIOPS  would  encourage  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 communication between auditors, audit committees 
and external stakeholders. Improved communication, 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  protection  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 limited. Form dominates over substance. 

More  transparency  is  needed  on  audit  quality,  and  the  reporting  of  it  by  regulators  and 
oversight bodies.  Expanding the content of  the auditor's report  is critical not  only to reduce 
the expectations gap but also to provide greater incentives for high quality audits. A qualified 
audit report should send a clear and important message to the market place; this is not the case 
at the moment. Fraud detection should be indispensible as it's invariably linked to the major 
disappointments with the present system. 

Additional information should give more prominence and visibility on work performed by the 
auditor  (also  linked  to  the  expectation  gap),  consider  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 the 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, expert and independent opinion 
of  the  auditor".  In  reality,  auditors  are  nominated  and  their  remuneration  is  fixed  by 
management.  To  give  power  back  to  shareholders,  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 public by enhancing audit reporting and disclosure on audit. The 
current  legal  framework  is  not  sufficient  to  safeguard  auditor  independence  and  structural 
changes are needed. Inspections in some countries show that 'big' does not necessarily equal 
'high quality'. 

EN 

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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 overall 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 never be considered to 
provide  comfort  on  the  financial  health  of  companies  since  this  would  transform  audit 
opinions  into  credit  ratings.  There  is  also  strong  support  for  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 the financial statements based 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 assessment (e.g. equity analysts). 

Over the past years, one can see a shift in the focus 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  have  noticed  a  shift  from  this  focus  to 
examining compliance with IFRS. 

With regard to the ideas of the Commission to come back to a more basic and substantive test 
of the balance sheet, they can only support them in relation to the 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 favour of this idea for medium-sized, 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 internal 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 preparers 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 regard 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  expectations  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  respondents  are  of  the  opinion  that  although  some 
measures  may  be  helpful  in  strengthening  the  role  of  audit,  several  topics  run  the  risk  of 
negatively impacting audit quality, imposing disproportionate costs on business and affecting 
shareholder's rights. The role of the regulators should also be revisited because many auditors 
have increased their focus on checklists in order 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 instead of providing a professional judgment. 

EN 

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On the audit methodology issue, all respondents admitted that the audit methodology should 
be  better  explained  to  the  public  and  the  users  but  this  explanation  should  not  be  included 
within the audit opinion. 

On the audit report, the preparers seem to agree that their language should be revisited (very 
defensive  and  difficult  to understand). The opinion should clearly  state the responsibility of 
the  auditor  and  the  work  performed.  Auditors  should  provide  more  detailed  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  beneficial  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  signal  does  not  make  sense.  Conversely,  if  the  auditor  fails  to 
qualify his opinion when it should have been qualified, audit regulators or inspectors should 
be  able  to  file  law  suits  or  impose  disciplinary  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 auditor has planned and conducted 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).  Companies  should  use  specific  experts  if  they 
seek some sort of assurance in this field. 

2. INTERNATIONAL STANDARDS ON AUDITING (ISAS) 

Views are mixed on the possible adoption of ISAs in the EU. 

The Profession 

Professional bodies and associations linked to the profession 

There  is  very  broad  support  for  binding  ISA  adoption.  Some  professional  bodies,  however, 
suggested  that  Member  States  should  be  allowed  to  introduce  modifications  to  ISAs  which 
would  be  needed  because  of  national  legislation/practice  (e.g.  company  law).  It  was  also 
suggested  that  ISAs  should  include  the  international  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 latter are catered for already in the standards 

EN 

73 

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themselves as well as the guidance provided. However, there are a number of responses from 
SMPs requesting sensitivity to the additional administrative burden. 

Investors 

Most investors supported application of consistent auditing standards 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 stakeholders can reasonably satisfy themselves that standards 
are  proving  to  be  'fit  for  purpose'.  It  was  believed  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 governance of the auditing standard 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 constituency 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 beneficial to retain an ability to 
amend standards prior to endorsement, should the European public interest so require. 

Academics 

There is support for  ISAs  in  the EU  through regulatory binding standards.  The risk  of  non-
application of ISAs by the US should, however, be taken into account. 

Preparers, businesses and organisations of companies 

Companies, nevertheless, expressed less enthusiasm for ISAs. Companies are not opposed to 
the  application  of  ISAs  by  EU  binding  instruments  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  IAASB  with  participation  of  all  interested 
parties.  At  the  moment  the  composition  of  the  board  is  unbalanced  (mainly  accountants) 
which may lead to conflicts of interest. Secondly, these reservations relate to the need to put 
in place a specific assessment and adoption approach 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  especially  in  a  context  where  ISAs  were 
drawn up by a body which is not accountable to European institutions. 

Explicitly  allow  amendment  of  standards  that  would  include  requirements  on 
companies. 

The  adoption  procedure  should  be  in  direct  cooperation  with  stakeholders  (in 
particular  companies)  to  make  sure  that  ISAs  do  not  set  up  new  corporate 

EN 

74 

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responsibilities. The ISAs should remain 'legal environment-neutral' to facilitate the 
international convergence of external auditing standards towards ISAs. 

– 

The adoption procedure of the ISA should not limit the responsibility of auditors. 

Some companies have also expressed their concern about the risk of ISAs pushing the core of 
audit  into  being  even  more  "compliance-driven"  as  opposed  to  focusing  on  the  veracity  of 
financial  statements.  ISAs,  as  they  stand  now,  would  inappropriately  describe  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 dimension associated to the adoption of ISAs. 

For SMEs and SMPs, there is a willingness to further explore this area. Some of the replies 
express  concerns  that  ISAs  should  be  further  developed  to  be  better  suited  for  SMPs  and 
SMEs. 

3. GOVERNANCE AND INDEPENDENCE OF AUDIT FIRMS 

3.1.  Appointment of auditors (Q.16/17) 

Profession 

Professional bodies and associations linked to the profession 

Although most respondents replied that the Code of Ethics and/or effective audit committees 
are sufficient to address any potential independence risk, others acknowledge the conflict in 
the current status quo. Although the vast majority rejects appointment by third parties, some 
did state that in very exceptional cases (systemically important entities) there could be some 
third party involvement e.g. the right of a supervisor to veto the appointment 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  appointment  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  perform  specific  procedures  in  relation  to  the  audited  entity.  The 
same  network  also  explains  that  such  an  arrangement  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 previous auditor has resigned due to disagreement 
with  the  entity  then  there  may  be  some  justification  for  third  party  appointment  of  the 
replacement auditor. 

EN 

75 

   EN 

 
The  Commission  has  also  been  requested  to  investigate  the  possibility  of  establishing  an 
independent  body  to  work  with  Audit  Committees  in  reviewing  their  audit  appointment 
procedures,  with  an  explicit  agenda  for  ensuring:  regular  and  open  tendering,  independence 
from management in setting audit remuneration and reduction 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 should be strengthened 
with regard to the appointment 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  segment  of  listed  companies  a  third  party,  maybe  a 
regulator integrated within a European supervisory body, could appoint 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 the 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  that  a  number  of  measures  already  exist  to 
mitigate that risk and that further measures could be invoked if necessary. 

Most investors oppose "a scenario where the audit role is one of statutory 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 scenario would seriously undermine the accountability 
of  auditors  and  their  relationship  with  shareholders.  However,  some  investors  noted  that  in 
some  specific  cases  the  intervention  of  a  third  party,  such  as  a  supervisory  authority,  in  the 
appointment of a new auditor might be necessary, such as in the situation 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 with these conflicts, the following measures were pointed out: 

(a) 

Shareholders should always approve the auditor. 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 hinges on the quality of 
their long-term relationship with the management board, the responsibility to decide 
on  the  auditor's  (re)appointment  should  no  longer,  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 

76 

   EN 

 
fully engaged in the audit process. It should provide a check and balance not only to 
prevent the conflict being abused, but also to improve their reporting to shareholders. 

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 the auditor in respect of audit and non-audit fees for, say, 
the last three years, the length of tenure of the audit firm, the date the audit was last 
put out to tender, and the company specific reasons why the Board is recommending 
election/re-appointment. 

There should be more transparency regarding the change in auditor 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  reasons  for  the  change  such  that  there  is  no 
meaningful transparency, which is most unsatisfactory. 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  assured  that  there  are  no  relevant  matters  that  they  should 
take  into  account  when  assessing  the  change  and  voting  on  the  appointment  of  the 
new auditor. 

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. 

An independent regulator should have a power to disagree on the entity's selection of 
an auditor and consequently the entity should appoint another auditor. 

(c) 

(d) 

(e) 

(f) 

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 and 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 remunerated 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 "right of veto", which is regarded as an efficient way to 
control the procedure of auditor's appointment. 

Academics 

The  company's  audit  committee  should  consist  entirely  of  independent  directors.  The  audit 
committee should be responsible for setting the auditor's remuneration. Some competition on 

EN 

77 

   EN 

 
fees should exist, but one should avoid other services being used to make up for lower audit 
fees. A floor for fees, checked by supervision could 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  audit  in  order  to  have  profitable  consulting 
assignments) but lowballing can be addressed by more transparency on fees paid, limited non-
audit  services,  fixed  period  appointment  of  auditors  and  approval  of  non-audit  services  by 
shareholders  or  non-executive  directors  or  supervisory  boards.  If  non-audit  services  were 
limited, this would no longer be the case. 

Preparers, businesses and organisations of companies  

Many businesses think the appointment 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  general  assembly.  They  nevertheless  believe  that 
there  may  be  certain  instances  where  a  regulator  could  require  the  company  to  elect  a  new 
auditor in the case that the current auditor was proved to be unable to perform any audits. 

3.2 

Rotation (Q18) 

Profession 

Professional bodies and associations linked to the profession  

There is a general rejection of mandatory firm rotation. A few respondents 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  engagement  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 directive 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 rotation 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 views. Some investors did 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  that  in  Austria,  Germany 
and Italy for cooperative banks, which are members of a national/regional cooperative association, the 
auditor  may  be  appointed  by  this  association  and  not  by  the  audit  cooperative.  According  to  their 
members, this appointment model preserves the independence of the auditor. 

EN 

78 

   EN 

 
                                                 
believed that more transparency from companies 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 support the introduction of mandatory rotation. Others stated, 
however, that such a measure would be beneficial, 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 whether 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  the  old  and  new  firms  so  that  information  and 
knowledge  can  be  transmitted  from  the  previous  auditor  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 external 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  independence.  Rotation  combined  with 
fixed  period  appointment  would  decrease  any  bias  in  the  auditor's  judgement  to  please 
management/shareholders to assure 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  independence;  it's  surprising  that  this 
route was chosen in the Directive. 

Auditor appointment for a fixed 5-7 year period, with mandatory rotation of both audit firm 
and  auditor  after  that  period  combined  with  limiting  the  dismissal  of  an  auditor  to  cases  of 
material reasons and with the approval of Courts 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  suggests  that  mandatory  audit  firm  rotation  may  be 
beneficial but only under very specific circumstances, 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  research  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 that motivate management to manage earnings. 

3.3 

Non-Audit services (Q.19) 

Profession 

Professional bodies and associations linked to the profession  

EN 

79 

   EN 

 
The  vast  majority  also  say  no  to  the  prohibition  of  non-audit  services.  A  few  respondents 
indicated  that  perhaps  there  could  be  some  restrictions  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 audit services to audit clients. Moreover, the Big 
Four  believe  that  any  such  provision  would  weaken  the  general  economic  independence  of 
audit  firms  and  the  range  of  skills  they  can  offer;  they  also  believe  that  adding  new  limits 
would  run  against  the  grain  of  the  Commission's  aims  to  remove  administrative  and  legal 
burdens to encourage the service sector, a growth area for Europe. It has also been argued that 
the provision of services to a non audit client has no impact on the statutory 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  effect,  the  Big  Four.  The  Big  Four  support  EU 
adoption  of  the  International  Standard  on  Quality  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  interest  in  having  stricter  rules  in  the  case  of  systemic  financial 
institutions in order to enhance general confidence in the audit of such companies. One view 
is: 'Accordingly, we would support a review of the position in respect of 'systemic companies' 
as part of a comprehensive set of measures addressing this segment of the market." 

Disciplinary sanctions have also been raised in the context of a firm providing services that 
are  proven  to  conflict  with  independence  standards.  Moreover,  it  is  considered  that  audit 
committees should ensure that fees for non audit services do not contain a hidden subsidy for 
a low audit fee and there is a call for greater transparency from the audit committees on fees 
and on appointment decisions. 

Mid Tier Firms and SMPs  

The  prohibition  of  non-audit  services  by  audit  firms  is  considered  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 "safe 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  natural  connection  with  the  audit  must  be 
discouraged or even forbidden as they are the main source of conflicts of interest and provide 
the audit firm with a competitive advantage which is unwarranted. 

(g) 

(h) 

EN 

There  should  be  requirements  to  establish  appropriate  protections  to  mitigate  the 
risks of some non-audit services. 

There should be much better disclosure of the non-audit services carried out by the 
auditor so that shareholders can raise concerns with auditors and audit committees on 

80 

   EN 

 
the  basis  of  useful  and  relevant  information.  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 that are allowed and those 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 independence in that the external audit firm will 
in  effect  audit  its  own  work  and  may  be  taking  on  management  functions.  Some  investors 
noted the importance of uniformly implementing the independence requirements throughout 
the EU. 

Public Authorities 

It was argued that the provision of non-audit services increases the auditor's knowledge of the 
company  and  thus  also  increases  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 that agreeing on the list of prohibited non-audit services could 
be a way forward. 

In  the  case  of  listed  companies,  PIEs  and  financial  institutions  it  would  be  appropriate  to 
allow  the  audit  committee  to  take  responsibility  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 necessarily 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  clients.  The  latter  would 
allow  the  audit  firm  to  keep  the  necessary  expertise  without  losing  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' perception of auditor independence. Research shows, however, that not 
all non-audit services have a negative effect on the perception of independence. 

For certain non-audit services, however, a ban appears inevitable. Knowledge spillovers from 
consulting services are not used to increase audit quality but to reduce audit costs. Consulting 
services  may  be  beneficial  to  the  auditor  and  client,  but  the  ensuing  lack  of  independence 
harms the interests of external stakeholders. A lack of independence can 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 independence in appearance. The recipient of financial reports 
(such  as  investors)  must  believe  in  the  auditor's  independence,  i.e.  independence  in 
appearance  is  required.  For  most  advisory  services,  but  not  all,  a  significant  impairment  of 

EN 

81 

   EN 

 
perceived  auditor's  independence  was  found.  Internal  separation  of  audit  and  non-audit 
services within an audit firm does not increase the perceived independence. 

The maximum percentage of non-audit services acceptable to investors is 25% of fees paid by 
the  audited  company  to  its  auditor.  There  is  also  broad  support  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-audit 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  the  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  limit  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 any one client (in Denmark 20%, in Germany 30 
or 20%) are not enough to exclude the risk of economic dependence. The loss of such a large 
client  could  threaten  the  existence  of  the  audit  firm  seriously,  and  thus  undermine 
independence  significantly.  For  this  reason,  a  limit  of  10%  is  considered  adequate.  In 
addition, it has been pointed out that the risk of economic dependence 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  proposed  that  the  Commission  addresses  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 associations linked to the profession  

Many respondents consider that alternative structures could be explored but the independence 
of auditors should be safeguarded and auditors' liability regimes would need to be revised. 

EN 

82 

   EN 

 
Big Four  

Both  Big  Four  and  Mid  Tier  Firms  support  the  exploration  of  alternative  structures  on  a 
voluntary  basis.  On  alternative  structures,  especially  with  regard  to  access  to  third  party 
capital  there  is  recognition  that  the  capital  would  flow  to  the  dominant  firms.  One  non  Big 
Four  firm  suggests  a  radical  review  of  rules  relating  to  the  ownership  and  funding  of  audit 
firms, with a view to encouraging new investment in audit firms outside of the Big Four. 

Mid Tier Firms and SMPs  

A vast majority of SMPs, especially those in Germany, speak out against allowing audit firms 
to raise capital from external resources; external interests could threaten the independence of 
auditors. 

Investors 

A vast majority of investors agreed that it is in the public interest, particularly for larger audit 
firms  and  irrespective  of  their  ownership  arrangements,  to  have  audit  firms'  financial 
information  available  to  the  public.  Among  other  things,  financial  information,  including 
information on legal claims, should help to evaluate 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  disaggregate  "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 informed 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  replies  noted  that  changes  in  ownership  structures 
might facilitate greater competition and choice in the market. 

Academics 

Essential  information,  regarding  internal  quality  review  procedures,  partner  remuneration, 
promotions  is  often  missing  from  transparency  reports.  There  should  be  transparency 
regarding the composition of audit networks, ownership 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  have  a  fundamental  (negative) 
impact on the ability of the group auditor to manage the group audit on a coordinated basis. 

Investors 

Investors  supported  Commission  views  and  suggestions  regarding  group  audits  that  would 
make sure that there are no barriers or constraints for the group auditor for the purpose of a 
group  audit  to  have  access  to  the  information  of  auditors  of  subsidiaries.  However,  some 

EN 

83 

   EN 

 
emphasized that "it needs to be handled carefully to avoid further entrenching the position of 
the Big 4". 

Academics 

Group auditors should have access to the reports and other documentation of all auditors of 
components of the group. 

EN 

84 

   EN 

 
4. SUPERVISION 

The Profession 

Professional bodies and associations 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;  increased  communication  is  favoured  especially  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 European Supervisory Authorities as this could 
lead  to  divisions  within  the  audit  profession  and  variation  in  oversight  practices  and 
ultimately audits. 

There is also support on strong two way communication between auditors and regulators for 
the audit of systemically important financial institutions. There is a suggestion that auditors 
could contribute to discussions at the newly created European Systemic Risk Board. 

Mid-Tier Firms and SMPs 

There is support for EU wide co-ordination. Some SMPs welcome 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 consultation and communication between the auditors of 
large listed companies and the regulators, the dialogue should be a two-way process so that 
supervisors also alert auditors regarding particular areas of concern. 

Public Authorities 

There  should  be  agreements  with  third  countries  to  share  information,  subject  to  adequate 
confidentiality requirements, and reliance on countries’ inspections processes, 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  the  new  European  Supervisory  Authorities, 
except that the European body should have inspection powers on the national supervisors and 
if needed also on the firms supervised by the latter. 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 

85 

   EN 

 
For  international  purposes  the  European  body  would  be  the  direct  interlocutor  for  non-EU 
supervisory  bodies,  and  would  channel  their  questions  and  coordinate  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-ordination of audit oversight bodies. 

5. 

CONCENTRATION AND MARKET STRUCTURE  

5.1 

Systemic risk? (Q.27) 

The Profession  

Professional bodies and associations 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  and  although  the  risk  is  not  similar  to  that 
presented by banks there is risk, in such an instance, to the continuity of audit services and to 
the  choice  of  auditor  in  the  market.  The  Big  Four  believe  that  this  risk  emanates  from  the 
litigation  environment  coupled  with  the  lack  of  effective  liability  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  market  poses  a  systemic  risk  to 
market stability. They go on to say that the choice is often even less than four as a company 
may not wish to appoint its competitor's auditor. Also, another auditor may be providing non 
audit services and may thus not be eligible to provide audit services. 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  term,  with  a  consequent  adverse  effect  on  the 
capital markets. It is likely that such effect would be greater than previous 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 regulators, be it national or international. 

Investors 

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The degree of concentration in the audit market and the Big Four dominance of the audits of 
most international companies are not good for competition and choice. If the Big Four were to 
be reduced to the Big Three this could undermine financial stability and market confidence, 
though not necessarily cause an economic crisis. Investors considered that a more open and 
vibrant  audit  market  would  serve  the  public  interest  better.  The  Commission  was  urged  to 
move with a greater sense of urgency and 'provide bold leadership in order to make serious 
headway  towards  a  sustainable  audit  market,  which  would  be  consistent  with  maintaining 
financial stability and strengthening 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 should be ‘diluted’. Among the positive side of joint 
audits, there would be benefits to non big four firms such as: 

• 

• 

• 

• 

Obtaining  necessary  experience  for  audit  of  public 
corporations, audits in specific areas, etc. 

interest  entities, 

large 

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 results 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  competition  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 risk 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 and possibly among investors  more  generally. Thus the existing 
high barriers to entry, leading to high market concentration, can be seen as contributing to the 
risk  of  wider,  systemic  failure  whereby  the  failure  of  a  network  could  have  substantial 
negative effects on the wider economy. 

An  independent  regulator  believes  that  the  degree  of  concentration  represents  a  systemic 
risk to capital markets. It suggests that public and investor confidence would be undermined 
and equity, bond and lending markets would fall significantly as a result: 'In the longer term, 
existing problems around lack of choice would be exacerbated Additionally, 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 

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severe  market  disruption.  However,  they  do  not  see  such  risks  as  being  the  same  as  those 
posed  by  the  banking  sector  during  the  financial  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 action in this area should 
be taken at the international level. 

Academics 

Concentration is a risk, though whether 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  effectiveness  of  supervisory  action  (a  supervisor 
confronted with unacceptable behaviour by a major audit firm would be very hesitant to take 
action  against  that  firm  if  that  action  could  trigger  a  crisis,  possibly  with  systemic 
consequences). This might also create "moral 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 situation might create serious difficulties for the 
certification of the annual account of multinational listed entities (three global networks is not 
enough). Amongst the reasons pinpointed is that the firms cannot themselves be considered as 
systemic  but  they  recognise  that  the  situation  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 associations 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.  There  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-ordination  problems.  They  also  believe  that  such  an 
artificial  attribution  to  smaller  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 that joint audits are tried and tested and have 
worked in keeping concentration lower in France 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  next  level  of  the  market  than  in  other  Member 

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States. Some believe that the participation of more 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  benefit  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.  Greater  understanding  of  more  firms  delivering  high 
quality services becomes a virtuous circle leading over time to more firms with a meaningful 
share of a larger company audit market; in spite 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  major  non  Big  Four  firm  claims  to  have  gained  important  joint 
audit  assignments  in  France,  Denmark,  Cyprus  and  Belgium  where  it  believes  it  would 
otherwise have had limited chance of winning the sole audit. 

Investors 

There  are  divergent  views  among  investors  regarding  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  fearing  an  increase  of  costs  of  audits,  the  dilution  of 
responsibility or the lack of beneficial effects. Other investor representatives however did "not 
fear  the  use  of  audit  firm  consortiums  on  a  more  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 deliver a quality audit and challenge 
each other to improve their approach". 

Public Authorities 

If  joints  audit  were  introduced  in  the  EU,  the  Commission  should  establish  clear  lines  of 
responsibility  for  the  joint  audit  opinion  as  well  as  to  consider  a  resolution  mechanism  for 
differences in opinion between consortium members. 

For  CESR  and  CEIOPS,  joint  audits  should  not  be  considered  as  a  means  for  dealing  with 
audit  market  concentration  or  making  the  market  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, the 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  requirements.  Whilst  some  companies  consider  that  the 
appointment of more than one auditor has some benefits (e.g. collusion with the management 

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would  be  more  difficult),  for  a  majority  of  companies,  the  benefits  do  not  outweigh  its 
disadvantages (e.g. costs incurred 15-20% higher than for conventional audit, overlapping of 
audit parts, etc.). 

The pros of the French joint audit are that they enhance audit quality: four eyes are better than 
two. The negatives relate to the 'burdensome nature' 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  companies,  as  the  additional  costs  would  be  hardly 
'bearable' for smaller entities. In any case, companies always have the choice of two auditors. 

5.3  Mandatory rotation and retendering (Q.29) 

The Profession  

Professional bodies and associations linked to the profession  

There  is  strong  rejection  of  mandatory  rotation  but  support  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  should  have  a  policy  for  re-tendering  and  clear 
criteria for selection, more transparency on reappointment. 

Big Four  

The  Big  Four  oppose  limitation  of  continuous  engagement  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 directive 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 rotation explaining that it will increase costs, 
impair  audit  quality  without  any  certainty  on  being  able  to  address  concentration.  On 
tendering they are more supportive, 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 criterion. It has also been suggested that 
tendering could be mandatory for listed companies 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  tendering  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  critical  because  the  current  practice  of  seeking 
shareholder  approval  at  the  AGM  is  usually  too  late  to  have  sufficient  influence  on  the 
decision.  An  example  of  the  UK  public  sector  audit  market  has  been  provided  where 
independent bodies representing the 'owners' monitor audit appointments, audit quality, value 
for money and tenders. 

Public Authorities 

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Mandatory rotation of audit firms may have the opposite effect to saving cost and enhancing 
audit quality. It might also increase the probability of collusion among audit 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  CEBS  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 committees, should include strict internal rules 
(call for candidates, independent selection, objective comparative analysis, selection on stated 
reasons submitted to shareholders). 

Preparers, businesses and organisations of companies 

On  rotation,  preparers  cannot  support  the  mandatory  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  communicated  to  make  sure  that  some  of  potential 
candidates  are  not  discriminated  against.  Finally,  audit  fee  should  not  be  decisive  in  the 
choice  of  auditors.  Selection  criteria  should  also  include  a  mix  of  parameters  that  are 
individually decided from company to company: for example, expertise in a specific domain, 
the  geographical  coverage,  strong  foothold  in  some  regional  markets,  the  network,  size  of 
specific audit team and audit fees. Re-tendering should 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 moment as the offer is not sufficient. 

5.4 

"Big Four bias" (Q.30) 

The Profession  

Professional bodies and associations 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  should  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  over  a  long  period  of  time,  through  consistent  high  quality 
performance,  which  implies  huge  investments  in  human  resources  and  enabling  technology 
and lack of circumstances that endanger a reputation. 

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There is support for some sort of European certification of quality. 

Investors 

Most  investors  believed  that  greater  transparency  was  needed  to  address  the  issue  of  a  Big 
Four bias: 

(i) 

(j) 

companies  and  their  audit  committees  should  report  their  policy  approach  towards 
audit tendering; 

audit  committees  and/or  the  board  should  make  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 should be disclosed. 

Public Authorities 

CESR explained that greater transparency on audit quality, both by auditor oversight bodies 
and from the audit firms themselves, could help to address the Commission’s question about 
whether  the  perceived  extra  level  of  comfort  in  appointing  a  Big  Four  firm  is  due  to 
“perceptions” rather than “merit”. CEIOPS sees value in the European quality certificate but 
warns about the possible creation of entry barriers for smaller firms. 

Academics 

Audit quality for the Big Four and mid-tier is comparable, but investors perceive the Big Four 
as  providers  of  better  quality.  However,  one  possible  reason  for  investors  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 the 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 associations linked to the profession.  

Many respondents agreed that regulators could prepare 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 develop contingency plans to address concerns of a 
disorderly failure. 

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Investors  

Most  investors  agreed  that  it  would  be  sensible  for  audit  firms  or  regulatory  authorities  to 
develop contingency plans, including 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 financial 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 should be developed that, as a minimum, seek 
to: 

• 

• 

• 

reduce the risk of a firm leaving 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, the contingency plan will need to include: 

• 

• 

• 

• 

A mechanism whereby firms inform regulators of any emerging issues which could 
threaten a national firm and/or its network. 

Arrangements  aimed  at  stabilising  the  firm  and  preventing  immediate  collapse 
through the exodus of clients and staff while an investigation is carried out. 

An  objective  incident  assessment  to  understand  the  root  cause  of  the  incident, 
whether the issue is systemic to the firm and/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 decision on whether the relevant regulator(s) 
felt  able  to  provide  continued  support  to  the  firm  and  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 and other market participants, then the plan 
would need to include provision for an orderly transition of clients and staff to one or 
more other firms.' 

CESR, CEIOPS and CEBS agree that contingency planning should be developed to mitigate 
these  risks.  CESR  suggests  that  planning  should  be  done  at  sector  level  and  by  individual 
audit  firms  and  audited  companies.  As  the  largest  audit  firms  are  part  of  international 
networks international co-ordination might be necessary. 

5.6 

Rationale for consolidation (Q.32) 

The Profession 

Professional bodies and associations linked to the profession 

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A  few  comments  were  made  on  possible  actions  that  could  be  taken  instead  of  seeking  a 
reversal of the past consolidation; promote growth of mid-tier firms, confine consolidations in 
the future. 

Big Four 

On the consolidation over the past two decades, the Big Four believe that the rationale is still 
valid and point to the fact that 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 was 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 firm 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  restructure  itself  into  two  or  more  smaller  entities,  or  where  the 
directors  of  large  entities  and  advisers  would  turn  away  from  the  Big  Four  and  appoint 
smaller firms in the current configuration. 

There  is  a  radical  suggestion  to  impose  restrictions  on  market  share:  a  monitoring  group 
comprised  primarily  of  investors,  and  possibly  regulators,  could  place  tapered  limits  on  the 
absolute number of audits that any one firm can carry out for defined sectors e.g. largest 100 
companies ranked by market capitalisation 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 should be a reversal or a forced break up of the 
Big Four, which in itself could disrupt the 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  audit  firms  to  restructure  their  operations  - 
possibly  by  demerger  or  other  strategic  combinations.  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 will 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 period 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  initiative.  One  should  not  be  prescriptive  as  to  how  many  firms  and 
networks there should be but eight or more feels like a sensible benchmark to use. To achieve 
this objective the Commission should co-ordinate its efforts with its global counterparts." 

Some respondents also suggested creating "pure" audit firms by the splitting up of audit and 
non-audit services. 

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It  has  been  submitted  that  investors  and  regulators  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 the 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 jurisdictions, taking into account the 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 practical perspective auditors must know local 
tax and legal requirements as well as language. Responses are generally quite 8positive to a 
European  passport  if  more  harmonisation  is  achievable.  However,  even  those  who  favour 
'maximum  harmonisation'  see  difficulties 
to  assess 
implementation  of  the  directive;  moreover,  education,  qualifications  and  training  should  be 
harmonised. Those in favour of the European passport state that differences in national laws, 
tax rules and language remain problematic. This could, however, be a long term project. 

this  area.  Time 

is  needed 

in 

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 would be detrimental to audit quality, where cross-
border liability issues may also arise. Some investors were sure that the cross-border mobility 
is not an issue for Big Four audit firms but could 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  requirements,  whilst  "avoiding  a  rush  to  the 
bottom". 

Public Authorities 

Many  respondents  stated  that  co-operation  between  professional  bodies  on  auditor 
qualifications  should  be  encouraged.  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  help  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  could  make  it  hard  to  move  to  maximum 

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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  (recognising  aptitude  to 
perform audits of large listed companies) could be of interest, but the requirements should be 
designed to avoid the creation of entry barriers. 

Academics 

Harmonisation has an important role but Member State differences should not be overlooked. 

Preparers, businesses and organisations of companies 

Although  some  support  the  idea  of  a  single  passport,  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  MEDIUM  SIZED  ENTERPRISES  AND 
PRACTITIONERS 

The Profession 

Professional bodies and associations 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  development  of  less  stringent  rules  of  internal  control  and 
suggest  that  the  oversight  of  firms  could be  provided  by  local  professional  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 closely 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 immediate needs of their SME clients. To ensure 
appropriate  conditions  for  the  development  of  such  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  allow  SMPs  to  reduce  their  administrative  costs 
while helping them to service their clients better. 

Others support exemption thresholds but remain reserved about a second tier audit, especially 
if  any  alternative  assurance  implies  a  de  facto  audit,  albeit  under  another  name.  On  the 
question of a 'safe harbour' there are mixed views as independence should remain the pillar of 
all audits, big or small. 

Investors 

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Among  those  who  responded,  there  was  a  general  understanding  that  "an  audit  is  an  audit" 
and  that  there  is  no  value  for  investors  in  having  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)  audited  consolidated 
accounts.  Nevertheless,  some  investors  thought  that  a  limited  review  could  be  possible  for 
SMEs. There was no appetite among investors to support "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 audit is an audit' and should not be diluted. In 
any case, ISAs are scaleable. Exempted companies 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 prohibit non audit services, SMPs should have 
a  "safe  harbour".  Very  few  supported  a  less  burdensome  quality  control/oversight  although 
one  replied  that  it  should  be  less  burdensome  and  could  be  done  by  the  local  professional 
body.  

CESR believes that international cooperation with audit oversight bodies in third countries is 
fundamental  to  addressing  the  issues  arising  from  the  supervision  of  large  groups  which 
operate  in  multiple  jurisdictions  and  from  the  supervision  of  global  audit  networks.  CEBS 
supports  discussion  with  international  partners  and  suggests  that  an  international  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  issue  were  split  between  those  in  favour  of  a 
limited audit and those arguing that a limited audit is unnecessary and might cause confusion 
amongst the stakeholders. Most respondents agreed that the provision of non-audit 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 wider range of non-audit services than may be 
provided to listed companies, provided that the degree of the auditor’s objectivity is clear. 

The more general view of the majority of respondents 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  currently  the  case.  It 
was, however, noted that internal control rules should 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 for all corporations. Most SMEs don't need 
one.  For  private  entities,  the  users  (banks,  lenders,  other  users)  should  decide  what  type  of 
service is needed. 

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Preparers, businesses and organisations of companies  

SMPs feel that they are surrounded by an ever growing regulated environment which may not 
necessarily  suit  their  practice  or  the  immediate  needs  of  their  SME  clients.  To  ensure 
appropriate  conditions  for  the  development  of  such  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  allow  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 financial stability responsibilities. 

Professional bodies and associations linked to the profession 

There  should  be  enhanced  mutual  reliance  (recognition)  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  would  lead  to  increase  international  cooperation 
between  audit  regulators  as  this  is  obviously  the  only  efficient  way  to  conduct  audit 
inspections of large networks. However, they recognise the difficulty of the task as it concerns 
the flow of sensitive business and commercial data. 

EN 

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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 Parliament 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 regarding the conduct of 
statutory audits in the EU.  

(2) the EU legal texts that require a statutory audit. Directive 2006/43/EC does not 
establish  when  the  statutory  audit  of  annual  and  consolidated  accounts  should  be 
undertaken.  

(1) Directive 2006/43/EC 

This  Directive  establishes  a  minimum  level  of  harmonisation  concerning:  (a)  rules  on  the 
approval, continuing education, mutual recognition and registration of statutory auditors and 
audit firms; (b) the professional ethics principles to be applied by statutory auditors and audit 
firms  to  guarantee  their  objectivity  and  independence;  (c)  the  audit  standards  to  be  applied 
and the reporting obligations; (d) principles of oversight of statutory 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-interest  entities  and  (g)  relations  with  third 
countries.  Finally  (h),  this  Directive  is  complemented  by  two  important  Commission 
Recommendations on external quality 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 carried out by statutory auditors 
or audit firms which are approved by the Member 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 Directive 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 repute 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  equivalent  level,  following  which  he  or  she  has 

222 

OJ L 157, 9.6.2006, p. 87. 

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completed  a  course  of  theoretical  instruction,  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 procedure requires passing an aptitude 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 State concerned and must cover 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  approved  statutory  auditors  and  audit  firms  are 
recorded in a register which is accessible to the public and which contains certain minimim 
information  concerning  the  statutory  auditors  and  audit  firms.  They  must  also  ensure  that 
statutory  auditors  and  audit  firms  notify  the  competent  authorities  in  charge  of  the  public 
register without undue delay of any change of information contained in the public register. 

(b)  Professional  ethics  principles  to  be  applied  by  statutory  auditors  and  audit  firms  to 
guarantee their objectivity and independence 

The Directive sets out some general principles concerning professional 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  function,  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 audited entity and is not involved in the decision-
taking of that entity. A statutory auditor or an audit firm must not carry out a statutory audit if 
there is any direct or indirect financial, business, employment or other  relationship  between 
the statutory auditor, audit firm or network and the audited entity. 

All  information  and  documents  to  which  a  statutory  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 determined 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  auditing  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  auditing  standards  within  the  EU.  However,  the 
Commission has not yet taken a decision on this issue. As a result, at present, Member States 
are  free  to  determine  the  applicable  audit  standards;  these  may  be  international  auditing 
standards or other.  

The outcome of the audit process is the audit report prepared by the statutory auditor or the 
audit firm. Where an audit firm carries out a statutory audit, the audit report must be signed at 

EN 

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least  by  the  statutory  auditor  carrying  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 statutory audit which shall at least identify the 
auditing standards in accordance with which the statutory audit was conducted; 

(c) 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  and,  where  appropriate,  whether  the  annual 
accounts  comply  with  statutory  requirements;  the  audit  opinion  shall  be  either 
unqualified,  qualified,  an  adverse  opinion  or,  if  the  statutory  auditors  are  unable  to 
express an audit opinion, a disclaimer of opinion; 

(d) a reference to any matters to which the statutory auditors draw attention by way 
of emphasis without qualifying the audit opinion; 

(e) an opinion concerning the consistency or otherwise of the annual report with the 
annual accounts for the same financial year.  

(d)  Principles  of  oversight  of  statutory  auditors  and  audit  firms'  compliance  with  their 
obligations;  

The Directive establishes some obligations regarding the supervision of statutory auditors and 
audit firms.  

Concerning  quality  assurance,  Member  States  are  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  resources  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  assessment  of  compliance  with  applicable  auditing 
standards  and  independence  requirements,  of  the  quantity  and  quality  of  resources  spent,  of 
the  audit  fees  charged  and  of  the  internal  quality  control  system  of  the  audit  firm.  Quality 
assurance reviews shall take place at least every 6 years.  

Also, effective systems of investigations and penalties must be put in place in order to detect, 
correct and prevent inadequate execution of statutory audits. 

In addition, Member States must organise an effective system of public oversight for statutory 
auditors and audit firms, governed by non-practitioners 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  and  registration  of  statutory  auditors  and  audit  firms;  (b)  the 
adoption  of  standards  on  professional  ethics,  internal  quality  control  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 Treaty on the annual accounts of certain 
types of companies) 

EN 

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auditing,  and  (c)  continuing  education,  quality  assurance  and  investigative  and  disciplinary 
systems. 

National competent authorities are required 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 dismissed 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 and consolidated accounts; and (d) reviewing and 
monitoring  the  independence  of  the  statutory  auditor  or  audit  firm,  and  in  particular  the 
provision  of  additional  services  to  the  audited  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-interest 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 particular 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  State  may  approve  a  third-country  auditor  as  a 
statutory auditor if that person has furnished proof that he or she complies with requirements 
equivalent to those laid down in the Directive.  

The  Directive  also  establishes  rules  concerning  the  cooperation  between  national  competent 
authorities and authorities of third countries concerning the supervision 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  entities224  provides  guidance  to  Member 
States on establishing an independent and effective system of inspections on the basis of the 
Directive on Statutory Audit. In essence, this Recommendation gives more responsibilities to 
the public  oversight bodies,  strengthens the independence  of inspection teams and  enhances 
the transparency of the results of inspections of individual audit firms. 

224 

OJ L 120, 7.5.2008, p. 20. 

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The  main  purpose  of  the  Commission  Recommendation  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 established 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 address public-interest entities 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 accounts audited under EU legislation 

1. General requirements according to the legal form (harmonisation of company law) 

Company 

4th 
Directive 
(78/660/EEC) on the annual accounts of 
certain types of companies 

Law 

Company 

7th 
Directive 
(83/349/EEC) on consolidated accounts 

Law 

Requires  the  audit  of  annual  accounts  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. 

Requires  the  audit  of  'consolidated  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 registered office is situated (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  needs  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. 

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Existing legal framework 

Main features 

2. Specific Requirements for public-interest entities  

Requires  the  audit  of  the  annual  financial  statements  and  of  the 
consolidated  accounts  of 
transferable  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. 

issuers  whose 

Requires  the  audit  of  the  financial  statements  that  form  part  of  the 
prospectus published when issuing securities. 

2.1. Listed companies 

on 

the 
2004/109/EC 
Directive 
harmonisation 
transparency 
of 
requirements  in  relation  to  information 
about 
issuers  whose  securities  are 
admitted  to  trading  on  a  regulated 
market 

Directive 2003/71/EC on the prospectus 
to  be  published  when  securities  are 
offered  to  the  public  or  admitted  to 
trading  and  Commission  Regulation 
implementing 
(EC)  No  809/2004 
Directive 
regards 
as 
2003/71/EC 
information  contained  in  prospectuses 
as  well  as  the  format,  incorporation  by 
reference  and  publication  of  such 
prospectuses  and  dissemination  of 
advertisements 

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  consolidated  accounts  of  direct  life 
reinsurance  undertakings.  Some 
and  non-life 
undertakings are excluded from the scope due to their size or type of 
operation or activity of the undertaking.  

insurance  and 

Directive 2005/68/EC on reinsurance  

Directive  2002/83/EC  concerning  life 
assurance 

Council  Directive  92/96/EEC  on  the 
coordination  of  laws,  regulations  and 
administrative  provisions  relating  to 
direct life assurance 

the  audit  of  annual  and  consolidated  accounts  of 
Requires 
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).  

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).  

Partially repealed by Directive 2002/83/EC. 

Council  Directive  91/674/EEC  on  the 
annual 
consolidated 
accounts of insurance undertakings 

accounts 

and 

Adapts  the  4th  and  7th  Company  Law  Directives  to  the  annual  and 
consolidated accounts of insurance undertakings.  

2.3. Credit institutions 

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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 
consolidated 
accounts  of  banks  and  other  financial 
institutions 

accounts 

and 

Adapts  the  4th  and  7th  Company  Law  Directives  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  complies  at  least  with  the  minimum 
conditions set out in the Statutory Audit Directive.  

2.4. Other financial institutions: investment firms, payment institutions, UCITS and e-money institutions 

Directive  2004/39/EC  on  markets  in 
financial instruments  

Requires the audit of annual and consolidated accounts of investment 
firms. 

Directive  2007/64/EC  on  payment 
services in the internal market  

on 

Directive 
the 
2009/65/EC 
coordination  of  laws,  regulations  and 
to 
administrative  provisions  relating 
undertakings  for  collective  investment 
in transferable securities (UCITS) 

Directive  2009/110/EC  on  the  taking 
up, pursuit and prudential supervision of 
the  business  of  electronic  money 
institutions  

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. 

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. 

Article 3(1), by references to Directive 2007/64/EC, requires the audit 
of accounts of e-money institutions. 

EN 

105 

   EN 

 
 
 
ANNEX 3. APPROVED STATUTORY AUDITORS AND AUDIT FIRMS 

This  annex  presents  an  estimation  of  the  number  of  statutory  auditors  and  audit  firms 
approved in EU Member States.  

Figure A3.1 

Member State 

Statutory Auditors 

Audit Firms 

Source of data 

(4 operating as sole 
practitioners) 

see below UK for combined figures 

Belgium 

Bulgaria 

Czech Republic 

Germany 

Denmark 

Estonia 

Greece 

Ireland 

Spain 

France 

Hungary 

Italy 

Cyprus 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

1044 

636 

1338 

13866 

4479 

344 

977 

5655 

14500 

3324 

140000 

450 

173 

397 

421 

967 

513 

94 

357 

2631 

1835 

200 

Belgian  public  oversight 
authority 

Bulgarian  Commission  for 
public  oversight  of  statutory 
auditors (CPOSA). 

Date 

April 2010 

June 2011 

Ministry of Finance 

June 2011 

WPK 

Danish  Commerce 
Companies Agency 

January 2011 

and 

June 2011 

Estonian  Auditors  Activities 
Register 
http://www.audiitortegevus.e 

March 2010 

24 

Greek oversight body 

June 2011 

1354 

Spanish Registry 

December 
2010 

June 2011 

4500 

2000 

21 audit firms 
registered with 
Consob (for PIEs). 
Approximately 300 
audit firms registered 
with CCRC. 

250 

160 

189 

100 

36 

CNCC 

Chamber of auditors 

2011 

CNDCEC (for auditors) 

May 2011 

CONSOB 

FEE 

LACA 

June 2011 

July 2006 

2011 

Chamber of auditors (LCA) 

2011 

CSSF 

2011 

Ministry of Finance 

March 2011 

15 audit firms registered with AFM for 
audits of PIEs 

AFM 

466 auditors or firms registered with AFM 

June 2011 

Austria 

Poland 

Portugal 

156 

3529 (practicing) 

1159 

378 

1804 

189 

QKB 

June 2011 

Ministry of Finance 

March 2011 

CMVM  &  Ordem  dos 
Revisores Oficiais de Contas 

December 
2010 

EN 

106 

   EN 

 
 
 
 
Romania 

3241 

Slovak Republic 

818 

Slovenia 

Finland 

219 

1448 

851 

237 

52 

74 

Chamber of auditors 

FEE 

Udva.sk 

Anr.si 

AB3C 

Sweden 

4100 

125 

Supervisory  Board of  public 
accountants 

December 
2009 

June 
(auditors) 

2006 

June 
(firms) 

2011 

December 
2009 

January  2011 
(auditors) 

August  2009 
(firms) 

June 2011 

United Kingdom 

27050 

7843 

Auditregister.org.uk 

June 2011 

Joint register IE/UK 

EN 

107 

   EN 

 
 
 
ANNEX 4. OVERVIEW OF RECENT INSPECTION REPORTS OF AUDITOR OVERSIGHT BODIES  

This  annex  presents  an  overview  of  recent  inspection  reports  of  Auditor  Oversight  Bodies 
from  5  of  the  6  biggest  EU  economies226;  France,  Germany,  Italy,  the  Netherlands  and  the 
UK.  These  reports  show  that  audit  quality  is  not  a  given  and  that  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  statutory  audits  are 
currently  carried  out  in  the  French  market  for  audit  services.  As  a  general  point,  the  H3C 
noted that there is a lack of formalisation and documentation in the performance of statutory 
audit:  

"Ce  défaut  est  patent  en  ce  qui  concerne  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 
formalisée,  voire 
seuil  de  signification  n’était  pas  suffisamment  explicitée, 
pertinente."227 

During the inspections carried out  in  2009, 272 audit  engagements  for  PIEs  were  examined 
and for more than 12% (35 audit engagements for listed companies and financial institutions) 
concerns were raised regarding the lack of sufficient information 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 auditor or audit firm: 

"Tout  d'abord,  le  secrétaire  général  a  relevé  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  contrôleurs  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  des  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  erreurs  dans  l’information  financière  fournie 
par l’entité et n’en a pas tiré les conséquences quant à l’opinion émise. Enfin il a été 
noté pour six mandats dont deux concernant des 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  audit  is  performed.  Thus,  the  recommendations 

226 

227 
228 

Concerning  Spain,  there  is  no  publicly  available  information  concerning  the  findings  of  the  Spanish 
oversight body. 
Haut Conseil du Commissariat aux Comptes (2009), p. 54. 
Ibid. p. 56. 

EN 

108 

   EN 

 
                                                 
directed  at  those  audit  firms  with  systemic  deficiencies  in  the  quality  of  their  audits,  were 
focused, among others, on the respect of the rules 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 regarding (i) the system of quality control, (ii) the performance of 
audit engagements in the context of the financial 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 
(objections), were made231.  

independence, 

the  following  findings 

•  "conclusive assessment of the 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 letter 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 the 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  the  independence  and  to  identify  possible 
conflicts of interest, are not consistently guaranteed. 

•  breach  of  internal  firm  policies  on  the  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  information  in  the  databases  set  up  for 
monitoring the obligations for internal rotations not guaranteed for all clients and 
professionals subject to rotation requirements."232 

229 
230 
231 

Abschlussprüferaufsichtskommission (2010). 
Ibid., p.3. 
The assessment of the risks associated 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  checked  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 

109 

   EN 

 
                                                 
Concerning  partner  evaluation  and  remuneration,  it  was  observed,  in  individual  cases,  that 
"the  partner  appointment,  assessment  and  remuneration  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  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 also carried out by persons who were themselves 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 individual circumstances had taken place. In many 
cases, the risk that the management may suspend control measures that appear effective was 
not counteracted with suitable audit procedures.  

Concerning the audit of the Going Concern assumption, repeatedly, a lack of sufficient and 
appropriate  audit  procedures  was  recognisable  with  regard  to  the  assessment  of  the  forecast 
procedure and the underlying assumptions which the management had made as a basis for its 
positive  going  concern  assumption,  although  the  client’s  economic  situation  would  clearly 
have required this. 

Concerning the audit of the measurement of goodwill and other 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  methods  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  the  business  plans  had  not  been  recognisably 
assessed in terms of its plausibility. Furthermore, 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 implementation of a risk-
based audit approach, that in some cases there was a lack of appropriate risk assessment at the 
beginning of the audit, making it impossible 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 control activities which were relevant for the audit 

232 
233 
234 

Abschlussprüferaufsichtskommission (2010), p.6. 
Ibid. p. 7. Emphasis added. 
Ibid. p. 9. 

EN 

110 

   EN 

 
                                                                                                                                                         
was  performed.  In  other  cases,  insufficient  understanding  of  the  control  measures  of  the 
company was gained during the assessment of the internal control system. 

Consequently,  essential  information  on  the  controls  was  not  documented  in  the  working 
papers.  Likewise,  errors  occurred  in  the  conduct  of  the  effectiveness  test  of  the  internal 
controls;  among  others,  insufficient  and  inappropriate  evidence  had  been  obtained  for  the 
implementation  of  the  controls  by  the  responsible  persons  in  the  audited  company,  and  the 
scope of random tests was not sufficient to be able to derive a conclusion 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 control system on the one hand and the determination of 
the  type,  scope  and  timing  of  the  substantive  audit  procedures  on  the  other  hand  were  not 
coherent  on  the  basis  of  the  audit  working  papers.  This  was  particularly  significant  in 
situations  where  the  result  of  the  audit  of  the  internal  control  system  should  have  led  to  an 
extension  of  the  substantive audit procedures initially planned.The inspection  of  substantive 
audit  procedures  repeatedly  revealed  findings  with  regard  to  obtaining  and  evaluating 
confirmations of balances. Concerns were also raised on the fact that the selection, dispatch 
and  response  to  inquiries  were  not  under  the  auditor’s  control,  no  additional  audit  evidence 
was  obtained  in  cases  of  a  confirmation  date  deviating  from  the  balance  sheet  date  and  no 
appropriate  alternative  audit  procedures  were  performed  for  unanswered  confirmation 
requests. 

In  some  cases,  it  was  also  not  comprehensible  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 ensure the enforcement of professional standards, 
in  particular  disciplinary  proceedings.  On  average,  25%  of  the  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,  supervised  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  application  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 
236 

Ibid. p. 11 and seq. 
See Consob (2010) and Consob (2011).  

EN 

111 

   EN 

 
                                                 
deadlines. 

Follow-up action was also taken in relation to a further 3 independent auditors 
subject to verification in 2007-2008, regarding the assessment of organisational 
remedies  adopted  by  the  firms  to  correct  shortcomings  emerging  during 
investigations.  

In  2009  a  further  8  inspections  of  independent  auditors  were  launched,  2  of 
which  were  completed  during  the  year.  The  aim  of  the  supervision 
concentrated  on  assessing  the  adequacy  and  correct  application  of  quality 
control  procedures  pursuant  to  Document  no.  220,  recommended  by  Consob, 
on "Quality control of independent auditing".237 

• 

In  2010,  Consob  checked,  in  respect  of  7  audit  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 deficiencies identified. In 2010, Consob ensured the follow-up 
of the actions taken against 3 large audit firms which were inspected in 2008-
2009.  Also  in  2010,  five  inspections  were  initiated  to  assess  audit  firms' 
organisational  structure  and  quality  control  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  analyse  the  process  of  implementation  of 
guidelines and standards issued by the global network. For the audit firms with 
a limited scale of operations, the inspections  also covered the  examination of 
some selected audit engagements.238 

Consob also examined the network dimension of audit firms.  

• 

• 

Thus  controls  in  2009  covered  relations  with  firms  in  the  respective  international 
networks,  also  with  the  aim  of  rebuilding  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  casi  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  auditor  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  audits  provides  other  services  to  other 
entities belonging to the same network. Therefore, Consob recommended measures 
to strengthen procedures for the verification of declarations of independence. 

Consob has also identified cases of irregularities regarding audits of financial statements: 

237 
238 

Consob (2010), p. 111. 
Consob (2011), p. 175. 

EN 

112 

   EN 

 
 
 
 
                                                 
• 

• 

In  2009,  letters  of  notice  were  issued  to  2  auditors  after  confirmation  of  audit 
irregularities concerning the 2006 and 2007 financial statements of a listed issuer and 
the 2007 annual report of an issuer of widely-distributed financial instruments. 

In  2010,  Consob  sent  4  letters  of  complaint  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  dell’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  irregolarità  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 cases, it was recommended that the workforce 
be  supplemented  with  staff  having  the  appropriate  professional  qualifications  and 
experience. 

Deficiences  were  identified  in  the  process  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 generalmente riscontrate carenze nel 
processo di nomina del cosiddetto second partner reviewer o independent reviewer e 
nella  documentazione  dell’effettivo  riesame  svolto  da  tale  figura  professionale 
indipendente, 
team,  prima 
dell’emissione dell’opinion."240 

incaricata  di  riesaminare 

lavoro  svolto  dal 

il 

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 comply with the rules of Document no. 570 on 
“Going  concern”  (recommended  by  Consob  in  November  2007),  which  governs 
auditors  assessments  of  going  concern  assumptions  and  provides  useful  indications 
on  the  correct  application  of  this  principle  in  the  specific  context  of  the  financial 
crisis.  

The  financial  crisis  had  considerable  effects  on  Italian  listed  companies,  leading  to 
tension and going concern difficulties that called for an increase in the content of the 
accounting and financial disclosures made by listed companies.242 

In 2009, the Italian supervisor, Consob, noted an increase in the number of requests 
to publish accounting disclosures by listed companies243 compared to previous years 

239 
240 
241 
242 
243 

Ibid. (2011), p. 176. 
Ibid. (2011), p. 50 
Consob (2010), p. 112. 
Ibid., p. 96. 
Ibid., p .95. 

EN 

113 

   EN 

 
                                                 
when the number of requests to publish supplements to periodic financial reports was 
6 in 2006, 1 in 2007 and 21 in 2008,. In 2009, the 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 regarding the quality of audits and quality control monitoring at 
the  four  largest  audit  firms  in  the  Netherlands:  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  companies  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 statutory audits conducted in 
the Netherlands. As part of its regular inspections, 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 the outcome of previous inspections. Awareness has 
clearly increased, as has the readiness to take action to improve quality. Partly as a result of 
the AFM’s supervision, progress has 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:  

– 

244 
245 
246 
247 
248 

External  auditors  failing  to  exercise  sufficient  and  appropriate  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 incorrectly issuing an unqualified audit opinion. In the case 

Ibid., p. 96. 
AFM (2010a). 
AFM (2010b). 
AFM (2010a). 
The  deficiencies  were  not  restricted  to  audits  in  the  financial  sector;  they  also  occurred  in  the 
construction/real  estate,  automotive  and  public  sector  (municipalities  and  housing  corporations).  The 
AFM published the results of its earlier 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 widespread and systemic. 

EN 

114 

   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  apply  sufficiently,  auditing  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  most  important  findings  related  to 
insufficient and inappropriate audit evidence due to, among other things:  

-  performing  insufficient  audit  procedures  to  verify  the  existence  and  valuation  of 
financial assets, work in progress, vehicles and property in the balance sheet; 

- performing insufficient procedures to assess whether there are indications of fraud 
or other non-compliance with laws and regulations; 

-  performing  insufficient  procedures  required  when  reliance  is  placed  upon  work 
carried out by another auditor, an internal 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 insufficient safeguards to ensure that audit 
opinions  issued  or  to  be  issued  were  correct  and  sufficiently  and  appropriately 
supported. 

Audit firms accepting audit quality falling 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 failed 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 degree to which these deficiencies occurred varied both per Big 
four audit firm and per audit. There were therefore differences in audit quality across the audit 
firms reviewed. 

The  AFM  also  explained  that  at  several  Big  four  audit  firms,  the  ‘tone-at-the-top’  and  its 
impact on the firm’s behavior regarding quality could be improved (emphasis added):  

"The  senior  executives  at  the  audit  firm,  the  audit  firm’s  policymakers  and  co-
policymakers  and  the  external  auditors  in  charge  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 the 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 

115 

   EN 

 
 
 
 
 
 
 
 
 
                                                 
quality of the audit by asking their own auditor for the AFM’s inspection findings or 
by  initiating  a  discussion  on  issues  raised.  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,  several  Big  Four  audit  firms  took  or  announced 
measures251.  

The AFM announced that it intends to: 

• 

• 

• 

• 

monitor  whether  the  measures  taken  or  announced  by  audit  firms  are  actually 
implemented; 

take formal enforcement measures against one or more Big Four firms252;  

submit  one  or  more  disciplinary  complaints  to  the  Disciplinary  Court  for  Auditors 
against  one  or  more  external  auditors  employed  or  previously  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 their impact on the quality of audits. The 
AFM  will  focus  particularly  on  compliance  with  independence  rules  and  policies 
regarding  appraisals,  remuneration,  appointments  and  sanctions  at  the  firms.  The 
AFM expects to publish its inspection findings in 2011"254. 

(5) United Kingdom 

The  2009/2010  annual  report  of  the  Audit  Inspection  Unit  (AUI)  of  the  UK’s  Professional 
Oversight  Board  (“the  Oversight  Board”)  underlines  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 
251 
252 

253 
254 
255 
256 
257 
258 

AFM (2010a).  
See AFM (2010b), p.19. 
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. 
AFM (2010b), p. 21.  
AFM (2010b), p. 22. 
FRC (July 2010). 
Deloitte, Ernst & Young, KPMG, PKF and PwC.  
FRC (July 2010), p. 2 and seq. 
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 

116 

   EN 

 
                                                 
 
The  AIU’s  inspections  in  2009/10  confirm  that  major  firms  have  policies  and 
procedures  in  place  to  support  audit  quality  that  are  generally  appropriate  to  the 
size  of  the  firms  and  the  nature  of  their  client  base.  Nevertheless,  improvements  to 
these policies and procedures have been recommended at all firms. 

Notwithstanding the quality of firms’ policies and procedures, the number of audits 
assessed as requiring significant improvement 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  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 deliver audit quality. While firms are willing to change these 
and  to provide additional  training to staff, such 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  highly  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 for clients operating in similar industries. 
Some firms have processes designed to confirm 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  greater  professional  scepticism 
particularly  when  reviewing  management’s  judgments  relating  to  fair  values  and 
the impairment of goodwill and other intangibles and future cash flows relevant to 
the consideration of going concern. 

Quality of audit evidence 

Auditing Standards recognise that 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 availability 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  also  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 well, audit teams need to ensure that the key 

EN 

117 

   EN 

 
factors  material  to  the  going  concern  assessment  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 client specialists and to assist in the audit of other complex 
audit  areas  such  as  taxation  and  pension  balances  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 services other than the audit to an audit client. Firms need to 
embrace  more  fully  the  principles  underlying  the  Ethical  Standards  which  require 
threats to be mitigated by appropriate safeguards 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 threats 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 

118 

   EN 

 
ANNEX 5. REVENUES FROM AUDIT AND NON-AUDIT SERVICES 

Changes in the revenues from audit and consultancy services between 2004/05 and 2009/10 
for the Big Four audit firms in Germany. 

Figure A5.1. Source: Calculations made on the basis of data published in Handelsblatt, "Preiskampf im Dax: Die 
Branche rangelt um Mandate mit Renomme", 19 January 2011 

EN 

119 

   EN 

 
 
Audit  and  non-audit  fees  in  selected  distressed  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  statutory  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 

120 

   EN 

 
 
ANNEX 6. BARRIERS TO MORE COMPETITION IN THE AUDIT MARKET FOR LARGE PIES 

There are a number of barriers preventing new audit 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  reduced  might  substantial 
market entry by mid-tier firms become feasible"259.  

Barrier 1. There is asymmetric information 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 Four audit firms the most 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  services260.  Moreover,  there  is  an  inertia  that  perpetuates  the 
effective bias towards the Big Four. This is particularly 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 shift in attitudes.  

Investors and regulators underlined the need for  greater  transparency  on  audit  quality.  With 
respect  to  individual  audits  inspected,  the  information  on  the  quality  of  these  audits  is  not 
divulged to those charged with the governance of the audited company. Only in the UK, is the 
audit committee sent a report which contains inspection findings on audits of their company.  

Barrier 2. Contract clauses effectively 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  conference  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  that  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 choice of the auditors.  

The confidential character of such contracts has prevented any material evidence from being 
presented to the Commission. It is worth noting that 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 
260 

261 

Oxera (April 2006), page i. 
Source:  Study  on  the  Economic  Impact  of  Auditors’  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. 
Auditors: Market concentration and their role - Economic Affairs Committee, Report ordered by House 
of  Commons  (March  2011).  CHAPTER  3:  Changes  to  the  Legislative/Regulatory  Framework 
Governing 
Audit, 
http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeconaf/119/11906.htm#a6 

EN 

121 

   EN 

 
 
                                                 
From the demand side, the rarity of instances where auditors are changed is one of the most 
critical deterrents to other potential market participants to enter the market for audits of listed 
and large companies262. The available empirical evidence proves a very low level of auditor 
switching among Union companies. 31% of EU surveyed companies indicated that their audit 
firm had served them for more than 15 years263. 

In relation to the UK, a recent report also shows 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 PwC 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,  any  possible  structural  changes  in  the  audit 
market would be delayed due to the low rate of switching.  

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

2%
2%
2%
3%
3%
4%

18%

19%

22%

24%

2004

3%
2%
3%
3%
3%
4%

17%

19%

23%

23%

2009

Baker 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 share 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  key  audit  partner(s) 
responsible for statutory audit rotate(s) from the audit engagement within a maximum period 
of  seven  years  from  the  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 

263 

264 

Source:  Study  on  the  Economic  Impact  of  Auditors’  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 
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 
Economic Affairs Committee -  Second Report  Auditors:  Market  concentration  and  their  role  (report 
ordered 
15 March 2011); 
http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeconaf/119/11905.htm#a3 

House 

Lords 

the 

by 

of 

EN 

122 

   EN 

 
 
                                                 
audits of listed companies (audit firm should change after 9 years) and in Poland with respect 
to  audits  of  insurance  companies  (after  maximum  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 'auditee'; this is turn impairs professional scepticism, the sine quo non of 
an adequate audit opinion.  

As  regards  the  reasons  for  rare  switching,  companies  that  responded  to  the  Green  Paper 
expressed satisfaction with their audit firm and were unwilling to change their auditors. They 
justify their unwillingness by citing high costs in organising a tender or spending management 
time  to  become  familiar  with  new  auditors.  When  citing  such  'difficulties',  little  or  no 
consideration is given to the fact that such tenders would not be annual but periodic. It is also 
important  to  consider  whether  the  management  should  have  an  opinion  at  all  in  terms  of 
expressing satisfaction with their auditors or whether it should be a demonstrably independent 
body that should express an opinion on the performance of the auditor. 

The  information  below  (figure  A6.2)  provides  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 switching 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 

123 

   EN 

 
 
                                                 
The restrictive ownership rules however have led to distortions and asymmetry in the markets 
for statutory audit and other services. Audit firms instead of focusing mainly on audit – the 
very purpose of the restrictive 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, Sustainability, Delivering deal value, Investigations 

Deals:  Business  recovery  services,  Corporate  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 commercial,  Corporate secretarial, Dispute resolution, Employment, 
Financial services, Immigration, Public law, Real 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 effectiveness, Transfer pricing 

Despite  different  reporting  styles  used  by  international  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 mainly advisory and tax-related services (see figure A6.3). Figures 
on Big Four audit firms in the UK show that audit and other related services 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  capital  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 firms from competition from medium-sized firms. 

266 

Accountancy Magazine, January 2011 

EN 

124 

   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  deterrent  to  enter  the  market  for  listed  and  large 
companies.  For  example,  this  practice  creates  significant  market  distortion  by  preventing 
other potential service providers of non-audit services from serving clients, to whom the Big 
Four  are  providing  statutory  audit,  but  also  may  deter  the  entry  of  non-Big  Four  firms  that 
have less developed NAS into the statutory audit market.  

EN 

125 

   EN 

 
 
ANNEX 7. MARKET CONCENTRATION 

(1) History of market concentration 

The  past  two  decades  have  seen  a  process  of  market  consolidation  of  large  firms  into  even 
larger firms. In the late 1980s there were eight major audit firms but since 2003 there have 
been  only  four  firms  that  audit  the  majority  of  large  public  companies  and  that  derive 
significant income from non-auditing services. The consolidation also allows big audit firms 
to  take  advantage  of  economies  of  scale,  expand  industry-specific  knowledge  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 

126 

   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 networks 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. 

100%

75%

50%

25%

0%

53%

28%

19%

5%

20%

75%

The rest
Next biggest 5
Biggest 5

TOP 50 global LAW
firms (2010)

Top 24 global AUDIT
firms (2009)

Figure  A7.2  -  Comparison  between  the  revenue  shares  of  five  biggest  market  players  among  audit 
firms and among law firms269. 

268 

269 

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. 
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 

127 

   EN 

 
 
                                                 
(3) Market concentration 

For the majority of EU Member States, the market share of the Big Four audit firms exceeds 
85%  as  regards  the  audit  of  large  listed  companies  (FTSE  350  equivalent  market 
capitalisation).  

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

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%

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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  audit  fees  (90%  in  2009)  rather  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 

128 

   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; table 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  for  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 considered, the combined market share of Big 
Four firms goes down to 63%. 

EN 

129 

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Big Four audit firms' market share in the Union (in terms of mandates) in 2010

83%

79%

63%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

listed companies with FTSE 350
equivalent market cap

listed companies with market cap
greater than £100m

listed 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 some other G20 countries is not as strong as in 
western economies, which explains the lower figures for the combined G20 countries.  

Big Four audit firms' market share in different countries (in terms of 
mandates) in 2010

84%

80%

75%

83%

79%

85%

81%

75%

68%

66%

63%

63%

with FTSE
350
equivalent
market cap

market cap
greater than
£100m

market cap
over £50m

14%

14%

14%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

G8

G20

EU27

US

China

Figure A7.7 - Source: data extracted from Huber (May 2011).  

EN 

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ANNEX 8. DETAILED POLICY OPTIONS 

(1)  OBJECTIVE  1:  POLICY  OPTIONS  TO  DEAL  WITH  THE  CLARIFICATION  AND 
DEFINITION OF THE ROLE OF THE STATUTORY AUDITORS GENERALLY AS WELL 
AS WITH SPECIFIC REGARD TO PIES 

Objective 1.1: Sub-policy options to improve business preparers/market understanding of the 
scope of audit generally  

Baseline  scenario.  The  existing  EU  rules  do  not  clearly  define  what  the  scope  of  the  statutory 
audit  is.  The  requirements  on  the  minimum  content  of  the  audit  report271  act  as  proxy  to  the 
scope of the audit. Indeed, auditors are requested 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 reporting framework, 
auditors  provide  "reasonable  assurance"  that  the  financial  statements  as  a  whole  are  free  from 
material misstatements, whether due to fraud or error. The fact that the companies' accounts are 
audited  does  not  mean  that  there  is  an  obligation  on  the  auditor  to  ensure  that  the  audited 
accounts are entirely free from misstatements, but this is not clearly explained in the EU rules. 
Additionally, EU rules do not require that the audit opinion will give assurance as to the future of 
the  audited  company,  but  the  requirement  on  the  auditor  to  provide  an  opinion  on  the  audited 
company as a "going concern" creates some confusion about the scope of this assessment, which 
helps to explain the expectations created 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 requirement in the legislation that the auditor applies 
professional scepticism when carrying 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 professional standards that auditors generally apply 
on the performance of the audit work.  

Option  1:  Clarify  and  specify  the  scope  of  statutory  audit  to  reduce  the  expectation  gap.  This 
option consists in (a) clarifying the scope of the audit of PIEs in the EU rules, without enlarging 
it;  and  (b)  specifying  the  role  of  the  auditor  by  requiring  that  auditors/firms  apply  their 
professional  scepticism  throughout  the  performance  of  the  audit  and  establish  requirements 
regarding the important audit work tasks (e.g. organisation of the work, market integrity, group 
auditors and internal quality control). 

(a)  Clarifying  the  scope  of  statutory  audit  in  the  EU  rules.  This  clarification  would  consist  in 
explicitly stating that  

– 

271 
272 

(i)  the  role  of  the  auditor  is  to  provide  an  opinion  on  whether  historical  financial 
information is misstated and whether the going concern basis is valid; and  

Cf. Article 51a of Directive 1978/660/EEC and 37(2) of Directive 1983/349/EEC. 
With  the  exception  of  some  requirements  for  group  auditors.  Cf.  Article  27  of  the  Statutory  Audit 
Directive. 

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– 

(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 affairs of the audited entity. 

(b)  Specifying  the  role  of  the  auditor  in  connection  with  that  scope.  This  would  consist  in 
explicitly requiring that auditors apply professional scepticism throughout the performance of the 
audit274.  Professional  scepticism  refers  to  "an  attitude  that  includes  a  questioning  mind,  being 
alert  to  conditions  which  may  indicate  possible  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  auditor  would  also  include  a  description  of  important  tasks  to  be 
undertaken when performing the statutory audit work. The following requirements form part of 
this option:  

– 

– 

– 

– 

– 

– 

273 
274 

275 

276 

requirements on the the appointment of adequate 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  market  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 requirements 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 expand those of Article 27 of the Statutory 
Audit Directive;  

requirements  in  relation  to  the  internal  quality  control  review  to  be  conducted  by  the 
audit firm before issuing the audit report; or  

requirements in relation to record keeping. 

As such, there is no change in the going concern examination. 
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  underlying  auditor  scepticism 
and the degree to which it is likely to be exhibited in practice.  
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".  
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 

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Option 1 should be read in connection with option 1 regarding objective 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, auditors 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  not  reflect  the  complexity  of  the  audit  work  carried  out  or  the 
methodology  used.  Concerning  the  communication  between  the  auditors  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 the 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 required to engage in regular 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 audit committee or the audited company279. 

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  administrative  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  functioning  according  to  provisions  in  place  in  the 
Member State in which the entity to be audited is registered. In such a case the entity 
shall disclose which body carries out these functions and how it is composed. 

Composition of the audit committee  

277 

278 
279 

In France, the audit report is generally longer because auditors are required to publicly justify their audit 
opinion. This includes their appreciation of a company's choices or use of accounting methods, of material 
or sensitive accounting estimates, and also, if necessary, of elements of internal control. 
Cf. Article 41(2)(c) of Directive 2006/43/EC. 
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,  irregularities  encountered,  accounting  methods  used  or  any 
"window dressing" transactions. 

EN 

133 

   EN 

 
                                                 
Member  State  determine  whether  audit  committees  are  to  be  composed  of  non-
executive members of the administrative body and/or members of the supervisory body 
of the audited entity and/or members appointed by the general meeting of shareholders 
of  the  audited  entity.  At  least  one  member  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  responsibility  of  the  members  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  company'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  supervisory  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  audit,  and  in  particular  on  material  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 the audit report disclosed to the public would be expanded and improved. 
The audit report should include the following information: 

– 

– 

– 

explanations on the methodology used (e.g. especially 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 areas of risk of material misstatement of 
the  accounts,  including  critical  accounting  estimates  or  areas  of  measurement 
uncertainty, the assessment of the internal control 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  business  transactions,  accounting  policy  decisions  and  other 
matters that are significant for the governance of the entity; 

280 
281 

See European Commission (2005). 
See also European Commission (2005). 

EN 

134 

   EN 

 
                                                 
– 

explanations  on  the  variations  in  the  weighting  of  substance  and  compliance  testing 
when compared to a previous accounting year, even if the statutory audit in the previous 
year was conducted by a different auditor.  

Option 2: Require the preparation of a longer and more detailed report for the audited entity. The 
auditor  would  be  required  to  prepare  a  longer  and  more  detailed  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 situation of the audited entity or in case of the statutory audit 
of consolidated accounts of the parent company 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  judgments  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, 
reports  show 
the  annual  or  consolidated  accounts  and  possible  additional 
appropriateness; 

indicate and explain all instances 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 various items in the annual or consolidated 
accounts including any impact of changes of such; 

provide full details of all guarantees, comfort letters, undertakings of public intervention 
and  other  support  measures  that  have  been  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  principles  of  consolidation  in  the  case  of  a  statutory  audit  of 
consolidated accounts; and  

indicate which audit work is performed by third-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  would  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  contain  business  secrets  and  possibly  price  sensitive 
information).  

Option 3: Increase the communication between the auditor and the audit committee. This option 
articulates  the  relationship  between  auditors  and  a  strengthened  audit  committee  (part  of  the 
"internal communication": between the auditor and the audited entity) in three steps:  

EN 

135 

   EN 

 
– 

– 

– 

(i)  auditors  would  be  clearly  required  to  report  to  the  audit  committee  on  key  matters 
arising  from  the  statutory  audit  and  in  particular  on  material  weaknesses  in  internal 
control in relation to the financial reporting process; 

(ii) both parties would be required to engage in regular dialogue; and  

(iii) the audit committee would be required to inform management of the outcome of the 
statutory  audit,  how  the  statutory  audit  contributed  to  the  integrity  of  the  financial 
reporting and what was the role of the audit committee in this process.  

It  should  be  noted  that  option  1  (tendering)  regarding  objective  3.1  would  have  an  indirect 
impact  on  this  option.  The  presentation  of  a  more  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  would  apply  to  the  structure  and  the  technical 
competence of the members of the 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 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 concept of independence 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  laws,  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 communication may be attributable 
to  the  absence  of  any  sanctions283  and/or  the  fear  of  potentially  infringing  the  professional 
secrecy principle when making a report to the authorities. Beyond this reporting obligation, there 
is no requirement for auditors to regularly engage with supervisors of PIEs. 

Option  1.  Enabling  (in  law)  and  recommending  regular  dialogue  between  auditors  and 
supervisors of PIEs. This option would consist in empowering 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 

283 

i.e. investment firms, credit institutions, insurance undertakings, payment institutions, e-money institutions 
or UCITS. However, auditors of alternative investment 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. 
Directive  2006/48/EC  (banking  directive)  does  not  foresee  any  sanction  of  the  auditor  in  case  of  the 
infringement of Article 53. 

EN 

136 

   EN 

 
                                                 
Option  2.  Requiring  the  establishment  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 companies involved. This would be 
achieved  by  setting  a  general  principle  in  legislation  and  empowering  EBA  and  EIOPA  to 
prepare guidance on how to enforce it284. Such dialogue could be associated with a clarified text 
on the early warning obligation to make 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  STATUTORY  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  set  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  situations  that  may  pose  a  threat  of  self-review,  self-interest, 
advocacy, familiarity or trust or intimidation. In line with the Commission Recommendation, the 
audit firm should neither take any 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  audit  client,  the  auditor  should  consider  applying 
particular  safeguards  to  mitigate  any  independence  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  accounting  records  and  financial  statements,  designing 
and implementing financial information technology systems, valuation services, 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  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  statutory  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 their independence and 
the safeguards applied to mitigate those threats. 

the  2002 
However,  existing  disparities 
Recommendation  will  persist.  Moreover,  due  to  its  limited  technical  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 

the  Directive  and 

implementation  of 

the 

in 

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 regulated firms. See FSA (2011). 

EN 

137 

   EN 

 
                                                 
case-by-case basis as to whether there are threats to independence arising from the provision of 
NAS. 

Option 1: Prohibition of the provision of certain non-audit services to audit 'client' (black-listing) 
Audit  firms  providing  statutory  audit  and  financial  audit  services285  would  not  provide  certain 
non-audit services to an audit client. This amounts  to "black-listing" 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 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 context of the 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 

138 

   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  other  services  which  are  not  part  of  the  audit 
mandate and are not included 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 should not be higher than 10% of the audit 
fee; 

shareholders  should  be  informed  of  the  provision  of  non-audit  services  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  provision  of  any  non-audit  services  to  the  audited 
entity  (PIE):  statutory  auditors  or  audit  firms  providing  statutory  audit  to  a  PIE  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 to provision of services other than audit would also be extended to the parent 
company of the audit client and at least its material subsidiaries. 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  statutory  audit  (including  other  statutory  duties) 
should,  however,  be  authorised  (a  "white-list").  This  "white-list"  would  include  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 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; 

– 

any other statutory duty related to audit work imposed by EU legislation. 

Option 3: Pure audit firms. Audit firms  providing statutory audit services and related financial 
audit  services  would  only  provide  audit  services  and  be  unconnected  to  firms  providing  non-
audit  services.  The  obligation  would  primarily  consist  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 

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   EN 

 
For this obligation to be effective, it should be accompanied by some 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  restriction  by  simply  splitting  the  responsibility 
for the different services into two different 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  individually  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  directly  or  indirectly  invest  in  firms  providing  non-audit 
services. 

This  option  would  be  adjusted  (see  the  proportionality  analysis  in  Annex  19)  to  the  size  and 
dimension of the activities of the audit firms. Certain 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 PIE 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 mitigate the risk of any conflict 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 potential 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 appointment of a statutory auditor or audit firm. The 
Statutory Audit Directive requires that the "proposal of the administrative or supervisory body 
for  the  appointment  of  a  statutory  auditor  or  audit  firm  of  a  PIE  shall  be  based  on  a 
recommendation made by the audit committee", but it is unclear whether managers are obliged to 
follow this recommendation. Therefore, the selection 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 appointment of auditors with an increased role 
for a strengthened Audit Committee. Under this option, stricter requirements would apply to the 
structure and the technical competence of the members of the Audit Committee. Currently, only 
at  least  one  member  has  to  have  an  audit  qualification  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  qualification  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 company. 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 

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   EN 

 
The role of the Audit Committee in the tendering and selection of the statutory auditor will be 
strengthened . The Audit Committee should be responsible for the monitoring and validation of 
the  result  of  the  selection  procedure  and  the  appointment  of  the  statutory  auditor.  The 
recommendation  of  the  Audit  Committee  should  be  transmitted  to  the  general  meeting  of 
it  should  explain  why.  The 
shareholders  and, 
recommendation  of  the  Audit  Committee  should  contain  at  least  two  possible  auditors,  for  the 
consideration of the general meeting. 

if  management  does  not  support 

it, 

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  board  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). Also, 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  auditors  of  important  financial  institutions  (e.g. 
banks) since the choice and performance of the statutory 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-approved 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 substantiated reason to suspect that exclusion or another 
reservation  is  warranted.  Where  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  consideration  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 information subject to banking secrecy requirements by the credit 
institution.  

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. 

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  duration  of  the  audit  engagement,  only  a 
requirement for the rotation of the key audit partner 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  Committee  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 engagement 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 

141 

   EN 

 
cooling off period would be established (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 Committee in overseeing the work of the statutory 
auditors. Under this option, stricter requirements would apply to the structure and the technical 
competence of the members of the Audit Committee. Currently, only at least one member has to 
have an audit qualification 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 
qualification 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 company. 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.  

The role of the Audit Committee will be also strengthened in the monitoring of the independence 
and work of the statutory auditor and audit firm.  

The  Audit  Committee  should  furthermore  monitor  all  major  outcomes  of  the  statutory  audit  in 
addition to focussing specifically on internal controls around the financial reporting process. The 
Audit Committee also has the responsibility to inform the administrative/ 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  represent  less  than  20% 
annually (or less than 15% for two consecutive years) of total fees received by the audit firm. In 
case of a breach of these thresholds, the Audit Committee should decide if the audit engagement 
should be subject to a quality control review by another statutory auditor prior to the issuance of 
the audit report.  

See  also  option  3  regarding  objective  1.2  above  and  option  1  regarding  objective  2.2  on  the 
Audit Committee. 

Option  3.  Establishing  additional  requirements  on  the  internal  organisation  and  governance  of 
audit firms. Under this option a statutory auditor or an audit firm would be required to: 

– 

– 

– 

establish  appropriate  and  effective  organisational  (including  governance  of  firms)  and 
administrative  arrangements,  also  with  regard  to  outsourced  services,  to  prevent, 
identify, eliminate or manage and disclose any threats to independence; 

establish  a  policy  to  preclude  his,  her  or  its  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,  statutory  auditor,  audit  firms  or  financial 
markets;  

establish  appropriate  and  effective  organisational  and  administrative  arrangements  for 
dealing with and recording incidents which have or may have serious consequences for 
the integrity of his, her or its statutory audit activities; 

EN 

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   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 facilitate switching of an audit firm 

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  very  low  (<0,15%  of  total 
turnover, see Annex 20) for most of PIEs. Contracts with auditors tend to be renewed, there are 
few cases of switching and rare cases in which tendering 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, Italy 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 procedure, 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 bidders judged against such criteria.  

Option  2.  Mandatory  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  cooling  off  period  would  be  established 
(currently,  the  cooling  off  period  for  the  audit  partner  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  audit  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 legal structure and ownership 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 structure of the audit firm;  

a description of the internal quality control system of the audit firm and a statement by 
the administrative or management body on the effectiveness of its functioning;  

EN 

143 

   EN 

 
– 

– 

– 

– 

– 

– 

an indication of when the last quality assurance review took place;  

a list of public-interest entities for which the statutory auditor or audit firm has carried 
out statutory audits during the preceding financial year; 

a  statement  concerning  the  statutory  auditor's  or  audit  firm's  independence  practices 
which  also  confirms  that  an  internal  review  of  independence  compliance  has  been 
conducted;  

a statement on the policy followed by the statutory 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 statutory audit of annual and consolidated accounts, and fees 
charged for other assurance services, tax advisory services and other non-audit services; 

information concerning the basis for the partners' 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 clauses limiting the choice of audit firm (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". 

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  inspection  reports  on  individual  statutory  auditors  or 
audit firms following quality assurance reviews.  

(b)  Audit  firms  auditing  PIEs  would  be  required  to  disclose  their  financial  statements  and 
statutory  auditors  their  income  statement.  Financial  information  at  the  level  of  the  network 
should  also  be  provided.  This  financial  information  would  be  made  available  on  their  website, 
alongside  the  transparency  report,  which  is  disclosed  pursuant  to  an  existing  obligation.  In 
addition, audit firms and statutory auditors auditing PIEs would provide more information in the 
existing  transparency  report  regarding  their  large  clients,  their  policy  on  rotation  of  staff  and 
their  corporate  governance  policy.  Audit  firms  and  statutory  auditors  will  additionally  report 
information on fees to supervisors (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 

144 

   EN 

 
                                                 
Option 3. Establish an audit quality certification. A pan-European system that would certify that 
an  auditor  or  firm  meets  some  quality  requirements  enabling  them  to  carry  out  high  quality 
statutory  audits  of  PIEs.  This  certification  would  be  delivered  by  ESMA  (see  policy  options 
regarding objective 5). The certification would be voluntary. 

This  option  would  require  that  secondary  legislation  is  developed:  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  relevant  requirements  would  be  entitled  to 
apply for the certificate; 

The requirements for obtaining the European quality certificate would be based on audit 
quality and the experience of the national quality assurance 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 charge fees for delivering the European quality certificate, as 
long as they are proportionate 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 increase 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  audits, 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  services  (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  mandatory  joint  audit  rule).  Obligation  for  large  PIEs  to  have 
more  than  one  audit  firm,  at  least  one  of  which  is  not  among  the  largest  four  audit  firms  (see 
Annex 19 for the proportionality assessment). 

EN 

145 

   EN 

 
Considering  option  3  of  objective  3.1,  there  would  be  a  tendering  process  for  the  selection  of 
joint auditors where the scope and responsibility of each auditor is clearly defined. 

The 4 eyes principle would be applied in the strategic preparation of the joint 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  option  would  require  that  the  European  supervisory 
authorities  develop  technical  standards  on  the  detailed  implementation  of  the  joint  audit  rule, 
with a view to faciliating its smooth application. 

In terms of proportionality, this sub-option would only apply to large PIEs. 

Sub-option 1.3. Mandatory joint audit applied only to large PIES in the financial sector  

Sub-option 1.3. is expected to have all the described 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 joint audit (see also description of policy option 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 financial 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  addition,  joint  audit  would 
help  smaller  audit  firms  to  compete  against  large  pure  audit  firms  focusing  on  audit  services 
only.  In  terms  of  proportionality,  however,  joint  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 PIEs: creates incentives for audit providers and audited entities 
alike to use joint audit on a voluntary basis. 

Sub-option 1.6 considers the introduction of joint audit as a voluntary measure by only creating 
incentives  for  auditied  entities  to  use  it  as  a  way  to  increase  audit  quality  and  auditors' 
independence.  This  sub-option  takes  into  account  the  existing  uncertainty  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  comprehensive  data  on  the  cost  side  of  the  joint  audit  does  not  provide 
sufficiently  strong  arguments  justifying  its  mandatory  introduction,  since  it  could  result  in  an 
excessive  cost  burden  for  certain  PIEs.  Therefore,  also  considering  that  joint  audit  is  used  by 
PIEs in the finacial sector on a voluntary basis in certain countries like Austria and Sweden, it 
could  be  considered  more  economically  prudent  and  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 use on an individual basis. 

EN 

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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 voting rights in an audit firm 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 restrictions 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 ceiling 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 approval should be the same in the different Member States, with the 
exception that the auditors carrying out the statutory audit on behalf of the audit firm should be 
approved  in  the  Member  State  concerned.  For  statutory  auditors,  the  approval  procedure  also 
requires passing an aptitude test. This test is limited by the conditions 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 must cover only the statutory auditor's adequate 
knowledge  of  the  laws  and  regulations  of  that  Member  State  in  so  far  as  relevant  to  statutory 
audits287. While there is certain convergence in the educational qualifications of auditors288 and 
the  test  of  theoretical  knowledge  in  the  Directive  includes  many  common  themes  with  no 
national  connection  (e.g.  international  accounting  standards,  risk  management  and  internal 
control,  financial  analysis  etc)289,  the  scope  of  statutory  audit  still  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 may differ from Member State to Member State and 
there is no requirement in Directive 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  audit  partner  leading  the  audit  is  approved  as  an 
auditor  in  the  concerned  Member  State  is  maintained.  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 procedures would not necessarily be 
statutory auditors approved in the Member States in which the firm operates. This option would 
result in changes to the supervisory environment since a supervisor 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 
288 
289 

Cf. Article 14. 
See for instance the Common Content Project, www.commoncontent.com  
Cf. Article 8.  

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   EN 

 
                                                 
Member State. A simple registration procedure, similar to the one for third country audit firms, 
could be necessary to facilitate supervisory tasks. 

Option  2:  Mutual  recognition  of  statutory  auditors.  Under  this  option,  a  statutory  auditor 
approved  in  one  Member  State  would  automatically  be  approved  in  all  Member  States.  This 
option  would  no  longer  require  a  statutory  auditor  to  pass  an  aptitude  test  (or  a  different 
procedure) to be approved in a different Member State (although registration may be required). 
Similar considerations as for option 1 would apply regarding supervision. 

This option has two different dimensions: the mutual recognition of auditors in the context of a 
free (cross-border) provision of audit services and the mutual recognition of auditors in the case 
of establishment in a host Member State. 

Option 3: Introduction of an adaptation period scheme and increased convergence, transparency 
and  predictability  in  the  aptitude  test.  This  option  would  allow  statutory  auditors  to  choose 
between two methods to obtain his/her approval in another Member State, which is the general 
principle governing the rules on professional qualifications at EU level290: 

– 

– 

(a) 
an adaptation period scheme under  the supervision of a local auditor.  Under the 
adaptation period, statutory auditors approved in one Member State would be allowed to 
work  in  another  Member  State  after  a  minimum  probation  period  has  elapsed  without 
having  to  pass  an  aptitude  test.  Such  minimum  period  could  be  three  years,  as  for 
lawyers291. During the adaptation period, the applicant auditor would register with the 
competent  authority  in  the  host  Member  State,  comply  with  the  applicable  standards 
(including ethical ones) in the host Member States 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  streamline  and  harmonise  audit  standards  on  audit 
practice, independence and internal control of audit firms across the EU 

Baseline scenario: Under  the  existing Statutory 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 audit292. At present, most EU jurisdictions 
apply  national  auditing  standards  which  are  largely  based  on  the  current  ISAs,  but  often  with 
amendments to comply with national legislation and quality aspects of the audits293. As a result, 
there  are,  to  a  large  extent,  divergences  in  auditing  standards  between  jurisdictions  which, 
according to preparers represent additional audit costs which could be passed on to companies. 

290 
291 
292 

293 

See Directive 2005/36/EC, Article 14.  
See Directive 98/5/EC. 
In principle, the adoption of the International Standards 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.  
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. 

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In  addition,  maintaining  distinct  sets  of  auditing  standards  at  Member  State  level  could  prove 
burdensome to regulators, standard setters and practitioners, not only at jurisdiction 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 Federation 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 financial  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  information.  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  designed  to  enhance  the  understanding  and 
implementation of the ISAs, as well as to facilitate translation. The clarified standards 
are  effective  for  audits  of  financial  statements  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 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"). 

Option  2:  The  introduction  of  clarified  ISAs  in  the  EU  through  their  endorsement  by  Member 
States, with the possibility for Member States to adapt and modify (carve-out) the international 
auditing standards to the specificities and the requirements of individual jurisdictions.  

Objective 4.3: Sub-policy options to ensure that statutory audit is adapted to SMEs needs 

Baseline scenario. In the absence of legislative measures, it could be possible that some Member 
States would voluntarily follow the example of France in adapting the audit standards to the size 
and dimension of activity of SMEs or provide for a “limited review” instead of statutory audit 

294 
295 

See FEE (September 2011). 
In addition to the ISAs, the "Clarity project" deals with the review of the International Standards on Quality 
Control (ISQC).  

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for  small  companies,  which  is  mandatory  in  Estonia  and  voluntary  in  other  Member  States.  It 
could  also  be  possible  that  individual  auditors  or  firms  would  take  the  initiative  to  apply  the 
auditng standards in a proportionate 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  proportionate  and  simplified  manner  to  SMEs.  Audit  standards, 
including international auditing standards, are scalable to size297. In order to maintain the unicity 
of auditing standards (see the policy options regarding the objective 4.2), this option would not 
require  the  enactment  of  other  standards  that  would  derogate  from  the  ISAs.  It  would  rather 
consist in: (a) ensuring that the audit oversight bodies accept such proportionate and simplified 
audits  as  a  valid  application  of  the  auditing  standards  and  (b)  requiring  national  professional 
bodies to provide auditors with guidance on how the auditing standards should be applied in a 
proportionate and simplified manner.  

Option  2:  Introduce  limited  reviews  for  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 for 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 the independence and effectiveness of supervision 
of national statutory auditors and audit firms. 

Baseline  Scenario.  The  Statutory  Audit  Directive,  complemented  by  the  Commission 
Recommendation on external quality assurance for statutory auditors and audit firms conducting 
audits  of  public  interest  entities  (see  Annex  2),  only  establishes  a  principles-based  legislative 
framework.  Member  States  have  discretion  concerning  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 approval and registration of auditors and audit 
firms.  

This  framework  has  failed  to  ensure  the  robustness  and  independence  of  all  national  audit 
supervisors.  The  external  quality  assurance  and  supervisory  practices  are  still  very  divergent 
between Member States, which does not ensure a level 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  firms  on  how  to  improve  their  audit  quality  and 

296 
297 

See for instance, the initiative of a Canadian auditor in Cowperthwaite (2011).  
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. 

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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 order 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 and 2010 give details of the recommendations 
made to audit firms following inspections undertaken 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 shortcomings discovered during the 
reviews.  However,  there  is  no  information  on  any  sanctions  which  may  have  been 
imposed  as  a  consequence  of  those  recommendations  (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:  

Reprimands 
- with fines 
Judgment of court 
sanctions 
Other 
prosecutor's office 
Instructions 
Dismissals 

by 

public 

2010 
115 
75 
- 
19 

105 
211 
450 

2009 
61 
32 
1 
22 

165 
218 
467 

2008 
58 
19 
2 
21 

145 
150 
376 

2007 
46 
14 
5 
17 

160 
229 
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 bodies 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 oversight authority would 
be responsible for the supervisory tasks foreseen in EU legislation on statutory audit. 

Option 2: strengthening national 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  Statutory  Audit  Directive.  The  requirements  would  be 
established in the field of independence (from the accounting/auditing profession), mandate and 

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powers  of  national  audit  supervisors.  These  requirements  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  competent  authorities.  It  would  also  imply 
establishing a single authority holding the ultimate responsibility for the supervisory duties, even 
if the delegation of certain tasks could be admissible.  

In the case of national authorities supervising statutory audits of PIEs, this option would imply 
that a national competent authority takes responsibility for the supervisory duties. This authority 
would be selected from three possible options: the securities markets supervisor298; the national 
authority that controls compliance with the financial 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 entrusted to carry out supervision on audit300. 

The  requirements  for  national  supervisors  regarding  supervision  of  statutory  audits  of  PIEs 
would include: 

– 

– 

– 

– 

– 

– 

– 

cooperating  with  other  relevant  authorities  at  national  level,  including  supervisors  of 
PIEs or financial intelligence units; 

undertaking quality assurance reviews on the audits carried out; 

investigating with a view to detecting, correcting and preventing inadequate execution 
of the statutory audit of PIEs; 

monitoring the developments in the market for 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; and assessing the need for structural measures 
to  mitigate  any  risk  arising  from  high  concentration,  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  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 plans to address such threats301; 

being  transparent  as  regards  their  activity,  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  duties:  access  documents,  demand  information, 

298 
299 
300 
301 

This is the case in Italy (Consob) or the Netherlands (AFM). 
This is the case in the UK (FRC). 
Such as in France (H3C), Germany (Abschlussprüferaufsichtskommission) or Spain (ICAC) 
See European Parliament (2011), §49 and seq. 

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152 

   EN 

 
                                                 
carry-out inspections etc. They should also be able to take specific supervisory measures, such as 
temporarily  prohibiting  the  statutory  auditor,  audit  firm  or  key  audit  partner  from  carrying  out 
statutory  audits  of  PIEs,  declaring  that  the  audit  report  does  not  meet  the  legal  requirements, 
requiring  the  statutory  auditors/audit  firms  to  modify  their  transparency  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  options  to  set-up  an  effective  EU-wide  supervisory  cooperation 
mechanism  that  would  also  ensure  an  efficient  supervision  of  supranational  audit  firm 
structures 

Baseline scenario 

Option 1 

Option 2 

Option 3 

EGAOB 

Level 3 Lamfalussy-
type committee 

Legal entity 

No 

Yes, under national 
law 

Created by 

Administrative 
structure 

Funding 

Commission's 
role 
Role in 
regulation and 
standard 
setting 

Commission decision  Commission decision 
and a parallel private 
law agreement 
between members 
Independent 
secretariat would need 
to be created 

independent 
and  no 

No 
secretariat 
specific premises. 
The 
provides both 

Commission 

EU  budget  (meeting 
room,  Commission 
secretariat  and  travel 
expenses of a national 
per 
representative 
Member State) 

Chair 

Advisory  role  to  the 
Commission 

Specific premises 
needed 
Members 
contributions 

EU budget 
contribution possible 
under certain 
circumstances 
Observer 

Advisory role to the 
Commission 
Prepares guidance 

Role in 
supervision 

Exchange  of  good 
and 
practices 
information 

Exchange of good 
practices and 
information 
Mapping and peer 
reviews 

New Europea 
Authority on Audit 
Supervision 

Similar to option 2 

Similar to option 2 

New administrative 
organisation to be 
created, including 
chair, executive 
director and 
secretariat 
Similar to option 2 

Integration of 
cooperation within 
the European 
Supervisory 
Authorities (ESMA, 
EBA, EIOPA) 
Yes, created by EU 
legislation  
European Parliament 
and Council 
Regulations 

Integration within the 
secretariat and 
premises of the ESAs 
and their Joint 
Committee 

Partially financed by 
EU budget, partially 
by members. Some 
fees from some 
market participants 
are possible 

Non-voting member 

Similar to option 2 

Similar to option 2 

Similar to option 2 

Advisory role to the 
Commission 
Prepares guidance 
Prepares draft 
technical standards 
for Commission 
endorsement 
Exchange of good 
practices and 
information 
Mapping and peer 
reviews 
Coordination  
Colleges of 
supervisors 

Baseline scenario: The continuation with the status quo on the EU-wide cooperation poses the 
following regulatory issues: 

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153 

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– 

– 

– 

misalignment  of  incentives  and  asymmetric  information.  The  Commission  services 
would  continue  to  run  the  structure  though  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  agenda  is  developed  by  the  Commission 
services,  which  does  guarantee  that  the  issues  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 regulators to discuss confidential matters, such 
as the findings of audit inspections or organisation of inspections 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  decisions,  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 supervisory 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  require  that  Member  States  agree  on  a  seat  for  the  level  3 
Committee, the establishment of a secretariat 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 independent from the Commission 
in its decision taking, with the Commission being only an observer at its meetings.  

The  scope  of  work  of  this  level  3  Committee  would  cover  convergence  in  the  application  of 
supervisory practices at Member State level, whether regarding audit of PIEs or of other entities. 
However,  it  would  not  have  the  same  legal  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  supervision/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 2010, the smallest budget for a level 3 Committee 
was €3.7M for CEIOPS. 

Option  2.  EU-wide  cooperation  on  auditor  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 and EBA within the Joint Committee established 
by the 3 European Supervisory Authorities (ESAs). 

A  requirement  for  ESMA  to  establish  a  specific  internal  committee  devoted  to  audit  policy 
would be imposed (currently, there is a sub-committee within ESMA dealing with audit policy). 

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This option would also allow for the application of the legal powers of the ESAs: the possibility 
to issue guidelines or to prepare technical standards for endorsement by the Commission, where 
specifically so empowered. 

The legal framework governing ESMA allows for 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  audit  supervisors  would  adopt  the  same  approach  as  in  other 
areas of the financial sector: i.e. creation of a new European Supervisory Authority specifically 
devoted to the audit market. If this option is pursued, a Regulation creating the new Authority, 
similar to the ones creating ESMA, EIOPA 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 Markets Authority (ESMA) would 
be the most appropriate body to undertake enhanced EU-wide audit cooperation and supervision 
matters: 

– 

– 

– 

– 

– 

– 

Some  national  audit  regulators  (LU,  NL,  IT)  already  function  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  the "public 
interest entities"). This includes compliance 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 other authorities are involved 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  with  auditing  issues  within  the  Corporate 
Reporting  Standing  Committee.  The  ESMA  secretariat  would,  with  some  marginal 
increase, cope with additional work. 

While  ESMA  could  take  a  leading  role,  this  does  not  prevent  EIOPA  and  EBA  from 
also  being  involved  in  auditing  matters.  The  Joint  Committee  (grouping  the  3 
authorities)  formalises  cooperation  between  the  three  authorities  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 supranational audit firms structures. In terms of 
the  costs,  they  are  expected  to  be  similar  to  the  costs  of  running  the  current  EGAOB 
structure (which mainly comprise the costs of meetings).  

EN 

155 

   EN 

 
Compared  to  option  1,  the  ESMA  structure  could  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 supervisory practices at MS level, in particular 
as regards PIEs; 

the  structure  provides  legal  recognition  to  the  cooperation  and  integrates  into  the 
recently created structure for the supervision of the EU financial sector; 

this option would allow the ESAs to develop "technical standards", helping convergance 
in auditor regulation and supervision. 

The main limitation of ESMA (or generally the European Supervisory Authorities) option is that 
any  cooperation  at  ESMA  (or  ESAs)  level  would  be  mainly  limited  to  public  interest  entities 
(listed companies and financial institutions). This would imply that cooperation on supervision 
of  non-PIEs  would  more  than  likely  be  carried  out  on  a  bilateral  basis.  At  the  same  time,  the 
cross-border dimension of non-PIEs (and therefore 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 European Supervisory Authorities 
and of making sure that the cooperation on the oversight of the audits of non-listed companies is 
fully taken into account.  

The  new  European  Authority  of  Audit  Supervisors  would  be  much  more  costly  and  time 
consuming to implement compared to all the other options considered in this analysis. The 2011 
budget for the current European Supervisory Authorities ranges from €12.7M to €16.9M. 

Additionally,  the  scope  of  such  an  Authority  would  be  relatively  limited,  compared  to  EBA, 
EIOPA and ESMA.  

EN 

156 

   EN 

 
ANNEX 9. SUMMARY OF VIEWS OF STAKEHOLDERS ON PREFERRED POLICY OPTIONS 

This Annex presents a summary table with the views of stakeholders on preferred policy options. 
When appropriate, it illustrates the alternative solutions proposed. 

EN 

157 

   EN 

 
Policy option  

Table A9.1 

Stakeholders 

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  clarification  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 
the 
preparation of a longer and more 
detailed  report  for  the  audited 
entity 

require 

and 

Broad  support  by  the  majority  of  stakeholders  (professional  bodies  and 
associations  linked  to  the  profession;  investors;  public  authorities  and 
others). 

N.A. 

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. 

the 

Increase 
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) 

Requiring  the  establishment  of 
regular 
between 
dialogue 
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 
two-way 
in 
communication  between  auditors  and  financial  supervisors  of  financial 
institutions, especially in relation to specific areas of concern. 

favour  of  enhanced, 

is 

N.A. 

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 

158 

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. 

Some  audited  entities  insist  that  the  company  should  decide  in  certain 
circumstances  to  keep  the  same  auditor  if  the  benefits  of  continuity  are 
demonstrable. 

Mid-tier Firms and SMPs are also in favour of mandatory tendering.  

Many investors, as well as some public 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 every eight years, on a renewable basis. 

Some  of  the  representatives  of  the  profession  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 prohibition of non-audit services should 
be done on a case by case basis. 

There  is  broad  support  by  academics  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). 

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 not opposed to joint audit if it is well-
balanced.  

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.  

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. 

159 

EN 

Pure  audit  firms/prohibition  of 
the  provision  of  non-audit 
services 

Joint audit 

EN 

 
  
The European Parliament recognises that the implementation of joint audits 
could have positive effects on the diversification of the audit market.  

There is a strong support amongst the majority of stakeholders (profession; 
investors; Big Four; Mid tier firms and SMPs). 

N.A. 

There  is  broad  support  among  stakeholders  (profession,  investors)  on  the 
idea of a passport, though they do not focus on the details.  

Many  public  authorities  were  reluctant  to  accept  the  introduction  of  an 
European  passport  as  this  would  harm  quality  and  would  be  difficult  to 
supervise. 

The  European  Parliament  is  in  favour  of  enhanced  harmonisation  with  a 
view to creating a European passport for auditors. 

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). 

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.  

The  European  Parliament  is  in  favour  of  the  adoption  of  clarified  ISAs, 
through a regulation.  

General support amongst stakeholders, especially by SMEs and SMPs 

N.A. 

Prohibition 
contractual 
of 
clauses limiting the choice of an 
audit firm 

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 

Introduction of clarified ISAs 

Adapt audit standards to the size 
of 
entity: 
proportionate audits for SMEs 

audited 

the 

audit 
Strengthening  national 
supervisory 
and 
authorities 
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 Big Four do not support integrating audit oversight bodies in the new 
European 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 

EN 

160 

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 assurance on the integrity 
of the financial information they receive. Auditor independence is therefore a key element in the 
statutory corporate reporting process.  

Providing  non-audit  services  (NAS)  while  auditing  a  company  presents  a  potential  source  of 
conflict  of  interest  arising  from  or  within  the  audit  firm:  i.e.  the  audit  firm  has  an  interest  to 
secure additional revenue from the provision of other (non-audit) services. In instances where the 
revenues  from  NAS  become  substantial  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 audited entity – would naturally be compromised302.  

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 two possible policy options 
to address this conflict of interst: (2) a ban the provision of certain NAS to the audit client and 
(3) a ban the provision of any NAS to the audit client and (4) the creation of "pure" audit firms. 

(1) The experience in the EU and the US in dealing with the conflict of interest created by the 
provision of NAS. 

There  is  currently  no  EU-wide  ban  preventing  auditors  from  offering  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  informed  third  party  would  conclude  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  far  been  implemented  in  a  very 
divergent manner across the EU.  

In France and Belgium, national legislation provides a strict framework regarding the provision 
of  NAS.  In  the  other  Member  States,  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 Belgian 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 

161 

   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 important elements reflected in the annual and consolidated 
accounts; 

taking part in the internal audit function; 

representing  the  audited  entity  in  the  settlement  of  disputes  (including  with  the  Tax 
Office); 

intervening in the recruitment of staff for the audited entity.  

It  should  be  noted  that  the  definition  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 audit network is not introduced by this definition.  

As far as the volume of NAS (not banned by the law) 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 these companies is envisaged. Such a derogation can 
be  approved  in  3  cases,  namely  by  the  audit  committee,  the  Controlling  Committee  under 
Belgian Law, or in case no audit committee exists a derogation can be approved 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  auditor  (or  any  entity/  person  part  of  its  national/ 
international network, controlled by him or controlling him) to provide any service not directly 
related to the core statutory audit service. In the 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 auditor must ensure that they are compatible with its statutory audit 
functions. In case of doubt, he/she may also consult the High Audit Commission 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  directly  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:  

– 

– 

EN 

preparation  of  any  financial  or  accounting  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  preparation  or  control  of  financial  or  accounting 
information to be included in the consolidated accounts subject to the statutory audit; 

162 

   EN 

 
– 

Carrying  out  of  any  activity  directly  or  on  behalf  of  the  management  of  the  audited 
entity. 

Services presumed to affect the independence of the 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 and 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  financial  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 Sarbanes-Oxley Act of 2002, the audit committee is 
responsible  for  the  appointment,  compensation  and  oversight  of  the  work  of  the  independent 
auditor.  As  part  of  this  responsibility,  the  committee  is  required  to  pre-approve  any  audit  and 
NASs  performed  by  the  independent  auditor  in  order  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 rules 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 example, place the auditor in the position of later 
having to audit his or her own work and identify the auditor too closely with the enterprise under 
audit. Similarly, an auditor who helped to negotiate the terms of employment for an audit client's 
chief financial officer is less likely to bring quickly to the audit committee questions about the 
new  chief  financial  officer's  performance.  However,  it  is  considered  that  an  audit  firm  can 
provide tax services such as tax compliance, tax planning and tax advice to its audit clients, as 
long as such services are pre-approved by the audit committee, without impairing the audit firm's 
independence. 

The  SEC's  rules  establish  two  different  approaches  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 ("general 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  audit  services  for  which  there  is  a  presumption  of 
conflict of interest and which, therefore, cannot be provided by the auditor to the audited entity, 
for  a  number  of  others  it  is  up  to  the  company  to  decide,  on  a  case  by  case  basis,  whether  a 

EN 

163 

   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 statutory audit and financial 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  audited  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 context 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 services which are not part of the audit mandate 
and are not included in the blacklist,  the general  rules on the assessment of possible  threats to 

303 

304 

The  blacklist  could  include  services  such  as  preparing  accounting  records  and  financial  statements, 
bookkeeping  services,  designing  and  implementing  financial  information  technology  systems,  etc.  See 
Annex 8. 
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 

164 

   EN 

 
                                                 
independence would apply. Therefore, to provide these other services, the audit firm would need 
to request the approval of the audit committee305. 

Advantages:  

• 

• 

• 

• 

The issue of conflict of interest which is generally associated with the auditor providing 
both  audit  services  and  NAS  to  the  audit  client  would  not  be  as  patent  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  streamlining  and  harmonising  policies 
among Member States306, creating a level playing field for all audit providers in the EU. 
It  would  be  easier  for  investors  and  regulators  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  Member  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  statements  of  companies  would  increase  accordingly 
(although not necessarily to the same extent as in the case of pure audit firms). 

Disadvantages:  

• 

305 

306 
307 

308 

In  the  case  of  a  ban  on  the  provision  of  certain  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 providing NAS to the audited client. But it 
is not only the amount of NAS fees that creates the problem.  

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  statutory  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 their independence and the safeguards applied to mitigate those threats. 
Belgian and French lists are not identical, for instance. 
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 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 interests at the level of a given subsidiary, even if the 
legislation in the country of the subsidiary is stricter.  
An option that would be based only on a cap on NAS fees (without blacklisting certain services) would not 
be practicable because of the risk of self-review. 

EN 

165 

   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 performance by the company's auditor of NAS 
at  the  direction  and  under  the  control  of  management  is  inherently  corrosive  and 
fundamentally incompatible with 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 perception 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. Therefore, 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 between the audit partner and the company may 
impair both the real and perceived independence 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 system therefore over-relies on the judgement 
of audit committee members. 

(3) A ban the provision of ANY non-audit services to the audited entity  

Another  way  to  reinforce  the  auditor  independence  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 PIE 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  other  than  audit  would  also  be  extended  to  the 
parent company of the audit client and at least its material subsidiaries. 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  statutory  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; 

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– 

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, assets, 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 could 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 option (see above) would disappear.  

The  incentives  for  audit  firms/statutory  auditors  to  by-pass  the  blacklist  by  providing 
remaining/other services would be reduced. Only a few additional audit-related services 
would be permissible and the list is less open to interpretation.  

Also, the over-reliance on the audit committee is reduced to the minimum.  

At  the  same  time,  this  option  should  facilitate  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  firm  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 words, audit firms would only provide statutory audit (and related 

309 
310 

311 

312 

See Regulation (EC) No 1060/2009.  
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. 
For instance, information provided by Assonime, the association of Italian listed companies, suggests that 
large  Italian  PIEs,  when  implementing  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.  
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. 

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services, see above) and only have audit clients. This would result in the creation of 'pure' audit 
firms.  

For this obligation to be effective, it should be accompanied by some 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  restriction  by  simply  splitting  the  responsibility 
for the different services into two different 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  individually  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  directly  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  auditors  would  no  longer  be  connected  to  the 
persons providing NASs. Indeed, public perception is important and investor confidence 
in the effectiveness of audit can be undermined if there is a perception 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 important client is likely to sacrifice his/her independence to secure a 
longer  auditor-client  relationship  would  beavoided.  Consequently,  the  confidence  of 
investors in the audit reports issued by the auditor would increase;  

The credibility of the audited financial statements of companies would increase as the 
auditor's  independence  would  no  longer  be  questioned,  whereas  currently  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  the  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 the 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 still be paid by the audited clients, the audit 
partners  would  become  less  vulnerable  to  economic  pressure  from  these  audit  clients, 
since the potential loss of the parallel provision of NAS will no longer be at stake. At 

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• 

• 

• 

• 

the same time,  if  this option will be combined  with  mandatory rotation, the economic 
pressure not to lose the audit client would also 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 conclusions of the audit report; 

There would be a level playing field for the provision of NAS allowing other providers 
to compete for NAS previously provided by audit firms to their 'captive' audit clients;  

Some market entry barriers could be eliminated 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 some audit firms would be enlarged: once converted into 
'pure audit' firms there would no longer be any impediment to providing 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 segregate 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 which they deem necessary to the provision of 
good quality audit services. While there may be synergies, providing NAS to an audited 
entity is not a condition necessary to provide audit services or be able to do so313. 

The  audited  entities  would  have  to  rely  on  other  service  providers  for  the  NAS,  who 
may  or  not  have  appropriate  skills  and  experience.  Finding  alternative  NAS  providers 
could  entail  initial  extra  costs  for  the  companies.  However,  the  audited  entity  may 
decide to keep the new entity segregated from the audit firm (and independent from it) 
as a provider of NAS, in which case this concern disappears. In any event, if the audited 
entity decides to look for another provider, the cost would be part of a business as usual 
situation.  

Any new NAS providers would require time to get to know the audited 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.  

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• 

The  conversion  into  'pure  audit'  firms  may  act  as  a  barrier  to  growth  for  mid-tier  and 
small  audit  firms.  Certain  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 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).  

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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 contributing to the switching of an audit firm to improve 
market  conditions  (objective  3.1).  This  option,  however,  is  controversial  and  has  attracted  the 
opposition of many stakeholders, in particular from the profession. The European Parliament has 
also expressed opposition. Opponents of mandatory firm rotation claim that the Statutory Audit 
Directive rules on partner rotation (as opposed to audit firm rotation) 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.  Italy  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  negative  impact  on  audit  quality,  the  difficulty  in 
maintaining industry specialisation and 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 counter-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  single  audit  appointment 
was three years and the same audit firm could be re-appointed twice. However, in order 
to reinforce independence, the system was modified in 1998. Currently, the audit firm is 
appointed for 9 years. The Italian authorities consider that this long-term appointment 
guarantees the well-functioning of the rotation system. In addition, 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, could 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 Directive rule on audit partner 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  mandatory  rotation  rule  in  Italy314,  69  %  of  managers  of  listed 
companies  approve  of  rotation.  14  %  consider  it  negatively.  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). 

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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  recognised  by  Assonime,  the  association  of  Italian 
listed companies315. 

Concerning the question of market structure, the Bocconi study316 came to the conclusion that: 
mandatory  audit  firm  rotation  did  not  have  much  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 contracts 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. However, 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 requiring the audited entity to also invite small and 
medium-sized audit firms to submit bids or the joint 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  introduce  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  provide  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 study317, refers to the point that mandatory audit firm 
rotation has a considerable impact upon the overall costs 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 the entity is not lost. Therefore, the 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. The following issues should be considered: 

• 

315 
316 
317 
318 

In a long term audit relationship, the auditor will tend to identify too closely with the 
management.  The  proper  professional  scepticism  will  be  diluted  and  auditors  will  be 
more  likely  to  smooth  over  areas  of  difficulty  in  order  to  preserve  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 

"Il nostro sistema…garantisse alti livelli di indipendenza". Assonime (February 2011), p. 9 
Bocconi (2002). 
Bocconi (2002). 
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.  

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• 

• 

• 

• 

• 

• 

• 

keeping  alert  to  subtle  but  important  circumstances.  The  great  preponderance  of  high 
profile financial reporting failures occurred in circumstances where the audit firm had 
been engaged for many years319. 

As explained above, managers of Italian listed 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-revision"  cases,  those  in  which  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, the materiality threshold was set at an average of $ 365,000. 
When  there  was  rotation  of  audit  firms,  the  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  actual  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 control 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  the  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 the 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 behalf of the audit firm needs 
to  rotate  from  the  audit  engagement  within  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 
320 

321 
322 
323 

Arel et al. (2005). 
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 attention to making suggestions/improvements. See Bocconi 
(2002). 
Arruñada & Paz-Ares (1997). 
Bates et al. (1982). See also FEE (2004), p. 9. 
Hoyle (1978). 

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its  view  that  "the  existing  partner  rotation  arrangements  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  scenario"  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 client325. Moreover, in case of partner 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 flexibililty to reopen them. The partner of a new 
firm does not have that problem326. On the other hand, opportunities to enter the upper 
segment of the market are not provided. 

Taking the above mentioned into consideration, the introduction of mandatory rotation of audit 
firms improves audit quality in terms of the avoidance 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  competition  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 look 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  negative  impact  on  audit  quality,  the  difficulty 
maintaining industry specialisation and the potential lack of choice. To address these suggested 
disadvantages the following issues should be taken into consideration: 

• 

324 

325 
326 
327 

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 also considered. The turnover of executive 
management  is  an  important  factor.  As  a  consequence,  the  auditor-management 
relationship is renewed continually even without 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. Moreover, audit firms developed even more detailed 
and specified rules for new engagements in order to reduce costs.  

See  European  Parliament  (2011),  §26.  On  the  contrary,  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).  
See above Section 2.3.2. 
See Doty (2011b), section II. 
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. 

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• 

• 

• 

• 

• 

As  it  is  more  likely  that  additional  costs  would  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 short and should include the possibility 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 five years. A possibility to renew the contract 
should be given once. However, to avoid conflicts 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 subsequent years. By 
introducing mandatory rotation, the contracts would be signed for a longer period and 
therefore  give  the  auditor  a  better  possibility  to  plan  his  future  work.  All  the  above 
mentioned aspects outweigh potential additional costs. 

Often,  it  is  feared  that  mandatory  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  providing  a  handover  file.  Additionally,  in 
combination  with  another  option  such  as  joint  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 the potential difficulty of auditors to develop 
and  maintain  the  industry  knowledge  to  operate  in  specialised  sectors.  However, 
specialised  knowledge  can  also  be  obtained  by  working  together  with  external 
specialists.  An  increase  in  costs  should  not  be  feared  because  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 rotation is opposed because of the fear that 
it  would  lead  to  a  lack  of  choice  when  appointing  a  new  auditor.  First  of  all,  by 
introducing transitional periods for introducing 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 obligation; the International Monetary Fund, Brasil 
and the US 

Other aspects that have not been considered so far are the following: 

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• 

• 

• 

• 

328 
329 
330 

331 
332 

333 
334 
335 
336 

Those  opposing  mandatory  firm  rotation  often  mention  Spain  as  an  example  where 
mandatory  firm  rotation  was  introduced  and  abolished.  However,  a  study328  clearly 
demonstrates  that  at  no  stage  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 International 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  the  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  academic  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  those  companies.  Braunbeck  suggests  that 
audit  quality  is  lower  when  agency  conflicts  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  years  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 recently proposed to modify the rotation rule: the rotation of 
audit firms would be maintained as an obligation, 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 publication of a consultation paper 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, showing arguments put forward in favour and 

Gómez-Aguilar et al. (2006).  
International Monetary Fund (2004).  
"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. 
Braunbeck (2010). 
"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. 
See CVM (2011). The deadline for comments on the possible modification of the rules was 15 August.  
See Doty (2011a), section III.B. 
US PCAOB (August 2011). 
US PCAOB (August 2011), p. 4.  

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against  this  measure337.  It  also  refers  to  the  limitations  of  existing  academic  studies, 
which  observe  the  consequences  of  "voluntary"  audit  firm  rotation,  which  "may  be 
associated  with  auditor-issuer  disagreements,  other  financial  reporting  issues  or 
economic  issues".  As  a  result,  those  studies  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  discussion.  It  is  noteworthy  that,  regarding  the 
possible  maximum  duration  of  an  audit  contract,  reference  is  made  to  10  years  as  "a 
substantial period of time".339 

337 
338 
339 

Ibid. p. 10 and seq.  
Ibid. p. 16 and seq. 
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. 

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ANNEX 12. JOINT AUDIT OF FINANCIAL STATEMENTS OF PIES 

One  of  the  possible  ways  to  increase  the  choice  of  audit  providers  for  public-interest  entities 
(PIEs) and to further improve audit quality would be the introduction of the obligation for PIEs 
to have more than one audit firm to perform the statutory audit or in other words – introduction a 
of  "joint  audit"  requirement.  This  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 providers for PIEs (objective 3.3).  

According  to  different  studies,  France  and  Denmark,  which  are  two  countries  that  currently  or 
previously require mandatory joint audit (Denmark abolished joint audit requirements in 2005), 
have  the  least  concentrated  audit  markets  in  Europe340.  Thus,  it  has  been  advanced  that  joint 
audit would safeguard auditor independence and would stimulate market competition. Moreover, 
the Institute of Chartered Accountants in England and Wales (ICAEW), which is one of the UK's 
most prominent accounting institutes, said that the introduction of mandatory 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 audit firms and some public authorities. Mid-tier audit firms have 
more positive views on joint audit. The European Parliament recognises that the implementation 
of joint audits could have positive effects on the diversification of the audit market.  

This  annex  presents  the  experience  in  two  Member  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 entity must appoint at least two statutory 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 tasks to be carried out 
by each auditor in order to complete the assignment.  

Three goals were pursued by the French legislator when imposing such a requirement on certain 
companies: 

• 

• 

• 

Reinforcement of the level of transparency and financial security; 

Improvement  of  the  independence  of  auditors  and  as  a  consequence  enhancement  of 
audit quality; 

Limitation of the hyper-concentration in the upper end of the audit market342. 

The  joint  audit  requirement  applies  to  all  entities,  which  are  obliged  to  publish  consolidated 
accounts – i.e. those entities that exercise exclusive or joint control or significant influence over 

340 
341 
342 

See London Economics (2006), p.19. 
See French Commercial Code, Article L.823-2. 
See Fremeaux et Noël (2009). 

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one  or  more  other  companies.  There  are  two  groups  of  entities  that  are  exempted  from  the 
general  obligation  –  (i)  exemption  within  a  larger  group  (i.e.  if  the  consolidated  financial 
statements are published by another entity at a higher 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 generally publish consolidated accounts, certainly 
the larger ones. 

The auditors are appointed at the shareholders' meeting and they are not obliged to present their 
bids together or to act in consortia. The only requirement is that the two appointed auditors are 
members of different firms or networks. Under the French model, there is no restriction on the 
size of the audit firm to be appointed, thus there are three possible scenarios: (i) appointment of a 
Big Four and a non Big Four firm; (ii) appointment of two Big Four firms and (iii) appointment 
of  two  non  Big  Four  firms.  The  following  table  presents  the  actual  combinations  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 (combination 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  appointed  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 are 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, defines 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  programme  between  the  two  co-auditors  and 
reciprocal review of the audited documents; 

Functional  and  effective  independence  not  only  between  the  auditors  and  the  audited 
company,  but  also  between  the  two  co-auditors,  which  implies  that  each  of  them 
conducts a significant part of the audit; 

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• 

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 auditors 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  auditors  are  jointly  and  severally  responsible  for  the  audit  opinion 
provided. This requirement requires a strong consensus 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 worked) and qualitative (e.g. experience and qualifications of the 
audit team members) criteria. Each auditor must be able to obtain a general understanding of the 
audited entity, to assess the risk of material misstatement 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 approve 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  and/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% for 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 readjusting them. Studies have shown 
that uneven audit work allocation between the two co-auditors might seriously harm audit quality 
and  lead  to  increased  audit  costs344.  The  following  table  (figure  A12.2)  presents  data  on  the 
distribution of fees in the French market in recent 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 
344 

See Fremaux et Noël (2009). 
See Audousset-Coulier (2006). 

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It  should  be  noted  that  the  fees  reflected  in  the  table  correspond  to  the  audit  of  consolidated 
accounts,  therefore  reflecting  the  work  carried  out  by  the  respective  networks  of  the  joint 
auditors.  If  only  the  data  at  the  level  of  the  parent  company  is  taken  into  account,  unbalances 
between  the  joint  auditors  are  normally  reduced.  Figure  A12.3  shows  data  from  selected 
Frenchcompanies:  

Company 

Distribution 
accounts  

for 

consolidated 

Distribution at the level of the parent 
company 

Auditor 2 

Auditor 1 

Auditor 2 

Michelin (2009) 

Axa (2009) 

Peugeot (2009) 

Auditor 1 

91% PwC 

83% PwC 

75% PwC 

9% Corévise 

17% Mazars 

25% Mazars 

Suez 
(2009) 

Envir. 

73% E & Y 

27% Mazars 

Danone (2009) 

66% PwC 

34% Mazars 

Axa (2010) 

Peugeot (2010) 

81% PwC 

77% PwC 

19% Mazars 

23% Mazars 

Suez 
(2010) 

Envir. 

71% E & Y 

29% Mazars 

Danone (2010) 

69% PwC 

31% E & Y 

Figure A12.3 Source: data from AMF (2010), p.6 and AMF (2011), P.7. 

50% 

86% 

71% 

55% 

57% 

82% 

67% 

52% 

58% 

50% 

14% 

29% 

40% 

43% 

18% 

33% 

48% 

42% 

Joint audits present numerous advantages both in terms of improving audit 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 companies. This was intended to ensure the 
sufficiency of audit resources  for  such companies. The concept of joint audit was abolished in 
2005, as it was considered that the administration 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  multinational  companies  are  now  addressed  through 
independence requirements, review partner requirements, 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 mandatory 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 complementary and combined expertise, applying the 
"four eyes principle" in the strategic preparation of the joint audit as well as in the analysis of the 

345 

See FEE, Briefing paper, Appointment of the Auditor, June 2011. 

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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  opportunities  for  the  smaller  firms  to  get  exposure, 
demonstrate their capability and build reputation over 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  concern  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 reputation of the other. In other words, one Big Four 
firm would somehow subconsciously validate any work performed by another Big Four firm, as 
they  link  it  to  quality  and  high  performance.  For  this  reason,  it  may  seem  more  appropriate  to 
appoint  one  Big  Four  and  one  mid-tier  firm  as  this  would  result  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  benefits  in  terms  of  more  choice,  audit  quality 
and other benefits resulting from more competition in the market are expected to outweigh the 
increased costs of joints audits. 

(4) Benefits of joint audits: 

• 

• 

• 

346 

347 
348 

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  business  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  additional  room  for  discussion  and 
improvement;  

Reinforce  professional  scepticism  –  In  the  conduct  of  the  joint  audit,  each  of  the 
auditors  would  cross-review  the  work  of  the  other.  As  a  consequence,  knowing  that 
his/her  work  will  be  the  subject  of  review  by  his/her  peer,  the  auditor  will  have  an 
additional challenge which should normally reinforce 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 audit on the financial sector–: It will create more expertise at the 
top level of the market. In some MS, statutory audits in the banking sector are currently 
conducted by Big Three or Big One (Spain, UK, Germany), which results in a lack of 

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 has a small or no market share in that same segment. 
See Fremaux et Noël (2009). 
See House of Lords (March 2011).  

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sufficient  expertise  even  at  the  top  level  of  the  market.  Therefore,  applying  the  joint 
audit in this area could build up respective expertise 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 expected that some of the specialist sector teams 
(e.g. the banking audit team) may leave the Big 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 added 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  audit.  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 stock exchange index (OMX Stockholm 30) (e.g. 
Svenska  Handelsbanken).  Voluntary  joint  audit  is  also  used  by  a  number  of  banks  in 
Austria 
(e.g.  Raiffeisenlandesbank  Niederösterreich-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  concentrated  than  other  European  markets349. 
According  to  a  study  carried  out  by  the  AMF,  the  French  securities  regulator,  and  to 
estimations  provided  to  the  Commission  by  different  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 jointly 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  thus  shows  that  joint  audits  (despite  the 
fact that the French model does not intend, and 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 resignation 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  coincide,  the  disruption  would  be 
minimised, as only one of the audit firms would be changed, allowing a certain degree 
of  continuity  of  the  audit  work  to  be  ensured.  Thus,  it  has  been  suggested  that  the 
audited  company  could  stagger  the  appointments  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 their systemic risks and complexity of their 
financial statements; 

Reinforce  the  auditor's  position  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 audited entity will be exposed to two suppliers instead of 

• 

• 

• 

349 

See Francis, Richard and Vanstraelen (2006). 

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one350.  This  would  further  address  the  "familiarity  threat",  as  under  a  joint  audit 
scenario, it seems less likely that any auditor develops a too-trusting ‘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 

184 

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(5) Downsides of joint audits: 

• 

• 

• 

• 

• 

Extra  costs  -  It  has  rightly  been  suggested  that  joint  audit  entails  further  costs  for  the 
audited entity. However, based on the available data, it is difficult to determine exactly 
this additional cost. According to estimations received from different stakeholders, the 
joint  audit  approach  would  involve  about  10%  (according  to  data  from  France)  in 
additional costs compared to a single auditor scenario. However, the cost mentioned by 
several stakeholders, including Danish representatives, which have had experience with 
joint audit in the past, is significantly higher, although, no estimates are provided351; 

Additional complexity and workload – Joint audits may bring additional complexity as 
the audited entity must choose and must communicate with two auditors instead of one 
and  in  some  instances  the  audited  entity  may  have  to  act  as  a  referee  in  case  of  a 
disagreement between the auditors352. In addition, it has been suggested that joint audits 
could lead to an increase in the workload resulting from the duplication 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 that 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 that, 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 auditor 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 statutory audit, together with 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 follow the instructions he is given354. 

351 
352 
353 
354 

Estimation provided to Commission services by stakeholders. 
See Francis, Richard and Vanstraelen (2006).  
See Benecib (2002). 
See Fremaux et Noël (2009). 

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ANNEX 13. DEFINITION OF PUBLIC-INTEREST ENTITY 

(1) The existing definition of PIE 

Currently, the Statutory Audit Directive establishes stricter requirements for the statutory audit 
of  the  annual  or  consolidated  accounts  of  public-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  State  whose  transferable  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 flexibility when implementing this definition. On the 
one  hand,  they  may  also  designate  other  entities  as  PIEs,  for  instance  entities  that  are  of 
significant public relevance because of the nature of their business, their size or the number of 
their employees358. On the other hand, Member States may exempt PIEs which have not issued 
transferable securities admitted to trading on a regulated 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  institutions  other  than  credit  institutions  and 
insurance companies 

Financial  institutions  other  than  credit  institutions  and  insurance  companies  have  a  growing 
importance for the financial system.  

Assets managed by investment funds 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 

356 

357 

358 
359 
360 

Cf.  recital  23  of  the  Statutory  Audit  Directive.  In  the  explanatory  memorandum  accompanying  the 
Commission  proposal,  the  Commission  explained  that  recent  scandals  showed  the  importance  of  further 
strengthening  requirements  concerning  the  audits  of  public  interest  entities.  See  European  Commission 
(2004). 
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  listed  companies,  banks,  insurance  undertakings  and  "other 
financial institutions"). See European Commission (2004), point (11) of draft Article 2. 
Third  country  issuers  of  securities  admitted  to  trading  on  regulated  markets  are  thus  not  covered  by  the 
definition of PIE. 
Article 2, point 13 in fine of the Statutory Audit Directive. 
Article 39 of the Statutory Audit Directive. 
See Efama (2010), table 6. Data includes UCITS and non-UCITS funds. Data includes funds from Norway, 
Switzerland and Turkey. 

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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  money  market  funds)  in  the  EU,  the  non-banking 
institutions  represent  around  25%  of  total  assets361.  Investment  funds  have  a  similar  weight  as 
insurance undertakings. 

Institutions 

2009 

Credit institutions 
Insurance undertakings 
Investment funds 
Pension funds 
Total 

Total assets 
42143710 
6381947 
6291915 
2363128 
57180700 

% of total 
74 
11 
11 
4 

2008 

Total Assets  
42217558 
6066224 
5125478 
2073043 
55482303 

% of total 
76 
11 
9 
4 

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 
362 
363 

ECB (2010). 
See Generally European Commission (April 2011c). 
González-Páramo (2011). 

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system is growing364 and the Financial Stability Board is looking at policy options 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  asset-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 comprehensive system that extends in a proportional way 
to  all  actors,  intermediaries,  markets  and  activities  that  embed  potential  systemic  risk.  In  this 
area the identification of data  gaps and putting in place an effective monitoring framework as 
well as reinforcing the accounting rules on consolidation internationally are key"366. Moreover, 
the shadow financial system also conducts an enormous 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 

365 
366 
367 

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  banking  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. 
FSB (2011). 
González-Páramo (2011). 
See European Commission (September 2010), p. 11 and seq. 

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In  this  context,  transparency  about  financial  information  (including  the  auditing  of  disclosed 
information)  is  of  paramount  importance:  "private  financial  markets  cannot  function  properly 
unless  there  is  enough  information  and  reporting  both  to  market  participants  and  to  relevant 
regulators  and  supervisors.  The  financial  crisis  evidenced  the  increasing  opaqueness  of  the 
financial sector and the resulting counterparty risk externality"368. 

Concerning  market  integrity,  the  recent  Madoff  fraud  case,  which  constitutes  the  biggest 
financial  fraud  ever,  originated  from  the  investment  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  circumstances,  in  competition  with  traditional  credit 
institutions. They are also subject to prudential requirements and specific supervision. However, 
they  are  not  included  in  the  category  of  public-interest  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  are  relevant  from  the  perspective  of  financial  stability  or  investor 
protection (e.g. protection against fraud).  

Hence,  it  is  appropriate  that  the  definition  of  public-interest  entities  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 committee; receive expanded audit reports as well as 
internal  audit  reports  from  their  auditor(s);  apply  the  specific  rules  on  the  appointment  of  the 
auditor(s) which would imply limiting the duration of the audit engagement (rotation rule) and 

368 

369 
370 

371 

Ibid. On the importance of transparency on financial reporting for the good functioning of financial markets 
and financial stability, see also Maaijoor (2001). 
Currently, there are about 200 payment institutions in the EU.  
The e-money Directive was due to be transposed by April 2011. E-money institutions are required to have a 
minimum initial capital of at least €350,000.  
This is already the case in Italy, for instance. 

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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  these  obligations.  The  application  of  some  of  them 
(joint audit rule, tendering rule or existence on an audit committee) would depend on their size 
(see also Annex 16 on this). Moreover, for some of the institutions, because of their nature (i.e. 
UCITS and alternative investment funds), it would not be appropriate 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  statutory  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 stricter requirements for the auditors of PIEs.  

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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 conducted across the Union, in particular 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  address  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. Therefore 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 fulfils the objectives in Section 4;  

(ii) certainty: highest possible confidence of the relevant stakeholders as to the content 
of  the  rules  to  be  respected  and  that  the  rules  followed  in  practice  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  applicable  to  statutory  audit  would  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  interpretation,  the  direct 
applicability  of  a  Regulation  would  offer  greater  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 Member States. Once in force, it 
would override incompatible provisions in domestic legislation. In terms of administrative costs, 
it  avoids  the  resource-intensive  and  time-consuming  transposition  of  directives  by  national 
legislators as well as the monitoring of timely and correct transposition by the Commission. 

A regulation could effectively deal with some of the policy options described above, in particular 
those  regarding  the  performance  of  the  statutory  audit  of  PIEs.  These  policy  options  are 
sufficiently  detailed  so  that  the  transposition  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  these  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  would  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 those in connection 

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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 regarding 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 binding 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  transposition  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, certainly as regards those policy options calling for 
detailed rules such as those in connection 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  registration  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 content 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 connection with the audit of PIEs and a 
directive  remain  for  the  approval  and  registration  of  auditors  and  audit  firms,  the  existing 
principles in the Directive regarding professional ethics, professional 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 regulation or directive is proposed as the preferred 
solution, it would need to be completed at a later stage with additional secondary legislation in 
some cases. There are instances in which the policy 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 "technical standards" that could be developed by 
ESMA or the other ESAs appears the logical solution373. In the case of the areas covered by the 
directive,  it  would  also  be  necessary  to  complete  it  in  the  future,  but  technical  standards 
developed  by  ESMA  would  not  be  the  solution  in  this  case,  but  rather  delegated  acts374  or 
implementing acts375 prepared by the Commission under the normal Treaty conditions. 

372 

373 

374 

"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. 
See  articles  10  (regulatory  technical  standards)  and  15  (implementing  technical  standards)  of  ESMA 
Regulation. 
Article 290 TFUE: 

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Figure A14.1 

Objectives  

effectiveness 

certainty 

common framework 

Policy option  
Policy options relating to the audit of PIEs, including supervision 

Regulation 
Directive 

++ 
+ 

++ 
+ 

Policy options relating to the audit of SMEs 

Regulation 
Directive 

+ 
+ 
Policy options relating to the approval and registration of statutory auditors and audit firms 
-- 
+ 

Regulation 
Directive 

≈ 
++ 

-- 
+ 

Policy options relating to the adoption of auditing standards 

Regulation 
Directive 

+ 
+ 
Policy options relating 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  

On this basis, the Commission services conclude that:  

– 

– 

375 

(i)  a  regulation  is  a  suitable  and  proportionate  solution  for  the  policy  options  that  are 
connected  with  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;  

(ii) a modification of the existing directive 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 connected 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 non-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 Council 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." 
Article 291 TFUE: 
"1. Member States shall adopt all measures of national 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 control by Member States of the Commission’s exercise of 
implementing powers. 
4. The word ‘implementing’ shall be inserted in the title of implementing acts." 

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– 

– 

(iii) both instruments are equally effective, certain and provide a similar harmonisation 
level concerning the adoption of international auditing standards; and  

(iv)  both  a  directive  or  a  regulation  would  need  to  be  completed  with  additional 
secondary  legislation,  in  one  case  delegated  acts,  in  the  other  technical  standards 
developed by ESMA.  

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ANNEX 15. IMPACT ON STAKEHOLDERS: ANALYSIS 

This Annex presents a summary analysis of the main impacts of the preferred policy options on 
different  stakeholders.  This  analysis  integrates  the  results  of  the  assessment  of  the  costs  and 
benefits of the preferred policy 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 continue as a going concern;  

audited  entities:  PIEs  and  SMEs.  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 said 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 implication of the proposed measures will be 
proportionally more important for them than for larger PIEs; and  

providers of statutory audit services: the impact 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 and 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 third countries, see Annex 17.  

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(1) Comparison of preferred options - Objective 1: Clarify and define the role of the statutory auditors generally as well as with specific regard to 
PIEs 

Stakeholder 

Policy option  

analysts 
Investors, 
employee 
organisations 
and  other  users  of  audit 
reports 

PIEs 

SMEs 
[only 
medium-sized 
enterprises are required to 
accounts 
have 
audited,  unless  they  are 
PIEs] 

their 

Big Four audit firms 

Mid-size audit firms 

SMPs 

0 

0 

0 

0 

0 

+ 
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. 

Baseline scenario 

Clarify and specify the scope of statutory 
audit to reduce the expectation gap 

Improve  and  expand  the  content  the 
audit report disclosed to the public 

Require  the  preparation  of  a  longer  and 
more  detailed  report  for  the  audited 
entity 

Increase the communication between the 
auditor and the audit committee 

0 

+ 

understanding 

Better 
of 
scope  of  audit  and  therefore 
better  valuing  the  accounts 
of the audited entity 

+ 
Investors  will  obtain  more 
and  better  information  from 
auditors  on  the  accounts  of 
the  PIE,  which 
should 
facilitate  the  evaluation  of 
the accounts 

+ 
Investors  will 
indirectly 
benefit from this measure as 
a  result  of 
the  expected 
increase in audit quality. 

+ 
Investors  will 
indirectly 
benefit from this measure as 
a  result  of 
the  expected 
increase in audit quality. 

EN 

+ 

accounts 

judgement 

Better 
of 
accounts by investors should 
result  in  more  confidence  in 
the  PIEs 
and 
therefore  better  value  of 
their securities. 
The  additional  disclosure 
requirements  will  have  a 
certain  cost  (estimated  at  8 
working hours/ report). 

++ 
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) 

++ 
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. 

n.a. 
This  measure  would  only 
affect  SMEs  which  are  also 
PIEs.s 

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 
cost 
so 
function, 

the 

196 

+ 
Positive  impact  as 
the 
the 
role  of 
auditor  will  be 
clarified. 

+ 
If  SMPs 
audit 
accounts  of  PIEs, 
same 
positive 
effect  as  for  mid-
size audit firm 

++ 
If  SMPs 
audit 
accounts  of  PIEs, 
same 
positive 
effect  as  for  mid-
size audit firm 

+ 
Audit  firm  will  be  in  a 
position to better explain the 
the  work 
quality 
undertaken  and  this  should 
improve  the  reputation  of 
the audit firm 

of 

+ 
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 

++ 
The  audit  firm  will  be  in  a 
position  to  better  explain  to 
the 
the 
audited 
the  statutory 
outcome  of 
audit.  It  is  expected  that  the 
cost 
be 
increase  will 
transferred to audited entity.  

entity 

entity 

audited 

++ 
The  audit  firm  will  be  in  a 
position to better explain to 
the 
the 
outcome  of  the  statutory 
audit. It is expected that the 
increase  will 
cost 
be 
transferred 
audited 
to 
entity.  

result 

++ 
Reinforced  communication 
with the audit committee can 
only 
improved 
quality of the statutory audit 
carried out by the audit firm. 
Hence,  positive  reputational 
effects  too.  As  shown  by  he 

in 

++ 
Reinforced  communication 
with  the  audit  committee 
can only result in improved 
quality  of 
the  statutory 
audit  carried  out  by  the 
audit  firm.  Hence,  positive 
too. 
reputational  effects 

++ 
If  SMPs 
audit 
accounts  of  PIEs, 
same 
positive 
effect  as  for  mid-
size audit firm 

EN 

 
  
 
 
 
 
Big Four audit firms 

Mid-size audit firms 

SMPs 

cost  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.. 
++ 
Reinforced  communication 
with the audit committee can 
only 
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. 

result 

in 

increase  should  be 

Cost 
marginal only. 

++ 
Reinforced  communication 
with  the  audit  committee 
can only result in improved 
quality  of 
the  statutory 
audit  carried  out  by  the 
audit  firm.  Hence,  positive 
too. 
reputational  effects 
Yearly 
increase 
cost 
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  

analysts 
Investors, 
employee 
organisations 
and  other  users  of  audit 
reports 

PIEs 

Requiring  the  establishment  of  regular 
dialogue 
and 
supervisors  of  PIEs  which  are  financial 
institutions 

between 

auditors 

53.600  euro  on  a  yearly 
basis  (based  on  20  expert 
days  and  cost  of  3  annual 
meetings).  

+ 
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.  

+ 
Investors  will 
indirectly 
benefit from this measure as 
a  result  of 
the  expected 
increase in audit quality. 

SMEs 
[only 
medium-sized 
enterprises are required to 
have 
accounts 
audited,  unless  they  are 
PIEs] 

their 

implications are lower. 

n.a. 
This  measure  would  only 
affect  SMEs  which  are  also 
PIEs.s 

Stakeholder 

Government 

Financial stability 

Employment 

Policy option  

impact 

Joint 
all 
measures under objective 1 

of 

facilitate 

++ 
The  combined  effect  of  the 
measures  under  objective  1 
the 
should 
supervisory 
exercise  of 
tasks 
statutory 
over 
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 
level  of 
the 
employment,  the  effect  of 
these  measures  should  be 
neutral. 
greater 
The 
involvement  of  key  audit 
reinforced 
partners 
in 
dialogue 
audit 
committees and supervisors 
in 
could 
other 
opportunities 

result 
for 

with 

EN 

197 

EN 

 
  
 
 
 
 
 
Stakeholder 

Government 

Financial stability 

Employment 

Policy option  

problems. 

auditors to also become key 
therefore 
audit  partners, 
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 

198 

EN 

 
  
 
 
(2) Comparison between options - Objective 2: Eliminate the inherent conflict of interest in the provision of statutory audit to 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 

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 
another 
committee 
this 
body 
function, 
cost 
implications are lower. 

fulfil 
the 

and 

can 

so 

+ 
This  measure  would  only 
affect SMEs which are also 
PIEs. 
For 
cost 
small  PIEs, 
implications  may  be  higher 
than  for  larger  ones,  but  at 
the 
same 
the 
complexity 
accounts 
should normally be lower. 

time 

of 

audit 

Strengthening  the  role  of 
committee 
the 
regarding the appointment 
of auditors 

+ 
indirectly 
Investors  will 
benefit from this measure as 
a  result  of 
the  expected 
increase in audit quality. 

++ 
Audit  committee  will  be 
better able to exercise its role 
the 
the  monitoring  of 
on 
cost 
audit. 
Possible 
(greater 
implications 
involvement  of 
the  audit 
committee members).  

Mandatory  rotation  of  an 
audit 
regular 
firm  via 
tendering 

+ 
Investors  will 
indirectly 
benefit  of  this  measure  as  a 
result  from 
the  expected 
increase in audit quality and 
reduction in audit costs. 

likely  cost 

+ 
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 
increase 
resulting  from  the  need  to 
support  the  new  auditor  at 
initial  stages,  which  may  be 
partially 
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.  

compensated 

+ 
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. 

+ 
audit 
If  SMPs 
accounts  of  PIEs, 
same 
positive 
effect  as  for  mid-
size audit firm 

- / ≈ 
lose 
SMPs  will 
audit 
their 
engagements  with 
PIEs  with 
no 
guarantee that they 
will be able to take 
ones 
new 
up 
without  important 
investments. 

+ 
Rotation  will  result  in  the 
need  for  these  firms  to 
search  for  new  customers, 
with potentially lower fees. 
But  at 
time, 
rotation  will  potentially 
lead to possible new market 
opportunities 
these 
firms  in  the  top  end  of  the 
market.  

the  same 

for 

The  tendering  will  have 
certain costs as presented in 
the  case  of  Big  Four  audit 
firms.  

for 

firms 

- / ≈ 
Rotation  will  result  in  the 
to 
these 
need 
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 
to  audited 
entity later on. The real cost 
for  audit  firms  will  be  the 
tenders which will not result 

transferred 

EN 

199 

EN 

 
  
 
 
 
 
 
Stakeholder 

Policy option  

Pure audit firms 

SMEs 
[only medium-sized 
enterprises are required 
to have their accounts 
audited, unless they are 
PIEs] 

+ 
This  measure  would  only 
affect SMEs which are also 
PIEs. 
Same  effects  as  for  other 
PIEs. 

Investors, employee 
organisations and other 
users of audit reports 

PIEs 

++ 
Investors  will 
indirectly 
benefit from this measure as 
the  expected 
a  result  of 
increase in audit quality that 
would 
such 
result 
increased independence. 

from 

+ 
This measure should result in 
increased 
quality, 
audit 
which  in  turn  should  lead  to 
better  judgement  of  accounts 
by investors and in turn more 
confidence 
the  PIEs 
in 
accounts  and  therefore  better 
securities. 
their 
value  of 
Possible 
in  audit 
increase 
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 
the  upper 
into 
segment of the market. 

Big Four audit firms 

Mid-size audit firms 

SMPs 

in a signed contract.  

- 
Similar  impact  as  for  Big 
Four,  although  the  scale 
and  dimension  is  smaller. 
tend 
firms 
Mid-size 
to 
less 
provide 
non-audit 
services 
than  Big  Four 
ones. At the same time, this 
the 
measure 
possibility  to  focus  on  the 
real  audit  service, 
thus 
increasing the quality of the 
service. 

offers 

-- 
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 
larger  source  of 
and  a 
negative 
revenues.  This 
financial  impact  would  be 
mitigated  by  adapting  the 
cost  structure  to  the  new 
scope 
authorised 
activities.  At  the  same  time, 
the 
this  measure  offers 
possibility  to  focus  on  the 
real 
thus 
increasing  the  quality  of  the 
service. 

service, 

audit 

of 

requirements 
Additional 
internal 
for 
the 
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 
the 
firms,  due 
partial  existence  of  such 
policies 
and  procedures. 
Positive  effects  in  terms  of 
audit quality. 

to 

+ 
Virtually  no  cost  effect  on 
these  firms,  due 
the 
partial  existence  of  such 
policies  and  procedures. 
Positive  effects  in  terms  of 
audit quality. 

to 

-- 
SMPs  will  most 
likely prefer not to 
and 
audit  PIEs 
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 
less  present 
are 
anyway. 

to 

-/≈ 
Costs  arising  from 
these  requirements 
be 
likely 
for 
important 
SMPs  willing 
to 
PIEs, 
audit 
although  there  is 
the  possibility  to 
adapt requirements 
to size. 

Stakeholder 

Government 

Financial stability 

Employment 

Policy option  
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  increase  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  positive  employment  implications  in 

EN 

200 

EN 

 
  
 
 
 
 
 
 
Stakeholder 

Government 

Financial stability 

Employment 

Policy option  

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  supervision  should  have 
positive  effects  on 
financial 
markets and their stability. 

the 

PIEs  (need  to  organise  tenders,  monitor  more  closely  the  incoming 
auditor, support to a more active audit 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 

201 

EN 

 
  
 
(3) Comparison between options - Objective 3: Improve market conditions for audits of PIEs so that audit firms compete more on audit quality and 
price while eliminating the existence 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 

Mandatory 
regular tendering 

rotation  with 

Pure audit firms 

Joint  audits  on  a  voluntary 
basis 

+ 
Will have a positive impact 
from 
more 
resulting 
audit 
in 
competition 
markets: 
audit 
higher 
quality, lower price 

+ 
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 

+ 
Initial  costs  of  mandatory 
rotation  and  tendering  will 
be  offset  by  lower  prices 
and higher quality of audits 
more 
resulting 
competition  (on  the  cost 
estimates  see  same  point 
above  as  well  as  respective 
section in Annex 20) 

from 

and 

+ 
This  measure  should  result 
in  increased  audit  quality 
and lower cost due to more 
choice 
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. 

+/≈ 
There  will  be  a  positive 
impact  on  those  SMEs  that 
will be considered as PIEs 

+ 
This  measure  would  only 
affect SMEs which are also 
PIEs. 
Same  effects  as  for  other 
PIEs. 

0 

– 

and 

Profits  margins 
the 
revenues  paid  out  to  partners 
within  Big  Four  firms  will  go 
down  closer  to  the  margins  of 
non-Big Four audit firms 

– 
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, 
the 
thus 
quality of the service. 

increasing 

and 

+/– 
Could have positive impact 
in long-run due to increased 
competition 
less 
concentration  in  the  audit 
markets.  In  short  run,  there 
will  be  additional  costs  for 
that  would 
joint  audits 
be 
to 
finally 

have 

+/– 
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 
provide 
will 
market 
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 
the  audit  work  with 
share 
smaller  audit  firms  on 
the 
audits of PIEs. 

0 

0 

from 

profit 

+ 
Non-Big  Four  audit  firms 
will 
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 

– 
Similar  impact  as  for  Big 
Four,  although  the  scale 
and  dimension  is  smaller. 
tend 
firms 
Mid-size 
to 
provide 
non-audit 
less 
than  Big  Four 
services 
ones. This measure is likely 
to  make  audit  firms  focus 
on  the  real  audit  service, 
thus  increasing  the  quality 
of the service. 
+ 
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. 

– 
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 
to 
audited companies. 

services 

+/≈ 
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 

202 

EN 

 
  
 
 
                                                 
Stakeholder 

Policy option376  

Investors, 
employee 
organisations  and  other 
users of audit reports 

PIEs 

SMEs 

Big Four audit firms 

Mid-size audit firms 

SMPs 

to  companies 
transferred 
and  finally  investors,  but 
there  will  be  also 
the 
beneficial  effects  on  the 
quality of audits 

it 

established, 

no  clear  cost  estimate  can 
be 
is 
considered  that  there  will 
be an increase in audit cost 
of  between  5  and  10% 
(based 
from 
France).  

data 

on 

additional  costs  for  joint 
audits  that  will  be  likely 
transferred  to  companies, 
but  also 
the  beneficial 
effects  on  the  quality  of 
audits 

+ 
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 

More  transparency  on  audit 
quality,  on  audit 
firms' 
financial  statements  and  a 
pan  European  audit  quality 
certificate 

Lift 
ownership of audit firms 

restrictions 

on 

Prohibition  of  contractual 
clauses  limiting  the  choice 
of an audit firm 

+ 

+ 

+ 

audit 

to 
Allowing  non-auditors 
firms  will 
own 
increase  competition  in  the 
audit markets 
+ 
Disappearance  of  contracts 
favouring  Big-Four  audit 
firms  will  have  a  positive 
impact  on  other 
audit 
service providers 

audit 

to 
Allowing  non-auditors 
firms  will 
own 
increase  competition  in  the 
audit markets 
+ 
Disappearance  of  contracts 
favouring  Big-Four  audit 
firms  will  have  a  positive 
impact  on  other 
audit 
service providers 

audit 

to 
Allowing  non-auditors 
firms  will 
own 
increase  competition  in  the 
audit markets 
+ 
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. 

with 

+ 
Overall,  PIEs  will  be  the 
winners 
more 
competition  and  choice  in 
the 
audit  market.  The 
benefits  brought  about  by 
competition  will 
more 
offset  the  slight  increase  of 
costs  in  organising  regular 

+ 
Overall,  SMEs  will  benefit 
from  more  competition  in 
the  provision  of 
audit 
services 

likely 

– 
Big  Four 
reputation 
firms' 
versus  non-Big  Four  firms  is 
likely  to  decrease  and  will  be 
to  act  as  a 
less 
competitive  advantage  over 
non-Big Four firms 
There 
increase 
is  a  cost 
resulting  from  the  publication 
of  information.  The  cost  of 
applying  for  the  pan-European 
certificate  is  not  estimated  at 
this stage. 

– 
Allowing  non-auditors  to  own 
increase 
audit 
competition 
audit 
markets 

firms  will 

the 

in 

– 
Since  Big-Four  audit  firms,  to 
our  knowledge,  were  the  only 
ones  benefiting 
these 
contractual  clauses  they  would 
be  the  only  stakeholder  group 
worse-off 

from 

the 

– 
Overall,  the  Big  Four  audit 
firms  will 
only 
be 
stakeholder  group  which  will 
suffer  from  the  measures  to 
open  up  the  market  for  audits 
to 
of 
competition. 
Competitive 
pressure  will  raise  the  audit 

companies 

large 

+ 
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. 

– 

– 

audit 

to 
Allowing  non-auditors 
firms  will 
own 
increase  competition  in  the 
audit markets 
+ 
Disappearance  of  contracts 
favouring  Big-Four  audit 
firms  will  have  a  positive 
impact  on  other 
audit 
service providers 

audit 

to 
Allowing  non-auditors 
firms  will 
own 
increase  competition  in  the 
audit markets 
+ 
Disappearance of contracts 
favouring Big-Four audit 
firms will have a positive 
impact on other audit 
service providers 

+ 
Overall,  other  international 
non-Big Four networks will 
be better off due to opening 
up  of  the  market  for  audits 
of 
the 
competitive  pressure  they 
might  be  facing  due 
to 
ownership 
of 
removal 

despite 

PIEs, 

+ 
Overall,  SMPs  will  be 
though 
positively, 
not 
likely 
significantly, 
impacted  by  the  measures 
taken 
promote 
competition  in  the  market 
for audits of PIEs 

to 

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 

tenders  and  changing  an 
audit firm 

quality  and  lower  the  costs  of 
services 

restrictions 

Stakeholder 

Government 

Financial stability 

Employment 

Policy option  

Joint  impact  of  all  measures 
under objective 3 

+ 
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 

+ 

the 
Facilitating 
a 
development 
of 
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 

level  of 
Regarding 
employment 
the 
in 
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, 
audit 
efficient 
more 
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 

204 

EN 

 
  
 
 
 
 
(4) Comparison between options - Objective 4: Avoid unnecessary additional compliance costs for audited SMEs as well as for audit 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 
accounts 
have 
audited,  unless  they  are 
PIEs] 

their 

Big Four audit firms 

Mid-size audit firms 

SMPs 

Base line scenario 

0 

0 

0 

0 

0 

0 

Mutual 
audit firms 

recognition  of 

≈ 
No  particular 
users of audit reports 

impact  for 

+ 
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 

of 

an 
Introduction 
adaptation  period  scheme 
and 
increased 
convergence, 
and 
transparency 
predictability 
the 
aptitude  test  for  statutory 
auditors 

in 

≈ 
No  particular 
users of audit reports 

impact  for 

≈ 
PIEs  in  general  use  audit 
firms  and  not 
individual 
auditors,  so  the  impact  is 
likely to be neutral 

+ 
Easier  for  statutory  auditors 
in  a 
to  provide  services 
cross-border 
so 
increased  choice  for  SMEs 
regarding statutory auditors. 

context, 

++ 
Easier  for  statutory  auditors 
to  be  approved  in  another 
Member  State.  This  will 
benefit the statutory auditors 
employed by audit firms. 

Introduction  of  clarified 
ISAs 

+ 
Investors  will 
indirectly 
benefit from this measure as 
a 
the  greater 
uniformity  of  audits  across 
the  EU  and  the  expected 
increase in audit quality. 

result  of 

+ 
Clarified  ISAs  should  lead 
to  more  structured  audit 
work and ultimately increase 
financial  reporting  quality. 
This 
the 
should  benefit 
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 

Adapt  audit  standards  to 
the  size  of  the  audited 
proportionate 
entity: 
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. 

≈ 

four 

firms  are 

Big 
less 
present in the market for the 
audit  of  SMEs.  The  impact 
of this measure should be of 

++ 
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.  

++ 
Easier  for  statutory  auditors 
to  be  approved  in  another 
Member  State.  This  will 
benefit the statutory auditors 
employed by audit firms. 

those  of 

++ 
Clarified ISAs across the EU 
facilitates  the  structuring  of 
the  audit  work  by  firms,  in 
particular 
larger 
size providing audit services 
to PIEs. 
Improvement 
in 
transnational  audit  client 
access 
and 
capital 
to 
business opportunities. 

+ 
Possibility  to  provide  better 
value  for  money  to  audit 
clients.  In  the  short  term,  it 
could  entail  a  diminution  of 

++ 
Small firms could be able to 
provide  services  in  a  cross-
border context.  

in 

services 

++ 
Easier  for  statutory  auditors 
to  be  approved  in  another 
Member  State  and  therefore 
be  able  to  provide  statutory 
audit 
that 
Member  State.  Of  particular 
interest for SMPs working in 
cross-border environments. 
+ 
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 
SMEs. 
audit 
of 
Improvement 
in 
audit 
client 
transnational 
access 
and 
capital 
to 
business opportunities 

+ 
Possibility  to  provide  better 
value  for  money  to  audit 
clients.  In  the  short  term,  it 
could  entail  a  diminution  of 

EN 

205 

EN 

 
  
 
 
 
Stakeholder 

Policy option  

Investors, 
employee 
organisations  and  other 
users of audit reports 

PIEs 

SMEs 
[only 
medium-sized 
enterprises are required to 
have 
accounts 
audited,  unless  they  are 
PIEs] 

their 

Big Four audit firms 

Mid-size audit firms 

SMPs 

marginal 
them. 

importance 

for 

Stakeholder 

Government 

Financial stability 

Employment 

by 

audit  fees,  but  it  could  be 
small 
compensated 
enterprises  continuing 
to 
accounts 
having 
audited 
a 
proportionate  and  simplified 
audit for SMEs. 

under 

their 

by 
continuing 

audit  fees,  but  it  could  be 
small 
compensated 
enterprises 
to 
accounts 
having 
audited 
a 
proportionate  and  simplified 
audit for SMEs. 

under 

their 

Policy option  

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 
supervisory 
exercise  of 
tasks 
statutory 
over 
auditors and audit firms.  

≈ 
No  particular 
financial 
identified.  

impact  on 
is 

stability 

- / ≈ 
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, 
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. 

facilitating 

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 

206 

EN 

 
  
 
 
 
 
 
(5)  Comparison  between  options  under  -  5:  Improve  the  effectiveness,  independence  and  consistency  across  the  EU  of  the  regulation  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 
ensure 
supervision  will 
trust in the audited financial 
statements 

will 

Companies 
get 
that 
additional  assurance 
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 
the 
practices  will 
regulatory burdens 

reduce 

+/≈ 
The 
of 
consistency 
supervisory  practices  will 
reduce 
regulatory 
burdens 

the 

≈ 
As  long  as  SMPs  does  not 
audit 
provide 
services to PIEs, no impact 
is foreseen 

statutory 

Stakeholder 

Government 

Financial stability 

Employment 

Policy option  

Strengthening 
the  national 
audit  supervisory  authorities 
and 
ESMA 
responsibility  for  EU-wide 
cooperation 
audit 
oversight  

giving 

on 

– 
There  will  be  additional,  but 
oversight 
substantial, 
not 
costs 
in  establishing  and 
running  the  national  public 
oversight  authorities  to  the 
these  will  not  be 
extent 
running 
recovered; 
level 
cooperation 
require 
would 
contributions 
the 
national/EU budgets 

at  EU 

from 

also 

≈/+ 

direct 

impact 

No 
is 
indirectly 
expected; 
positive  with  distortions 
less  likely  in  the  financial 
markets and their impact on 
the economy as a whole  

and 

+ 
Independent  and  effective 
supervisory 
national 
practices 
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 

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 

 
  
 
 
 
 
ANNEX 16. IMPACT ON SMES (AND PIES OF SMALL DIMENSION) 

One  of  the  main  concerns  of  the  stakeholders  who  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, will not increase the costs and administrative burden 
on SMEs and that any new requirement is proportionate to SMEs.  

This annex aims at explaining how the principle "think small first" is applied by the Commission 
and that the policy options described 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 annual or consolidated accounts, 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  statutory  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  (SE)  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 the 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* 
7th  Directive 
Financial Statements** 
IAS Regulation 
Source: European Commission (October 2011a) 

on  Consolidated 

86,748 
~150**** 

5,936,774 

1,117,214 

245,431 

45,301 

7,344,720 

33,657 
≤ 1,100**** 

12,365 

14,095 
≥ 6,115**** 

146,865 
7,365*** 

The  requirement  to  have  the  accounts  audited  does  not  apply  to  all  companies  (with  limited 
liability) that are subject to the 4th and 7th Company Law Directives.  

• 

Currently these directives require that the accounts of the companies concerned (those 
with limited liability) should be audited, whatever 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 

208 

   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 thresholds, around 62,000 medium-sized companies would shift to 
the small category379. 

The  savings  that  arise  from  this  proposal  are  evaluated  in  the  impact  assessment 
accompanying it380.  

SMEs
SMEs
[22 Million]
[22 Million]

Sole traders
Sole traders

Entities with
Entities with
UNLIMITED liability
UNLIMITED liability

Companies with
Companies with
LIMITED liability
LIMITED liability

NO AUDIT
NO AUDIT
Required by EU law
Required by EU law

Small companies, less than:
Small companies, less than:
5M balance sheet
5M balance sheet
10M turnover
10M turnover
50 employes
50 employes

Medium-sized companies
Medium-sized companies
-balance sheet: between 5M and 43M
-balance sheet: between 5M and 43M
-turnover: between 10M and 50M
-turnover: between 10M and 50M
-employees: between 50 and 250
-employees: between 50 and 250

Between 200000 and 250000 
Between 200000 and 250000 
companies concerned
companies concerned

SMEs which are public-interest entities: 
SMEs which are public-interest entities: 

listed companies & financial institutions
listed companies & financial institutions

Figure A16.2 

AUDIT
AUDIT
Required by EU law
Required by EU law

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 described 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 SME is an audited entity: 

378 
379 
380 
381 

See European Commission (October 2011b). 
See European Commission (October 2011a). 
Ibid. 
Total  =  (245431+12365+1100+150)  –  62000  +  (large  companies  according  to  the  accounting  directive 
which meet the SME criteria). Please note that the definition of "large company" in the accounting directive 
includes SMEs when the traditional definition of SME is used. 

EN 

209 

   EN 

 
 
 
 
                                                 
• 

• 

(2.1) the audited entity is a PIE; 

(2.2) the audited entity is not a PIE. 

(2.1) SMEs as PIEs and other PIEs of small dimension (small caps). 

The majority of the preferred policy options in this paper address the audit of PIEs. SMEs will 
not  be  affected  by  the  new  measures  regarding  the  audit  of  PIEs,  unless  they  are  PIEs 
themselves.  

While  the  possibility  that  a  bank  or  an  insurance  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  audited  financial  statements  is 
among these obligations. 

Extract  from  the  impact  assessment  on  the  amendment  to  the  Transparency 
Directive (European Commission (October 2011c), p.10). 

"[…] Small and medium sized issuers often argue that, for them, the costs of compliance 
with transparency requirements 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  part  of  total  market  capitalisation  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 companies on EU regulated markets by size 

382 

383 

"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." 
"See Glossary Annex 4." 

EN 

210 

   EN 

 
                                                 
Source: FESE (2009). (Federation of European Securities 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  liquidity  and  more  difficulties  for  small  and 
medium  size  companies  to  raise  capital  on  regulated  markets,  compared  to  larger 
companies.  However,  small  and  medium  size  listed  companies  still  bear  the  full  costs 
associated  with  the  listing384.  According  to  recent  research385,  the  explosion  of  the 
private  equity  market  in  the  last  twenty  five  years  suggests  that  for  some  firms, 
especially small firms in R&D intensive sectors, disclosure costs are substantial." 

Similar issues arise regarding the question of statutory audit. For SMEs which are PIEs as well 
as for PIEs of small dimension, specific obligations regarding the conduct of audits may increase 
the burden on boards and senior management (opportunity cost) in addition to the costs of the 
service.  

Therefore, adapting the requirements on statutory audit to the size and dimension of the business 
of  PIEs  appears  appropriate  and  proportionate.  From  the  perspective  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 Statutory Audit Directive regarding the need to have 
an audit committee: the administrative or supervisory body as a whole 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 performing those functions. 

384 

385 

"Many aspects of these costs do not directly result from 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." 
"Zingales (2009) p.18." 

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When developing the policy options described in Sections 5, 6 and Annex 8, account has been 
taken of the SME dimension. As a result, the following adaptations 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  chairmanship.  This  option  should  also  be 
extended to small caps, understood as companies with reduced capitalisation (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  function  is  maintained  in  this 
option; 

Tendering: PIEs which are SMEs should not be obliged to tender for their audit service 
and  may  directly  negotiate  with  a  possible  service  provider.  At  least  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  audited,  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  "medium-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 standards to the size of the audited entity should result in better audit 
services to the SMEs concerned – with no diminution 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 for 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 
387 

388 

Cf. definition of company with reduced market capitalisation, Article 2(1)(t) of Directive 2003/71/EC.  
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/documentation_de_ref/norme_et_doctrine_pr/table_sy
nthetiques_d/nep_910._certificati/ooo_preview_html 
However, this specific standard is not applicable to the companies incorporated as "sociétés anonymes". In 
this case, the normal standards should be applied.  

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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 developed specific operational guidance (so-
called "pack PE") to faciliate the auditor's tasks when auditing SMEs. Additionally, the 
CNCC provides training to auditors on how to audit an SME and to use the "pack PE", 
irrespective  of  whether  the  NEP  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 hours 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 corresponding reduction in 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.  

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 course, savings would depend on 
the complexity of the audited entity). 

The  French  example,  however,  is  not  easy  to  extrapolate  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 (between EUR 5 000 000 and 43 000 000), net turnover 
(between EUR 10 000 000 and 50 000 000) and average number of employees (between 50 and 
250).  

As a result, it cannot be claimed that the savings would be comparable to the French case for the 
small  companies.  In  any  event,  the  French  example  shows  that  there  is  a  real  possibility  to 
achieve savings for SMEs by adapting the auditing standards to the size of the audited entity. 

Small companies 

Small companies are not subject to the EU requirement 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. 

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In  Estonia390,  certain  small  companies  are  however  required  to  have  a  “limited  review”  391  of 
their accounts done.  

Similar  types  of  alternative/limited  assurance  service  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 with the IAASB International Framework for 
Assurance  Engagements395.  The  technical  guidance  for  the  service  (AAF03/06)396 
adopts  limited  assurance  (in  contrast  to  reasonable  assurance)  instead  of  moderate 
assurance as used in ISRE (International 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  expected  to  perform  additional  or  alternative 
procedures  where  minimum  defined  procedures  (analytical  review  and  management 
enquiry) do not provide them with the assurance required to reach a limited assurance 
conclusion. The report issued includes a negative 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 compliance 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 reviews 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 

391 
392 

393 

394 
395 
396 
397 

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).  
A different type of assurance service providing a lower level of assurance than statutory audit. 
Those small companies are not required to have their accounts audited under EU law, since Member States 
may waive the obligation arising from the Fourth and the Seventh Company Law Directives. 
E.g.  France,  Ireland  (for  charities  and  small  pension  schemes),  Italy  (continuous  assurance  by  Collegio 
Sindacale), Romania and the UK (ICAEW limited assurance service). Other EU Member States considered 
the introduction of limited reviews. See FEE (2009), p.13.  
See FEE (2009), p. 46. See also ICAEW (2009). 
http://www.ifac.org/IAASB/Pronouncements.php. 
ICAEW (2006). 
See www.ifac.org/IAASB/Pronouncements.php#Standards.  

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In  any  case,  according  to  ICAEW,  the  experience  is  positive  and  limited  reviews  are 
considered valuable by the market398 

Concerning  third  countries,  "limited  reviews"  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 (Gesellschaft mit beschränkter 
Haftung)) are either subject to a statutory full scope audit ("ordentliche Revision") or a 
limited statutory examination ("eingeschränkte Revision"). 

Swiss alternative assurance service  

The Swiss  alternative  assurance 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  which  has  been  prepared  by  the  Institute  of 
Certified  Accountants  and  Tax  Consultants  (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,  the  testing  of  operational  processes  and  the 
internal  control  system,  as  well  as  inquiries  and  further  testing  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  statutory  examination,  certain  matters  come  to 
the auditor's attention, the auditor has to describe 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 assurance service does not materially differ from 
review engagements widely applied worldwide. 

The  limited  statutory  examination  is  strongly  related  to  a  review  as  laid  out  in  ISRE 
(International  Standard  on  Review  Engagement)  2400.  The  structure  of  the  Swiss 
standard for the limited statutory examination 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 
399 
400 

401 

ICAEW (2009). 
In the US, limited reviews are common practice, but are not required by law. 
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). 
See FEE (2009), p. 43. 

EN 

215 

   EN 

 
                                                 
The types of entities subject to limited statutory 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 equivalents on average per year). 

The following entities are always subject 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 audit - 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), Swiss 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  experts  are  both  allowed  to  perform  limited 
statutory examinations, but only licensed audit 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 examination,  the independence  requirements  are less 
strict than for a full scope audit. Thus, advisory services including bookkeeping services 
are allowed provided that certain safeguard measures are adhered to and disclosed in the 
report. In general, licensed auditors performing the limited statutory examination are not 
subject to firm and file reviews (inspections) undertaken by the Federal Audit Oversight 
Authority. 

Nonetheless, licensed auditors have to adhere to high quality standards and compliance 
with  these  standards  has  to  be  confirmed  regularly  in  connection  with  re-licensing 

EN 

216 

   EN 

 
procedures. In cases where sole practitioners perform the limited statutory examination, 
they are subject to an external quality control reviews (peer review).  

All  auditors  who  want  to  perform  audit  services  regulated  by  Swiss  Law  (full  scope 
in  respect  of  capital  decreases, 
audits, 
contributions in kind etc.), have to register with the Swiss audit oversight body. 

limited  statutory  examinations,  audits 

(3) SMEs as Audit firms/statutory auditors: the small and medium-sized practitioners (SMPs) 

Audit firms or statutory auditors may as well qualify 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  period)  should  have  positive  effects  for  statutory 
auditors  working  in  cross-border  environments.  The  same  is  true  for  the  statutory  auditor 
providing cross-border services: the mutual recognition 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  dimension.  Hence,  the  policy  options  addressing 
specifically  the  auditors  of  PIEs  will  also  impact  on  SMPs.  In  this  case,  it  has  also  been 
considered appropriate and proportionate 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 requirement 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 segment 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 logically 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 joint audit engagement, although this will very much depend on the 
complexity of the entity to be audited. Concerning the mandatory rotation rule, SMPs auditing 
PIEs will be on equal footing compared to larger audit firms. SMPs will have to seek new audit 
engagements  once  the  mandatory  rotation  rule  becomes  applicable.  The  tendering  rule  should 
facilitate this process. In the case of individual auditors, they may benefit from more competition 

EN 

217 

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between  large  audit  firms  for  the  market  of  audits  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 through the disclosure of inspection reports 
on quality assurance reviews should provide information to the 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  adapted  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 companies (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 and 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 services to audit clients. 

The impact on SMPs resulting from the modification of the 4th and 7th Company Law Directives 
(only  the  audit  of  accounts  of  medium-sized  companies  will  be  required)  is  examined  in  that 
context. 

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218 

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(4) Summary of specific adjustments to the policy options for SMEs402 

Figure A16.3 

Policy option 

Audit Committee 

Tendering 

Joint Audit 

Prohibition  on  the  provision  of  non-
audit services / pure audit firms 

Internal  policies  and  procedures  to 
comply  with  legal  requirements  on 
threats to independence 
Application  of  the  auditing  standards 
(the adopted clarified ISAs) 

Supervision 

SME as audited entity 
PIE 
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.  
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.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] 

SME as audited entity 
Non-PIE 

SME as auditor/audit firm 
SMPs 

N/A 

N/A 

N/A 

N/A 

N/A 

N/A 

N/A 

Obligation  to  become  a  pure  audit  firm  would  only  be 
applicable to large audit firms. 

Policies  and  procedures  to  be  proportionate  in  view  of 
the scale and complexity of business of the audit firm or 
statutory auditor. 

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 required by national 
law or the company voluntarily decides to have its accounts audited. 
Voluntary review of financial statements remains possible. 

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 are expected to have positive impacts on SMEs as audited entities 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 

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ANNEX 17. IMPACT ON THIRD COUNTRIES 

The proposed measures are rather neutral regarding their effects on third countries Firstly, there 
is no change regarding the scope of application of EU audit rules. Secondly, the possibility for 
third country nationals to become statutory auditors in the EU is not adversely affected but rather 
facilitated.  Thirdly,  there  are  marginal  improvements  regarding  the  audit  of  consolidated 
accounts:  the  policy  choices  take  account  of  the  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  has  subsidiaries  in  the 
EU. Fourthly, the supervisory cooperation with third country authorities is encouraged, but the 
substantive  rules  on  such  cooperation  (e.g.  transfer  of  audit  working  papers)  remain  largely 
untouched.  

(1)  No  change  regarding  the  scope  of  application  of  the  EU  audit  rules:  no  impact  on  third 
country companies. 

EU  rules  respect,  in  principle,  the  “company  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 financial 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 affect, 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  (Transparency  Directive):  third  country  companies 
issuing securities in regulated markets in the EU. However, a special procedure for the audit of 
these companies is already foreseen (see below).  

The  audit  of  third  country  incorporated  companies  which  list  securities  on  EU  exchanges 
presents some particularities, which are not modified 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 country of incorporation. There are two possible situations within 
the EU: 

• 

403 

the securities of the third country company are listed in an EU Regulated Market. The 
Transparency  Directive  requires  that  the  audit  of  the  accounts  of  such  a  company  is 
carried out in accordance with the Directive 2006/43/EC (Statutory Audit Directive)403. 

It  should  be  noted  in  this  regard  that  the  Transparency  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,  China,  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. 

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The  audit  carried  out  in  the  third  country  by  a  third  country  auditor  or  firm  in 
conformity with the national law of the audited entity is not automatically recognised in 
the EU404. However, the Statutory Audit Directive provides for the recognition of such 
audits  carried  out  by  a  third  country  auditor  or  audit  firm  if  two  conditions  are 
respected: (i) the third country auditor or firm is registered 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 firm is subject to public 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  audit rules, whether those for PIEs or those for non-PIEs, only apply to 
EU  companies,  with  a  few  minor  exceptions  for  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  his/her  professional  qualification  in  the  same 
manner as an EU national. Currently there are three options:  

• 

• 

404 
405 
406 

407 

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  regarding  good  repute  and 
educational qualifications.  

if he/she has already been approved as a statutory auditor in accordance with Article 3 
in  an  EU  Member  State,  the  third  country  national  can  seek  approval  in  another  EU 

Cf. Article 45(4) of the Statutory Audit Directive. 
Cf. Article 45(1) of the Statutory Audit Directive. 
Cf. Article 45(3) of the Statutory Audit Directive. However, a Member State may 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. 
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 

221 

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Member  State  through  the  procedure  foreseen  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) recognise this professional qualification and 
approve the third country auditor. Article 44 of the Statutory Audit Directive sets three 
conditions:  (i)  the  third  country  auditor  must  indeed  provide  proof  that  he  or  she 
complies with requirements equivalent to those 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 procedure 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  benefit  from  this  simplification,  since  the  Article  14  procedure  is 
also applicable to them408: it will also be easier for them to obtain the recognition because of the 
conditions required in Article 44. 

Thirdly,  in  the  case  of  third  country  audit  firms,  they  need  to  obtain  approval  in  the  EU  in 
accordance  with  Article  3  as  would  any  EU  audit  firm.  It  should  be  noted  that  there  is  no 
nationality  restriction  regarding  the  ownership  of  the  firm  by  third  country  investors. 
Additionally,  third  country  audit  firms  would  also  benefit  from  the  lifting  of  ownership 
restrictions  in  audit  firms  as  regards  voting  rights  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  audit  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 subsidiaries in the EU presents some particular needs. 
The  proposed  measures  take  account  of  these  particularities  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 country auditors auditing subsidiaries of the EU PIE; 

duties and powers of an EU auditor (e.g. auditing an EU subsidiary of a third country 
company)  towards  a  third  country  group  auditor  of  a  third  country  company. 
Clarification  of  the  circumstances  in  which  the  EU  auditor  can  derogate  from  the 
professional  secrecy  rule  and  transfer  relevant  documentation  to  the  group  auditor 
situated in a third country for the purposes of the group audit. It is also clarified that the 
EU  auditor  cannot  send  documents  to  a  third  country  authority  (e.g.  for  a  quality 

408 

Cf. Article 44(2) of the Statutory Audit Directive.  

EN 

222 

   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 services to subsidiaries of EU companies in 
third  countries:  third  country  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 services within the EU.  

These  new  measures  do  not  affect  the  capacity  of  a  third  country  auditor/audit  firm 
which is a member of the network of an EU statutory auditor/audit firm to provide non-
audit services to his/her/its audit clients and 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  his/her  or  its  independence. 
Some services are considered to affect such independence in all cases (blacklist) while 
some  other  are  presumed  (but  this  presumption  is  rebuttable)  to  affect  it.  As  a  result, 
there is an effect on the ability of the third country auditor/firm which is member of the 
same network of the group auditor to provide certain non-audit services.  

• 

the question of the rotation of the auditor regarding the subsidiaries of EU PIEs in third 
countries. The new measures are silent regarding rotation 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  third  country  authorities  and  bodies  regarding  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 the transfer of audit working papers which remain untouched. 
Therefore, the new measures are neutral. 

EN 

223 

   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 preferred policy options regarding objectives 1 to 5, 
with more detail for those regarding objectives 1 to 3. Figure A18.1 shows an overview 
of  the  actors  and  the  main  cumulative  effects:  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 appointment of auditors. Figure A.18.3 
presents  the  policy  options  from  the  perspective  of  the  performance  of  the  statutory 
audit  and  the  related  measures  on  supervision.  Figure  A.18.4  combines  figures  A18.2 
and A18.3. 

Figures A18.5 and A18.6 present the measures regarding objective 4.  

Figure A.18.7 present the measures regarding objective 5. 

Figure A18.1. General overview. 

Competing audit firms
Competing audit firms
Competing audit firms

General Meeting
General Meeting
Shareholders
Shareholders

Investors
Investors

Audit firm 1
Audit firm 1
Audit firm 1
Audit firm 1
(Big Four) 
(Big Four) 
(Big Four) 
(Big Four) 

Audit firm 2
Audit firm 2
Audit firm 2
Audit firm 2
(Mid Size) 
(Mid Size) 
(Mid Size) 
(Mid Size) 

Audit firm…n
Audit firm…n
Audit firm…n
Audit firm…n
(…) 
(…) 
(…) 
(…) 

Increasedchoiceof more
Increasedchoiceof more
Independent auditors
Independent auditors
FIGURE A18.2
FIGURE A18.2

AUDITED
AUDITED
ENTITY (PIE)
ENTITY (PIE)

Better quality of AUDIT RESULTS
Better quality of AUDIT RESULTS

FIGURE A.18.3
FIGURE A.18.3

Strengthened
Strengthened
AUDIT COMMITTEE
AUDIT COMMITTEE

(appointed)
(appointed)
AUDITOR 
AUDITOR 

More transparency on
More transparency on
AUDIT QUALITY
AUDIT QUALITY

FIGURE A.18.2
FIGURE A.18.2

Enhanced SUPERVISION
Enhanced SUPERVISION

FIGURE A.18.4 & A18.7
FIGURE A.18.4 & A18.7

Contribution to financial stability
Contribution to financial stability

FIGURE A.18.7
FIGURE A.18.7

Strengthened and independent
Strengthened and independent
AUDIT SUPERVISOR
AUDIT SUPERVISOR

SUPERVISOR of 
SUPERVISOR of 
financial institutions
financial institutions

ESMA  & Other national 
ESMA  & Other national 
AUDIT SUPERVISORS
AUDIT SUPERVISORS

EN 

224 

   EN 

 
 
Figure A18.2. Policy options on the selection and appointment of auditors. 

SELECTION & APPOINTMENT OF AUDITOR(S)
SELECTION & APPOINTMENT OF AUDITOR(S)

LICENCING OF AUDIT FIRMS
LICENCING OF AUDIT FIRMS
-Pure audit firms
-Pure audit firms
-No restriction on ownership
-No restriction on ownership
-Single approval within EU
-Single approval within EU

ORGANISATION OF FIRMS
ORGANISATION OF FIRMS
-Enhanced rules on internal org. 
-Enhanced rules on internal org. 
-Enhanced rules on ethics
-Enhanced rules on ethics
-Enhanced rules on independence
-Enhanced rules on independence

Reinforced independence
Reinforced independence

Competing audit firms
Competing audit firms
Competing audit firms

Audit firm 1
Audit firm 1
Audit firm 1
Audit firm 1
(Big Four) 
(Big Four) 
(Big Four) 
(Big Four) 

Audit firm 2
Audit firm 2
Audit firm 2
Audit firm 2
(Mid Size) 
(Mid Size) 
(Mid Size) 
(Mid Size) 

Audit firm…n
Audit firm…n
Audit firm…n
Audit firm…n
(…) 
(…) 
(…) 
(…) 

SELECTION 
SELECTION 
PROCEDURE
PROCEDURE
-Tendering
-Tendering
-Maximum duration
-Maximum duration
-Rotation of audit firm
-Rotation of audit firm
-No big-four only clauses
-No big-four only clauses
-Joint audit (large 
-Joint audit (large 
PIEs and financial inst.)
PIEs and financial inst.)

Increasedchoice
Increasedchoice

General Meeting
General Meeting
Shareholders
Shareholders

Investors
Investors

APPOINTMENT (2)
APPOINTMENT (2)
-Decision by General Meeting
-Decision by General Meeting

AUDITED
AUDITED
ENTITY (PIE)
ENTITY (PIE)

APPOINTMENT (1)
APPOINTMENT (1)
-Recommendation by audit committee
-Recommendation by audit committee

Strengthened
Strengthened
AUDIT COMMITTEE
AUDIT COMMITTEE

More transparency on
More transparency on
AUDIT QUALITY
AUDIT QUALITY

PUBLICATION
PUBLICATION
-Financial information
-Financial information
-Corporate information
-Corporate information

PUBLICATION
PUBLICATION
-Inspection Reports
-Inspection Reports

EUROPEAN QUALITY
EUROPEAN QUALITY
CERTIFICATE
CERTIFICATE

Strengthened and independent
Strengthened and independent
AUDIT SUPERVISOR
AUDIT SUPERVISOR

EN 

225 

   EN 

 
 
Figure A18.3. Policy options regarding the performance of statutory audit. 

PERFORMANCE OF STATUTORY AUDIT
PERFORMANCE OF STATUTORY AUDIT

General Meeting
General Meeting
Shareholders
Shareholders

Investors
Investors

Better quality of AUDIT RESULTS
Better quality of AUDIT RESULTS

AUDITED
AUDITED
ENTITY (PIE)
ENTITY (PIE)

Improved and expanded
Improved and expanded
Improved and expanded
AUDIT REPORT
AUDIT REPORT
AUDIT REPORT

Additional
Additional
Additional
INTERNAL REPORT
INTERNAL REPORT
INTERNAL REPORT

Strengthened
Strengthened
AUDIT COMMITTEE
AUDIT COMMITTEE

Improved communication 
Improved communication 
with Audit Committee
with Audit Committee

CLARIFIED SCOPE OF AUDIT
CLARIFIED SCOPE OF AUDIT
-Rules on Professional scepticism
-Rules on Professional scepticism
-Rules on audit tasks
-Rules on audit tasks
-Rules on audit standards
-Rules on audit standards

(appointed)
(appointed)
AUDITOR 
AUDITOR 

Enhanced SUPERVISION
Enhanced SUPERVISION

PUBLICATION
PUBLICATION
-Inspection Reports
-Inspection Reports

Quality Assurance Reviews
Quality Assurance Reviews
& Investigations
& Investigations

-Reporting on problems
-Reporting on problems
-Regular dialogue
-Regular dialogue

Strengthened and independent
Strengthened and independent
AUDIT SUPERVISOR
AUDIT SUPERVISOR

SUPERVISOR of 
SUPERVISOR of 
financial institutions
financial institutions

ESMA  & Other national 
ESMA  & Other national 
AUDIT SUPERVISORS
AUDIT SUPERVISORS

EN 

226 

   EN 

 
 
Figure A18.4. Combination of all policy options. 

SELECTION & APPOINTMENT OF AUDITOR(S)
SELECTION & APPOINTMENT OF AUDITOR(S)

PERFORMANCE OF STATUTORY AUDIT
PERFORMANCE OF STATUTORY AUDIT

LICENCING OF AUDIT FIRMS
LICENCING OF AUDIT FIRMS
-Pure audit firms
-Pure audit firms
-No restriction on ownership
-No restriction on ownership
-Single approval within EU
-Single approval within EU

ORGANISATION OF FIRMS
ORGANISATION OF FIRMS
-Enhanced rules on internal org. 
-Enhanced rules on internal org. 
-Enhanced rules on ethics
-Enhanced rules on ethics
-Enhanced rules on independence
-Enhanced rules on independence

Reinforced independence
Reinforced independence

General Meeting
General Meeting
Shareholders
Shareholders

APPOINTMENT (2)
APPOINTMENT (2)
-Decision by General Meeting
-Decision by General Meeting

AUDITED
AUDITED
ENTITY (PIE)
ENTITY (PIE)

Competing audit firms
Competing audit firms

APPOINTMENT (1)
APPOINTMENT (1)
-Recommendation by audit committee
-Recommendation by audit committee

Audit firm 1
Audit firm 1
Audit firm 1
(Big Four) 
(Big Four) 
(Big Four) 

Audit firm 2
Audit firm 2
Audit firm 2
(Mid Size) 
(Mid Size) 
(Mid Size) 

Audit firm…n
Audit firm…n
Audit firm…n
(…) 
(…) 
(…) 

SELECTION 
SELECTION 
PROCEDURE
PROCEDURE
-Tendering
-Tendering
-Maximum duration
-Maximum duration
-Rotation of audit firm
-Rotation of audit firm
-No big-four only clauses
-No big-four only clauses
-Joint audit (financial inst.)
-Joint audit (financial inst.)

Increasedchoice
Increasedchoice

Strengthened
Strengthened
AUDIT COMMITTEE
AUDIT COMMITTEE

Investors
Investors

Better quality of AUDIT RESULTS
Better quality of AUDIT RESULTS

Improved and expanded
Improved and expanded
AUDIT REPORT
AUDIT REPORT

Additional
Additional
INTERNAL REPORT
INTERNAL REPORT

CLARIFIED SCOPE OF AUDIT
CLARIFIED SCOPE OF AUDIT
-Rules on Professional skepticism
-Rules on Professional skepticism
-Rules on audit tasks
-Rules on audit tasks
-Rules on audit standards
-Rules on audit standards

Improved communication 
Improved communication 
with Audit Committee
with Audit Committee

(appointed)
(appointed)
AUDITOR 
AUDITOR 

Enhanced SUPERVISION
Enhanced SUPERVISION

More transparency on
More transparency on
AUDIT QUALITY
AUDIT QUALITY

Quality Assurance Reviews
Quality Assurance Reviews
& Investigations
& Investigations

-Reporting on problems
-Reporting on problems
-Regular dialogue
-Regular dialogue

PUBLICATION
PUBLICATION
-Financial information
-Financial information
-Corporate information
-Corporate information

PUBLICATION
PUBLICATION
-Inspection Reports
-Inspection Reports

EUROPEAN QUALITY
EUROPEAN QUALITY
CERTIFICATE
CERTIFICATE

Strengthened and independent
Strengthened and independent
AUDIT SUPERVISOR
AUDIT SUPERVISOR

SUPERVISOR of 
SUPERVISOR of 
financial institutions
financial institutions

Contribution to financial stability
Contribution to financial stability

-Market monitoring
-Market monitoring
-Contingency planning
-Contingency planning

ESMA  & Other national 
ESMA  & Other national 
AUDIT SUPERVISORS
AUDIT SUPERVISORS

EN 

227 

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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)
LICENCING OF AUDITOR(S) & AUDIT FIRM(S)

Applicant
Applicant
audit firm
audit firm

Key audit partner
Key audit partner
(statutory auditor)
(statutory auditor)

Applicant
Applicant
statutory auditor
statutory auditor

Conditions for audit firm(s) [NEW]
Conditions for audit firm(s) [NEW]
-No ownership restriction
-No ownership restriction
-But firm directed by statutory auditors
-But firm directed by statutory auditors
-Key audit partner in charge of the audit
-Key audit partner in charge of the audit

Conditions for statutory auditors [NO CHANGE] 
Conditions for statutory auditors [NO CHANGE] 
Educational Qualifications:
Educational Qualifications:
-professional competence
-professional competence
-theoretical instruction
-theoretical instruction
-practical training
-practical training

MEMBER STATE A
MEMBER STATE A
DOMESTIC APPROVAL & REGISTRATION (LICENCING)
DOMESTIC APPROVAL & REGISTRATION (LICENCING)

Licenced audit firm
Licenced audit firm

Licenced statutory auditor
Licenced statutory auditor

Mutual Recognition
Mutual Recognition
(but key audit partner
(but key audit partner
must be approved in MS B)
must be approved in MS B)

Choice for applicant
Choice for applicant

NEW
NEW
ADAPTATION 
ADAPTATION 
PERIOD (3 YEARS)
PERIOD (3 YEARS)

IMPROVED
IMPROVED
APTITUDE 
APTITUDE 
TEST
TEST

MEMBER STATE B
MEMBER STATE B
DOMESTIC APPROVAL & REGISTRATION
DOMESTIC APPROVAL & REGISTRATION

Predictabilityof 
Predictabilityof 
Aptitude test
Aptitude test

Member States 
Member States 
Cooperation
Cooperation

EN 

228 

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Figure A18.6. Policy options for objectives 4.2 and 4.3: streamline standards on audit practice, 
independence  and  internal  control  of  audit  firms  across  the  EU  and  ensure  that  statutory 
audit is adapted to SMEs needs. 

STATUTORY AUDIT BY SIZE OF 
STATUTORY AUDIT BY SIZE OF 
AUDITED ENTITY & AUDIT STANDARDS
AUDITED ENTITY & AUDIT STANDARDS

PIEs
PIEs
[irrespective of size]
[irrespective of size]

Large 
Large 
enterprises
enterprises

MEDIUM-SIZED
MEDIUM-SIZED
enterprises
enterprises

SMALL
SMALL
enterprises
enterprises

MICRO 
MICRO 
enterprises
enterprises

Simplified accounts
Simplified accounts

Special rules for
Special rules for
Audit of PIEs
Audit of PIEs

Normal audit
Normal audit

Proportionate and 
Proportionate and 
simplified audit
simplified audit

No audit required
No audit required
(EU level)
(EU level)

Adapted audit standards
Adapted audit standards

EU rules
EU rules
+
+
Clarified ISAs
Clarified ISAs

Clarified ISAs
Clarified ISAs
(adopted nationally)
(adopted nationally)

Clarified ISAs
Clarified ISAs
(adapted to size
(adapted to size

If voluntary or 
If voluntary or 
required nationally
required nationally

Limited Review
Limited Review
(where it exists)
(where it exists)

Domestic rules on
Domestic rules on
limited review
limited review

Same level of assurance
Same level of assurance

AUDIT REPORT
AUDIT REPORT

Limited Review
Limited Review
REPORT
REPORT

Adapted supervision
Adapted supervision

Strengthened and independent
Strengthened and independent
AUDIT SUPERVISOR
AUDIT SUPERVISOR

EN 

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Figure  A18.7.  Policy  options  for  objective  5:  improve  the  effectiveness,  independence  and 
consistency of the regulation and supervision of auditors of PIEs. 

Sanctions
Sanctions
Supervisory measures
Supervisory measures

PUBLICATION
PUBLICATION
-quality assurance reviews
-quality assurance reviews
individual reports
individual reports

MAIN TASKS
MAIN TASKS
(and powers)
(and powers)

Stautory auditors
Stautory auditors
Audit firms
Audit firms

Quality assurance 
Quality assurance 
reviews
reviews

Large audit firms
Large audit firms

Investigations
Investigations

Contingency planning
Contingency planning

Market monitoring
Market monitoring

Market concentration
Market concentration
-need for adoption of
-need for adoption of
structural measures?
structural measures?

EUROPEAN
EUROPEAN
QUALITY CERTIFICATE
QUALITY CERTIFICATE

Audit Supervisor
Audit Supervisor
Audit Supervisor
Member State X 
Member State X 
Member State X 

Audit Supervisor
Audit Supervisor
Audit Supervisor
Member State Y 
Member State Y 
Member State Y 

Audit Supervisor
Audit Supervisor
Audit Supervisor
Member State Z 
Member State Z 
Member State Z 

EGAOB
EGAOB

EU cooperation
EU cooperation

ESMA:
ESMA:
-special internal committee on audit
-special internal committee on audit

OBLIGATION TO
OBLIGATION TO
OBLIGATION TO
COOPERATE
COOPERATE
COOPERATE
-exchange of information
-exchange of information
-exchange of information
-quality assurance reviews
-quality assurance reviews
-quality assurance reviews
-investigations
-investigations
-investigations
-on-site inspections
-on-site inspections
-on-site inspections
-contingency planning
-contingency planning
-contingency planning

Colleges of supervisors
Colleges of supervisors
Colleges of supervisors
(e.g. for networks)
(e.g. for networks)
(e.g. for networks)

Mediation
Mediation
Mediation

Delegation of tasks
Delegation of tasks
Delegation of tasks

SUPERVISION: AUDIT OF PIEs
SUPERVISION: AUDIT OF PIEs

PUBLICATION
PUBLICATION
-annual activity report
-annual activity report
-annual work programmes
-annual work programmes
-overall results of the 
-overall results of the 
quality assurance system
quality assurance system

Transparency
Transparency

International
International
Organisation and
Organisation and
bodies
bodies

Third Countries
Third Countries
Competent Authorities
Competent Authorities

COOPERATION AGREEMENTS
COOPERATION AGREEMENTS
-exchange of info.
-exchange of info.
-but, Art. 47 Dir. applies
-but, Art. 47 Dir. applies
(transfer of working papers)
(transfer of working papers)

International cooperation
International cooperation

AUDIT SUPERVISOR
AUDIT SUPERVISOR
independent from profession and with clear and stronger powers
independent from profession and with clear and stronger powers

Competent Authority A
Competent Authority A
Competent Authority A
3 options:
3 options:
3 options:

Authority responsible for
Authority responsible for
Authority responsible for
Control of accounts: 24(4(h TD)
Control of accounts: 24(4(h TD)
Control of accounts: 24(4(h TD)
(e.g. FRC)
(e.g. FRC)
(e.g. FRC)
Financial Markets Supervisor
Financial Markets Supervisor
Financial Markets Supervisor
(e.g. Consob)
(e.g. Consob)
(e.g. Consob)
Specific Audit Supervisor
Specific Audit Supervisor
Specific Audit Supervisor
(e.g. H3C)
(e.g. H3C)
(e.g. H3C)

Competent Authority B
Competent Authority B
(optional) :
(optional) :
Supervisor of PIEs, 
Supervisor of PIEs, 
for obligations on PIEs
for obligations on PIEs
(e.g. tendering etc)
(e.g. tendering etc)

Guidelines
Guidelines

Domestic
Domestic
cooperation
cooperation

Supervisors of PIEs
Supervisors of PIEs
Supervisors of PIEs
(banking, insurance, 
(banking, insurance, 
(banking, insurance, 
financial markets etc)
financial markets etc)
financial markets etc)

Financial Intelligence Units
Financial Intelligence Units
Financial Intelligence Units
(anti-money laundering)
(anti-money laundering)
(anti-money laundering)

Competent Authority for 
Competent Authority for 
Competent Authority for 
Approval & Registration of
Approval & Registration of
Approval & Registration of
auditors and audit firms
auditors and audit firms
auditors and audit firms

EN 

230 

   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 assessment regarding the proportionality of a few selected 
preferred  policy  options.  This  assessment  concerns  the  options  which  are  perceived  by 
stakeholders  as  particularly  intrusive409,  namely:  regular  tendering,  mandatory  rotation,  pure 
audit firms/prohibition on the provision of NAS and joint audit. 

(1) The proportionality of the package of measures. 

This impact assessment proposes different policy options (see section 6). Some of these policy 
options,  if  pursued,  would  affect  the  overall  baseline  scenario,  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 demonstrated. Taking the above into consideration, 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) demonstrates 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 this 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 impact of the liberalisation of the conditions 
for  accessing  the  profession  (e.g.  recognition  of  audit  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  could  question  the  need  for  other  policy  options 
regarding objectives 1 (on clarifying 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  committee  could,  on  its  own,  ensure  that  (see  figure 
A19.1):  

– 

– 

– 

409 

the  auditor/audit  firm  provides  more  information  on  the  statutory  audit  to  users  (thus 
eliminating the need for the preparation of an extended audit report); 

the auditor/audit firm increases  the  communication with the audit committee and with 
the supervisors of the audited entity (thus eliminating 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, 

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 

231 

   EN 

 
                                                 
thus  eliminating  the  need  for  the  prohibition  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 appointment of auditors) and  

the  work  of  the  auditor/audit  firm  would  be  monitored  (thus  eliminating  the  need  for 
mandatory rotation of audit firm). 

Strengthened audit Committee: without additional measures
Strengthened audit Committee: without additional measures

Competing audit firms
Competing audit firms
Competing audit firms

Audit firm 1
Audit firm 1
Audit firm 1
Audit firm 1
(Big Four) 
(Big Four) 
(Big Four) 
(Big Four) 

Audit firm 2
Audit firm 2
Audit firm 2
Audit firm 2
(Mid Size) 
(Mid Size) 
(Mid Size) 
(Mid Size) 

Audit firm…n
Audit firm…n
Audit firm…n
Audit firm…n
(…) 
(…) 
(…) 
(…) 

General Meeting
General Meeting
Shareholders
Shareholders

Investors
Investors

No additional rules on the 
No additional rules on the 
appointment of auditor:
appointment of auditor:

-audit committee prepares
-audit committee prepares
a recommendation which
a recommendation which
or not be followed
or not be followed

AUDITED
AUDITED
ENTITY (PIE)
ENTITY (PIE)

AUDIT 
AUDIT 
REPORT
REPORT

Strengthened
Strengthened
AUDIT COMMITTEE
AUDIT COMMITTEE

Unstructured and 
Unstructured and 
intermitent dialogue
intermitent dialogue

SUPERVISOR of 
SUPERVISOR of 
financial institutions
financial institutions

Monitoring of 
Monitoring of 
statutory audit 
statutory audit 

Review and monitor the 
Review and monitor the 
Independence of the auditor,
Independence of the auditor,
in particular, the provision of NAS  
in particular, the provision of NAS  

Unstructured
Unstructured
Communication: 
Communication: 
No internal report 
No internal report 

(appointed)
(appointed)
AUDITOR 
AUDITOR 

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 preferred 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 would result in a large shift of responsibility 
towards its members, which appears disproportionate and unfair. Audit committee members are 
not  employees  of  the  audited  entity  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 

232 

   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 largely depend on behavioural 
solutions  and  therefore  on  the  quality  of  the  persons  appointed.  Structural  solutions  would 
facilitate the tasks of the audit committee, which could focus more on the substance of the audit 
work (i.e. monitoring the financial reporting channels 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  the  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  relation  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 have 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,  those  identified  results  can  be  easily  framed  by  structural  solutions:  i.e. 
rules  requiring  management  to  explain  to  shareholders  whether  managers  depart  from  the 
recommendations  made  by  the  audit  committee  or  requiring  auditors  to  provide  more 
information. Therefore, structural solutions ensure that certain conduct will be carried out, thus 
allowing the audit committee to focus on the review of the substantive audit work. 

Therefore,  the  strengthening  of  the  audit  committee  needs  to  be  completed  with  structural 
measures to support its functioning and ensure that results are delivered (see figure A19.2). 

EN 

233 

   EN 

 
Strengthened audit Committee: with additional measures
Strengthened audit Committee: with additional measures

Competing audit firms
Competing audit firms
Competing audit firms

Audit firm 1
Audit firm 1
Audit firm 1
Audit firm 1
(Big Four) 
(Big Four) 
(Big Four) 
(Big Four) 

Audit firm 2
Audit firm 2
Audit firm 2
Audit firm 2
(Mid Size) 
(Mid Size) 
(Mid Size) 
(Mid Size) 

Audit firm…n
Audit firm…n
Audit firm…n
Audit firm…n
(…) 
(…) 
(…) 
(…) 

General Meeting
General Meeting
Shareholders
Shareholders

Investors
Investors

AUDITED
AUDITED
ENTITY (PIE)
ENTITY (PIE)

Improved and expanded
Improved and expanded
AUDIT REPORT
AUDIT REPORT

Strengthened
Strengthened
AUDIT COMMITTEE
AUDIT COMMITTEE

Internal additional
Internal additional
REPORT
REPORT

New rules on the
New rules on the
Selection of auditors:
Selection of auditors:
- reinforced recommendation
- reinforced recommendation
of the audit committee
of the audit committee
-managers to explain whether
-managers to explain whether
they follow the audit committee
they follow the audit committee
-shareholder to make
-shareholder to make
a choice between two
a choice between two
recommended options
recommended options

Structured and
Structured and
Regular dialogue
Regular dialogue

SUPERVISOR of 
SUPERVISOR of 
financial institutions
financial institutions

Strengthening
Strengthening
oversight role
oversight role

Rotation of 
Rotation of 
audit firm
audit firm

Prohibition of the 
Prohibition of the 
provision of NAS
provision of NAS

Structured
Structured
communication
communication

(appointed)
(appointed)
AUDITOR 
AUDITOR 

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 market created by the removal of barriers to access 
(see policy options regarding objective 3) could make the requirement to provide more and better 
information in the audit report unnecessary, since this result would be delivered voluntarily by 
market participants.  

However, several factors point in a different direction. There is already legislation 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.  Investors  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 practice" being extended.  

Fear of liability certainly stands as a key concern for audit firms preventing them from disclosing 
more information.  

EN 

234 

   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 appears proportionate in this regard. 

The need for a quality certificate 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  system  (policy  option  regarding 
objective 3.2) would no longer be necessary because the process for mutual recognition of audit 
firms is improved and the regulatory and supervisory requirements increasingly harmonised (see 
policy options regarding objectives 4 and 5) 

However, it should be noted that the quality certification 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 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 perception (by market participants) of the 
quality of its services will necessarily be increased.  

The strengthening of supervision could indeed result in similar effects to a quality certification. 
But  the  outcome  of  supervision  is  less  observable  for  the  outside  world than  a  certification  on 
quality, which can (and should) take account of the 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 could imply that the auditor of this company could 
no longer be able to provide its services and automatically banned from the market for PIEs.  

Therefore, a voluntary certification system has the advantage of addressing the reputational issue 
while not becoming a barrier to entry/growth for smaller audit firms. 

(2) Assessment on the proportionality 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 choice of audit providers 
for PIEs); and 

(b)  On  the  other  hand,  objectives  2.3  (mitigate  the  risk  of  any  potential  conflict  of 
interest due to a "familiarity threat" and 3.1 (facilitate switching of an audit firm). 

Indeed, these preferred policy 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 regarding those objectives.  

EN 

235 

   EN 

 
Figure A19.3 

Effectiveness 

Objectives 

Objective 3.1: 
facilitate 
switching of 
an audit firm 

Objective 3.3: 
increase the 
choice of audit 
providers for 
PIEs 

Policy option  

Objective 2.1: 
prevent any 
conflict of 
interest arising 
from the 
provision of 
non-audit 
services to PIEs 
0 

Objective 2.3: 
mitigate the risk 
of any potential 
conflict of interest 
due to "familiarity 
threat" 

Conver-
gence 

Cost-
effecti-
veness 

0 

0 

0 

0 

0 

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;) 

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  from  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  audited  entity  by  the  audit  firm  would  be  effective  in  prevening 
conflicts of interest but could have undesired effects regarding the availability of eligible audit 
firms for the audit of large PIEs, thus not addressing objective 3.3. It must be noted in this regard 
that statutory audit is carried out in the public interest, while non-audit services are not.  

Therefore,  the  option  of  pure  audit  firms  appears  to  be  the  only  one  that  produces  positive 
combined  effects  on  both  objectives,  and  therefore  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  exposure,  demonstrate  their  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 also 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 interest 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  option  of  introducing  joint  audit  would  increase  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 audit of PIEs of smaller dimension. Therefore, 
in terms of proportionality, it would appear appropriate to limit both the joint audit and the pure 
audit firms policy options to the statutory audit of either large PIEs or Financial Institutions only 

EN 

236 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(see below). This way, negative effects 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) resulting from the pure audit firm requirement411. 

As already explained in Annex 16 regarding the impact on SMEs, this 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  requirement)  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  their  audit  fee  revenues  from  large  PIEs  (see  above  for  the 
threshold).  Below  this  threshold,  only  the  prohibition  on  the  provision  of  non-audit 
services would apply. Specific safeguards would 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  joint  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 joint audit rule could be smoothly applied. In France, where joint 
audit  is  legally  required,  there  is  a  specific  professional  standard  that  takes  account  of  the 
specificities  of  joint  audit.  Similarly,  it  would  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  potential conflict of interest due to a "familiarity 
threat") and 3.1 (facilitate switching of an audit firm). 

The  option  of  tendering  without  rotation  of  an  audit  firm  would  hardly  have  any  impact,  or  a 
marginal one only, if the audited entities decided to systematically prolonge audit mandates. At 
the same time, if  rotation of the  firm is  not ensured, it would be  necessary to  organise regular 
tendering procedures within relatively short timeframes (e.g. five years 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).  This  would  result  in  increased  costs  associated  with  tendering 
procedures. Additionally, if tendering does not result in change of auditor, tendering costs may 
be disproportionate considering the results.  

410 

411 

The cost of audit (not necessarily joint audit) for smaller 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  trading  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).  
Smaller  audit  firms  whose  revenues  are  largely  audit  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 

237 

   EN 

 
                                                 
On the other hand, rotation of audit firms without 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 contribute to facilitating the emergence of new entrants and in addition 
it  does  not  contribute  either  to  an  objective  selection  of  an  audit  firm  (thus  does  not  have 
synergies with objective 3.2). 

However, as explained in sections 6.2 and 6.3, the combination of mandatory rotation of audit 
firms  and  tendering  would  have  very  positive  synergies.  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  disproportionate  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  timing  of  the  rotation  of  firms.  Currently  the 
Statutory Audit Directive sets the 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.  Therefore,  a  rotation  of  audit  firm  (and  tendering 
procedure) every 7 to 9 years would appear proportionate413.  

As a result, the combination of mandatory rotation and tendering appear proportionate to address 
objectives 2.3 and 3.1. 

At  the  same  time,  recognising  the  cost  of  tendering  procedures  for  smaller  PIEs,  it  would  be 
proportionate to alleviate such cost at least for the PIEs which are SMEs. Thus, PIEs which are 
SMEs should not be obliged to tender for their audit service (although they 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 the 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 firms would need to apply in all circumstances as otherwise the 
above objectives are not achieved. 

Figure  A19.4  provides  a  summary  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 

413 

Tendering procedures with  short  mandates  may  have  uncompetitive  effects,  as  described  in  Billard  et  al. 
(2011). 
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 

238 

   EN 

 
                                                 
Figure A19.4 – Summary of the proportionality assessment 

Audited entities 

(PIES) 

e
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t
t
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Large PIE in the 
Financial sector* 

Large PIE* 

Medium-sized PIE 

Small PIE** 

(cid:51) 

(cid:51) 

(cid:51) 

(cid:51) 

(cid:51) 

(cid:51) 

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(cid:50) 

(cid:51) 

(cid:51) 

(cid:50) 

**** 

(cid:51) 

(cid:51) 

(cid:51) 
obligation 
adapted to 
size of 
firm 

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(cid:51) 

(cid:51) 

Auditor/  
 audit firm 

Large  
audit firm*** 

Smaller  
audit firm 

* PIEs with more than €1 billion market capitalisation (if listed company) or balance sheet (if unlisted financial institutions)  

** PIEs which are SMEs (i.e. less than 250 employees, balance sheet not exceeding €43 million and 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 million) 

*** Audit firm which obtains at least one third of its audit fees from large PIEs. 

EN 

239 

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 securities. 

EN 

240 

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 and benefits of  the preferred policy options. In 
some cases the new legal obligations (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 for the individual policy options 
are presented under the respective 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 specific objectives and 14 operational objectives. 

– 

– 

– 

For  10  of  these  options,  quantitative  estimations  are  presented  regarding  costs  in 
section  (2)  of  this  Annex.  This  is  particularly  the  case  regarding  the  two  measures 
that result in higher costs for PIEs and audit firms: tendering and joint audits. This is 
also  the  case  regarding  the  measures  regarding  audit  reporting  or  that  involve  a 
strengthened audit committee. 

For  the  remaining  7  options,  a  qualitative  assessment  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  estimation  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, their quantification is not an easy task. 

EN 

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   EN 

 
The main expected benefit of the package of measures 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  quantitative  estimate  of  the  benefit  of  such  an 
increase in trust.  

The cost of capital is lower for companies with well audited and reliable accounts. Therefore, 
the benefits could be estimated as an average reduction 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 business activity. Therefore, we cannot 
quantify the possible reduction in the cost of capital for the audited entity due to the increase 
in audit quality. 

Moreover,  audit  quality  is  not  synonymous  with  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 quality. These losses could be 
investors'  losses  due  to  fraud  (e.g.  a  Madoff-type  scenario)  or  due  to  underperforming 
businesses (e.g. a Lehman Brothers- or Fortis-type scenario); or general losses incurred as a 
result of the financial crisis: e.g. cost to the taxpayers due to the 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  accounted  for  39  %  of  EU-27  GDP.  The  large 
amounts of support to banks 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. 

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 financial 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  played  a  role  in  the  financial  crisis,  the  Commission 
considered  that,  as  such,  at  least  part  of  the  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 than €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 

242 

   EN 

 
                                                 
(2) Cost and benefits of the preferred policy options 

Specific  objective  1:  Clarify  and  define  the  role  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  from  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; organisation of audit file; market integrity and fraud 
prevention;  responsibility  of  group  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 would incur additional costs. 

In  terms  of  benefits,  this  measure  should  result in  increased audit quality  (see above on the 
question of measuring the increased 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  administrative  cost  of  preparing  the 
report.  This  would  be  a  cost  for  the  audit  firm  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 preparing the audit report is estimated to be low: around 8 hours for 
a single audit report. 

If these 8 hours are charged at audit partner rate, the total cost of a single audit report can be 
estimated at 4,800 euro (the cost of an average partner hour is estimated at 600 euro). 

Require the preparation of a longer and more detailed 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  administrative  cost  of  preparing  the 
report.  This  would  be  a  cost  for  the  audit  firm  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 such a long form report takes about 40 hours for 
annual accounts and 30 hours for the consolidated accounts. The use of electronic support 
programmes and sample long form reports could reduce the time; 

–  For smaller and less complicated engagements this can go down to 6 hours; 

EN 

243 

   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 
hours 

of 

Estimation 
hourly rate (€) 

of 

Small  PIE  -  uncomplicated 
engagement 

6 

Mid-size company 

Large PIE 

40 

80 

600 

600 

600 

cost  per 

Total 
PIE 
(€) 

3.600 

24.000 

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 objective 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  increase  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  technical  profiles.  In  addition,  the 
requirements  under  these  policy  options  will  also  involve  an  increased  engagement  by  key 
audit  partners  and  audit  managers.  These  costs  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 increase in remuneration 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 options 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  the  informal  feed-back  received  from  other 
stakeholders on costs regarding the participation 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  FSA415  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  audit  partner,  2.280£  for  the  audit 

415 

FSA Market and regulatory failures, benefits and costs. 

EN 

244 

   EN 

 
 
                                                 
manager,  900£  for  the  PIE  management  cost,  and  1.000£  for  the  PIE  Audit  Committee 
member  (feed-back  from  other  EU  stakeholders  supports  this  assumption,  while  it  could  be 
estimated that such cost ranges from 1000 to 1500 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 respectively; 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 meeting 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  cost  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  costs,  it  is  estimated  that  there  will  be  an  additional  cost 
related to the increased involvement of audit committee members in monitoring the tender for 
the  selection  of  auditors  as  well  as  the  validation  of  the  choosen  audit  firms.  For  this 
estimation, it is considered that audit committee members will spend as an average about 20 
extra working days on studying tender documentation, preparation of the opinion of the audit 
committee  on  the  selection  of  the  audit  firm,  analysing  the  reports  from  auditors  as  well  as 
any additional input needed to fulfil their tasks.  

Table  A20.2  summarises  the  estimated  additional  cost  for  individual  PIEs,  resulting  from 
enlarging  and  deepening  of  the  role  of  the  audit  committee  (these  costs  would  not  arise  for 
those audited entities which already today have 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 members 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  dialogue  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  mentioned  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 

245 

   EN 

 
 
 
                                                 
Using  the  estimated  rates  presented  under  the  previous  point,  it  could  be  estimated  that  a 
bilateral  meeting  between  auditors  and  supervisors  would  cost  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  respective  supervisors.  Taking  this  into  account,  it  could  be 
estimated  that  the  enforcement  of  this  policy  option  would  have  a  minimum  cost  of  10.800 
euro  (cost  of  2  bilateral  meetings),  while  the  cost  of  the  trilateral  meeting  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  communication  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 financial supervisors. 

Specific objective 2: Reinforce the independence and professional scepticism of statutory 
auditors and audit firms in the provision of statutory audit to PIEs 

Prohibition of the provision of any non-audit services to the audited entities 

This policy option will have no direct cost on the auditor 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  statutory  audit  and  NAS  as  a  result  of  the  whole 
package of policy options. It could also be expected 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  longer  able  to  provide  NAS  to  the  audit  client 
could be compensated by expanding their market share of NAS to non-audit clients (provision 
of NAS to other clients is still possible). It should be mentioned that due to potential conflicts 
of  interest  the  provision  of  NAS  to  audit  clients  is  already  prohibited  in  the  Member  State 
(partially or in full).  

Pure  audit  firms  (approved  audit  firms  should  only  be  allowed  to  provide  statutory  audit 
services and be unconnected to firms providing certain 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  their  activities,  respectively  adapting  their  cost 
structure  and  focusing  on  the  provision  of  either  statutory  audit  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 Big 4 and Mid-tier audit firms), because these 
revenues will go to the new entity. The indirect cost for the audit firm is the loss of synergies 
with the NAS side of the firm.  

EN 

246 

   EN 

 
Mandatory rotation of an audit firm: audit firms would 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. 

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 initial investment needed for the in-coming auditor 
to familiarise themselves with the audited client. This will normally 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 tendering 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  there  will  be  a  positive  synergy  in  costs  in  this 
respect,  since  the  new  auditor  will  have  the  opportunity  to  accumulate  an  initial  knowledge 
about the PIE during the preparation of the tender. Taking into account that 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  requirements  on  the  internal  organisation  and  governance  of  audit 
firms. 

Due  to  the  fact  that  audit  firms  already  have such  procedures/policies,  this  measure  reflects 
somewhat existing practices. Therefore, its cost (if any) will be only marginal.  

Specific  objective  3:  Improve  market  conditions  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,  including  an  audit  firm 
which is not among the four biggest players in the market.  

It  is  considered  that  there  will  be  some  initial  costs  for  audit  firms  in  the  first  year  of  a 
statutory audit mandate to better understand their new audit client as well as the costs for both 
PIEs in organising a tender and audit firms in preparing/ submitting the bid.  

From the information provided by different stakeholders, the Commission 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  involving  key  audit  partners  communication  (partner  hours  and  travel 
costs) with PIEs (Audit Committee and/or CFO – CEO). These costs on the side of audit firms 
can  be  higher,  when  preparing  tenders  for  certain  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 financial institution with substantial operations 
in  most  countries  in  the  world,  was  around  7  million  euro  (7,000  partner/hours  at  the 

EN 

247 

   EN 

 
estimated  average  cost  of  1,000  euro/h)417.  On  the  basis  of  the  scarce  data  available  to 
Commission services tendering costs could be estimated at around 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  simulations  for  13  case  studies  of  PIEs  across 
Europe,  all  with  different  sizes  and  representing  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 hourly wage envisaged by ESTAT for the category 
of managers (50 euro/ hour including overheads- 400 euro/ working day), this would result in 
a  cost  range  of  60.000-  80.000  euro.  The  maximum  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 management 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 experience in organising tenders due to the fact that 
there has been no such obligation. Therefore, we should expect a reduction of these costs for 
consecutive  tendering  procedures.  This  would  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 documentation. Respondents also reported reductions 
of audit fees as a result of a first tender exercise. 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  would  have  such  an  effect  on  the  audit  fees,  it 
could be assumed that the first rounds of tenders 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 and presented at the level 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 

From 5M to 7M 

[44.444 on an annual basis] 

[600.000 on an annual basis] 

417 

Data provided by stakeholders  

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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) 

From 1,06M to 1,08M 

[120.000 on an annual basis] 

Medium PIE 

[8.889 on an annual basis] 

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) requiring 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 information 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  burden)  will  result  from:  the  preparation  of  the 
additional information for the transparency report and the preparation and the publication of 
the  audit  firms'  financial  statements.  These  costs  will  be  moderate.  Concerning  the 
transparency  report,  the  additional  information  is  limited,  therefore  leading  to  a  marginal 
increase. Concerning the financial statements, audit 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.  Regarding  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 publish their transparency report on their website. 
Therefore,  the  cost  of  publication  would  be  marginal  since  the  financial  statements  would 
only be required to be easily accessible 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 transparency report. It would only imply a marginal 
administrative burden, which can be estimated at: 8h/year/audit firm. 

Concerning the publication of the inspection reports, the overall administrative burdens would 
be  the  cost  of  publication  on  the  authority's  website  (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. 

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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-European  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 proposal will affect both audit firms and competent authorities. 

This audit quality certificate will involve two types 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  conditions  would  normally  match  the  EU  and  ISA 
requirements.  Therefore,  the  adaptation  cost  would  be  marginal  or  non-existent  as  it  would 
have been incurred anyway as a result of other measures. 

Additionally, this certification will be voluntary. Therefore, costs may be avoided by the audit 
firms which will not attach value to such a certificate. 

The  audit  quality  certificate  will  involve  administrative  costs  for  the  competent  authorities 
involved  in  providing  the  certificate,  whether  ESMA  or  at  national  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 preparation of the secondary legislation by ESMA  

Concerning the benefits, it is estimated that this audit quality certification will contribute to 
improving the reputation of audit firms that obtain this certificate in the market and facilitate 
the  opening  of  the  European  market  to  firms.  This  improved  reputation  is,  however,  not 
measurable.  

Joint  audits:  cost  estimates  in  terms  of  additional  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 joint 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 the fact that the 4-eyes 
principle is only applied on certain areas of the audit, mainly related to strategic preparation 
of  the  audit  and  the  analysis  of  its  results.  Increased  communication  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  coordination  costs  ranges  from  2,5%  to 

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5%  of  total  audit  costs,  (overall  audit  costs  increase  by  10-15%  with  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 financial statements contain errors; 

Determining materiality thresholds; 

Defining  and  documenting  the  audit  approach  to  ensure  concerted  audit  approach, 
when conducting analytical procedures; 

Reviewing the procedures performed by the partner joint auditor; 

Ensuring the information provided at the time the financial statements are approved 
presents  a  true  and  fair  view  of  the  audited  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  conservative  figure  of  a  10%  increase.  The  above 
estimation is based on the assumption that the audit fees of the two partners remain at similar 
levels compared to the fees of the incumbent auditor. 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  those  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 would 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  chances  of  growth  of  mid-sized  and  smaller  audit 
firms and contribute to a more competitive and efficient audit market. 

Specific objective 4: Avoid unnecessary additional compliance costs for audited SMEs as 
well as for audit providers in a cross-border context 

Mutual  recognition  of  audit  firms:  an  audit  firm  approved  in  a  Member  State  would 
automatically be approved in all Member States, provided that the key audit partner leading 
the audit is approved as an auditor in the Member State concerned  

This measure should not result in direct costs. 

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Concerning  benefits,  savings  will  result  from  the  avoidance  of  the  administrative  costs  of 
applying for a new licence in each Member State where the firms wants to provide services. 
In addition, it will create a true access to audit markets in 27 Member States.  

In  terms  of  indirect  benefits,  audit  firms  could  more  easily  consolidate  with  other  firms  at 
cross-border  level,  thus  facilitating  the  development  of  stronger  and  larger  actors.  Also,  for 
existing  groups,  the  need  to  keep  different  legal  persons  in  each  Member  State  is  avoided. 
Therefore, this could lead to some savings in the administrative structure 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  regarding  audit  firms.  For  instance,  it 
could be easier for an SME to keep its audit firm in case the SME creates a subsidiary abroad. 

Mutual recognition of statutory auditors approved 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 additional business opportunities. 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 baseline scenario (aptitude test only). 

It  may  result  in  costs  for  the  competent  authorities  that  need  to  improve  the  aptitude  test. 
However, this is estimated to be a business as usual cost for those authorities. Therefore, no 
quantification of these costs is provided.  

Concerning benefits, this measure will open new markets 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  auditing  standards  are  the  same  across  the  EU. 
National additions would be acceptable, where necessary.  

An external study commissioned by the Commission and published in 2009419 undertook an 
assessment of the possible costs and benefits arising 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). 

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Table A20.4 

Type of Option 

Description 

1.  Baseline-  No  policy 
change 

No change. Each MS is free to require auditors to conduct an audit in 
accordance  with  the  national  auditing  standards  or  may  have  to 
comply  with  the  clarified  ISAs,  international  standards  of  auditing 
developed  by  the  International  Assurance  and  Auditing  Standards 
Board  (IAASB),  an  independent  standard-setting  board  under  the 
auspices of the International Federation of Accountants (IFAC).  

Introduction 

2. 
Clarified 
possible add-ons  

of 
ISAs  with 

Introduction 

3. 
Clarified 
possible carve-outs 

of 
ISAs  with 

Legal  enforcement  of  the  "clarified  ISAs"  to  make  sure  that  audit 
standards  are  the  same  across  the  EU.  Member  States  would  be 
allowed to add new requirements. 

Legal enforcement of the clarified ISAs. Possibility for individual MS 
to carve out parts of ISAs. 

In  assessing  the  costs  and  benefits  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 qualitative benefits for companies, investors and regulators.  

For this study, the recurrent benefits would outweigh increases in audit costs: 

– 

– 

– 

On one hand, the recurring costs of an audit could increase by approximately 6% to 
10% per engagement. Nevertheless, the actual 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 are estimated at about €246 M per year.  

On  the  other  hand,  market  participants  would  benefit  from  improvements  in  audit 
quality, a lower cost of capital and increased business opportunities 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  total  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  parties,  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 adoption of the clarified ISAs by 
the EU for the EU economy as a whole through 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 perpetuity can be estimated at €40 billion (if 
using an assumption of a long-term discount rate of 5%).  

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The study provides further data and evidence. 

Adapt  audit  standards  to  the  size  of  the  audited  entity:  request  Member  States  to  ensure  a 
proportionate and simplified audit for SMEs. 

This  measure  could  result  in  direct  costs  for  a  public  authority  or  a  professional  body  to 
establish  guidance  at  national  level  on  proportionate  application  of  the  applicable  auditing 
standards. Since there is already guidance on the application of the 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. These 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  proportionate  application  of  audit  standards  to  the  size  of  SMEs 
should result in cost savings for the audited entity without a diminution of audit quality. 

These savings are difficult to estimate as the practical 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  company  could  be  around  40%  on 
average.  However,  these  figures  cannot  be  extrapolated  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 these potential benefits. 

Another  benefit  is  the  possibility  for  the  auditor  to  provide  better  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 (see above). However, it may also allow the auditor to try to 
convince  smaller  companies,  not  subject  to  the  auditing  obligation,  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 financial 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  costs  should  not  be  significant. 
Other  authorities,  however,  will  have  to  invest  time  and  resources  to  upgrade  their  audit 
supervision systems. It is likely that some authorities 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  audit  markets  could  consider  integrating  their 

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auditor  supervision  into  the  existing  structures  of  financial  supervision  in  order  to  obtain 
economies of scale and synergies.  

In  terms  of  benefits,  independent,  robust  and  effective  national  supervisory  practices  (and 
their coordination at the EU level) should give companies assurance 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 functioning of markets for audits of 
PIEs. This should have a positive impact on audit quality and ultimately 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  and  EIOPA).  Taking  into 
account that facilities already exist, it is considered that the equivalent of 2 persons would be 
enough  to  cover  the  additional  tasks  in  an  initial  period:  i.e.  organising  the  cooperation 
between  the  national  authorities  and  the  preparation  of  technical  standards  regarding  joint 
audit, and subsequently, guidelines on other issues420. These two positions should normally be 
drawn from existing resources within the European Supervisory Authorities and/or from the 
staff expansion foreseen in these initial years. 

There  will  be  indirect  costs  for  national  authorities  if  the  cooperation  is  reinforced  as  more 
resources may need to be devoted 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  representatives  (the  Commission  pays  the  travel 
expenses and some allowances for one representative per country). In 2009, the expenses for 
the  national  representatives,  for  3  EGAOB  meetings,  were  €27,854.47.  The  resources 
allocated  by  the  Commission  to  the  EGAOB  (secretariat  etc)  will  not  be  saved,  but  rather 
transferred since the Commission services would also be involved in the 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 entity. The direct 
beneficiaries  of  such  confidence  will  not  only  include  investors  and  creditors  but  also  the 
company  itself  (as  well  as  its  employees).  There  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 

421 

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.  
The cost of the meeting room and interpretation are not estimated.  

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Measures such as the strengthening of audit committees, 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 measures, we broadly estimate that for public-
interest entities with a market capitalisation or a balance sheet 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  entities  (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 additional costs for the incoming audit firm. To what 
extent they will be passed on the audited entity is difficult to gauge. 

Public  interest  entities  with  a  market  capitalisation  or  a  balance  sheet  total  of  more  than  €1 
billion  would  be  required  to  engage  joint  auditors.  Based  on  the  French  experience,  it  is 
estimated that the additional work required by joint 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 certain 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 policy options. There are four categories of PIEs 
considered for the estimation: 

• 

• 

• 

• 

Very Large PIE (total turnover more than 40 billion euro422); 

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 

Type of cost 

Additional direct costs (€) 

Very  Large 
PIE 

Large PIE   Medium-

Small PIE  

PIE 

53.600 

53.600  

53.600** 

** 

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  robust  and  efficient  audit 
committees)* 

422 

E.g. Unilever Plc with a turnover of 44,262 billion euro 

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Table A20.5 

Cost  of  2  Bilateral  meetings  with  supervisors  (only 
for  PIEs  which  are  financial  institutions;  these 
additional  costs  would  not  arise 
financial 
institutions  are  already  holding  bilateral  meetings 
with supervisors) 

if 

Additional direct costs (€) 

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 

8.889 

6.667 

N.A. 

[400000 
every 
years] 

9 

[80000 
every 
years] 

9 

[60000 
every 
years] 

9 

Preparation of additional internal report 

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 audit 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). Therefore, 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 PIEs, the proportion of fees 
to total turnover is lower, therefore the 5% increase is applied (e.g. Unilever 18M euro audit fee is 0,042% of 
44,262 billion turnover; 5% audit fee increase due to joint 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 charged 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  been  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 provided informal information that, for example, 
responding  to  the  tender  for  the  audit  of  a  large  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  billion,  the  cost  reported  was  in  excess  of  €5 
million.  

Given  that  a  tender  for  a  given  company  would  take  place  every  9  years,  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 some of these costs would prove fruitless. This 
may sound like a step increase in jurisdictions with little tendering over the past decades but 

EN 

257 

   EN 

 
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  the 
potential  reward:  in  France,  the  average  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; the fees for some companies exceeded £30 million.  

In the case of medium-sized PIEs, tender costs would be significantly lower: on average €160 
thousand (roughly €18 thousand per annum). To put this into perspective, it is worth noting 
that  the  average  audit  fees  for  such  companies  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). 

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  audited  entities.  For  firms,  increased  and  repeat  experience 
with  tenders  will  streamline  and  institutionalise  the  process  thus  lowering  the  costs  of 
preparing tenders.  

Table A20.6 

Type of cost 

costs (€) 

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 

120.000 

17.778 

N.A 

[total 
costs 
estimated  at 
5.400.000] 

[total 
costs 
estimated  at 
1.080.000] 

[total 
costs 
estimated  at 
160.000] 

* 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 the financial system can be solely 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 future. 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 aid amounting to 39% of the Union's GDP for 
2009, renders a serious overhaul of the existing system 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 various measures more players will emerge at the top 
end  of  the  market.  It  is  difficult  to  predict  if  they  will  compete  mainly  on  price  thus 
moderating  some  of  the  cost  increases  referred  to  above  or  whether  the  current  charge  out 

EN 

258 

   EN 

 
 
rates  will  be  preserved  with  the  competition  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 capital 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  other  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  business  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 economy as a whole through lower 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-term 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 audit firms complying with 
the  necessary  requirements  the  possibility  to  provide  services  in  all  27  Member  States. 
Administrative  burden  of  SMEs  will  also  be  reduced,  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 

259 

   EN 

 
ANNEX 21. TRANSITIONAL ISSUES REGARDING ROTATION 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 audit 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 timing: will all (or a vast majority of) PIEs 
be calling for tenders at the same time? 

Concerning the first issue, it would be desirable that any future  legislation respects existing 
contracts,  provided  that  they  were  entered  into  in  good  faith  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 are 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 legislation, audit contracts for 10 years are signed. 

Concerning the second issue, it would be desirable that the tendering and 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 services 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) contracts 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 entry into force of the text would be the 
day following the publication in the OJ) and (iii) contracts signed after the entry into 
force  of  the  legal  text  but  before  the  termination  of  the  transposition/transitional 
period  (in  principle,  two  years.  This  period  would  be  needed  to  ensure  that  all 
requirements on Member States regarding supervision are in place). For the second 
type of contracts, the PIE and 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 applicable rule, so no retroactivity 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 mandatory rotation and joint audit rule would 
not apply immediately. The PIE and the auditor would be in a position to renew the 
existing  contract  once  (as  in  the  case  of  a  normal  contract  under  the  proposed 
measures). However, it would be inappropriate to allow for a renewed 5 year contract 
in  all  cases,  considering  that  the  auditor  would  normally  have  been  in  place  for  a 
long period.  

EN 

260 

   EN 

 
– 

The duration of the renewed contract should therefore be adapted depending on the 
tenure of the existing auditor: the longer the tenure, the shorter the new contract. This 
would  also  allow  for  a  progressive  entry  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  contract  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 contracts (of 6 years) are respected;  

(2)  an  audit  contract  was  signed  after  the  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 that 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 terminated: a single renewal of the contract with 
the same auditor (no tendering) would be possible. 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  accounting  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 audit 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 maximum 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 

261 

   EN 

 
E
N

2
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A
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1
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1

1/7/2013 -Entry intoforce of Council and EP legaltext
1/7/2013 -Entry intoforce of Council and EP legaltext
1/1/2015 -end of transitionalperiod
1/1/2015 -end of transitionalperiod
1/1/2016 -pure audit firms
1/1/2016 -pure audit firms
1/2/2012 -Commission proposal
1/2/2012 -Commission proposal

only
only

(1)
(1)

(1)
(1)

existing
existing
audit 
audit 
contracts
contracts

(2)
(2)

NEW PIE
NEW PIE

(3) Renewal of contract with same auditor possible:
(3) Renewal of contract with same auditor possible:
-1 year: if same auditor was in place for 100 or more years
-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
-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
-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
-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 less
-5 years: if same auditor was in place for 10 years or less
In any case, until the end of the first accounting year ending
In any case, until the end of the first accounting year ending
after the end of the transitional period
after the end of the transitional period

Rotation, tendering and joint audit 
Rotation, tendering and joint audit 
Earliest scenario (assuming that: 
Earliest scenario (assuming that: 
the original contract exhausts the 
the original contract exhausts the 
4 or 5 years grace period; and 
4 or 5 years grace period; and 
there is a contrct renewal)
there is a contrct renewal)

Rotation, tendering and joint audit:
Rotation, tendering and joint audit:
at the latest from this date onwards
at the latest from this date onwards

Rotation and tendering:
Rotation and tendering:
Longest scenario: 4+5 years
Longest scenario: 4+5 years
asuming renewal of contract
asuming renewal of contract
[shorter scenario: 2+1 years]:
[shorter scenario: 2+1 years]:

1/1/2011
1/1/2011

1/1/2012
1/1/2012

1/1/2013
1/1/2013

1/1/2014
1/1/2014

1/1/2015
1/1/2015

1/1/2016
1/1/2016

1/1/2017
1/1/2017

1/1/2018
1/1/2018

1/1/2019
1/1/2019

1/1/2020
1/1/2020

1/1/2021
1/1/2021

1/1/2022
1/1/2022

1/1/2023
1/1/2023

1/1/2024
1/1/2024

1/1/2025
1/1/2025

1/1/2026
1/1/2026

1/1/2027
1/1/2027

1/1/2028
1/1/2028

1/1/209
1/1/209

1/1/2030
1/1/2030

1/1/2031
1/1/2031

Tendering and joint audit
Tendering and joint audit

Renewal of contract with same auditor:
Renewal of contract with same auditor:
-according to new rules
-according to new rules
(5 years maximum and no more than 9 years in total)
(5 years maximum and no more than 9 years in total)

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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 specifically concern the audit of PIEs and 
are  directly  applicable423.  Given  that  the  rules  on  the  audit  of  PIEs  would  be  directly 
applicable, it appears appropriate that the sanctioning regime is harmonised. 

Such regime, without prejudice to the provisions of criminal law, would include rules on:  

– 

– 

– 

– 

– 

423 

the identification of the key violations; 

the identification of the types of sanctions that, at a minimum, should be applied (by 
the  authorities  charged  with  the  supervision  of  the  audit  market  or  other  national 
authorities); 

the supervisory measures that, at a minimum, should  be available to  the competent 
authorities  charged  with  the  supervision  of  the  audit  market.  Certain  supervisory 
measures  are  particularly  important  to  respond  adequately  to  key  violations  of  the 
rules.  It  should,  therefore,  be  ensured  that  all  competent  authorities  have  at  their 
disposal  those  powers:  e.g.  the  possibility  to  temporarily  prohibit  the  auditor  from 
carrying  out  statutory  audit  of  PIEs;  requiring  the  auditor  or  the  PIE  to  bring  an 
infringement to an end; declare that the auditor does not meet the legal requirements; 
require  auditors  to  amend  their  transparency  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 realised by infringing the rules, for example 
carrying out an audit when the independence 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  administrative  fine,  to  the  seriousness  and  the 
consequences  of  the  violation  and  to  the  personal  conditions  of  the  author  of  the 
violation,  which  would  help  ensuring  the  effectiveness,  proportionality  and 
dissuasiveness of the sanctions actually applied; 

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 

263 

   EN 

 
                                                 
– 

the  publicity  of  sanctions:  publication  of  sanctions  is  considered  to  be  one  of  the 
most  deterrent  tools  to  prevent  violations,  particularly  because  of  the  reputational 
damage  that  the  author  of  the  violation  will  incur.  The  introduction  of  a  general 
obligation  to  publish  sanctions  would  ensure  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  (Art.  47),  presumption  of  innocence  and  right  of 
defence (Art 48), freedom to conduct a business (Art 16), data protection (Art 8), consumer 
protection (Art 38), and – even though Art. 49 on the legality and proportionality of criminal 
offences  and  penalties  may  not  be  directly  applicable  to  all  of  the  administrative  sanctions 
envisaged – the general principles of legality and proportionality underpinning the Charter.  

In relation to these fundamental rights, the measures envisaged would ensure that a violation 
of reporting and notification requirements would be subject to the same type of administrative 
sanctions  across  the  EU.  These  uniform  rules  would  particularly  ensure  that  the  types  and 
levels  of  administrative  sanctions  that  can  be  imposed  are  proportionate  to  each  specific 
violation  across  all  Member  States.  This  option  will  not  harmonise  the  national  liability 
regimes  and  will  not  affect  the  procedure  for  the  imposition  of  administrative  sanctions. 
Therefore, it will preserve Member States’ current arrangements for ensuring compliance with 
procedural  rights  such  as  the  right  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 dissuasive 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  simplification  of  the  legal  framework  for  cross-border  financial 
institutions.  

EN 

264 

   EN 

 
Annex 23. Monitoring and evaluation: detailed plan 

First of all, it should be noted that some of the policy choices envisaged would be included in 
a  directive  requiring  the  adoption  of  national  transposition  measures:  i.e.  those  regarding 
access to audit markets in different Member States; the audit standards to be used, including 
when  auditing  SMEs;  and  the  supervisory  issues.  Other  preferred  policy  options  would  be 
integrated in a directly applicable legal instrument (i.e. those containing 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 into 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 transposition 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 monitoring activity; and 

(3) the evaluation of the policy. 

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Monitoring (by national authorities):
Monitoring (by national authorities):
-Regular Quality Assurance Reviews
-Regular Quality Assurance Reviews
-Market developments: market concentration levels
-Market developments: market concentration levels
-Threats to continuity of operations of large audit firms
-Threats to continuity of operations of large audit firms

Monitoring (by Commission):
Monitoring (by Commission):
-Transposition (guardian of Treaty) 
-Transposition (guardian of Treaty) 
-Powers and resources of national authorities
-Powers and resources of national authorities

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(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 the 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 rules and any subsequent evaluation. This group would 
also set a strategy for the collection of such 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 Supervisors 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 rules is in-built in the preferred policy options 
and would essentially be carried out by the national competent authorities and ESMA on an 
ongoing basis. 

Monitoring  activities  by  national  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 audits 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, including at the level of specific sectors; and 
assessing the the need for structural measures to mitigate any risk arising from high 
concentration,  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;  

EN 

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– 

(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 plans 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  authorities  is  without  prejudice  to  the 
role  of  the  Commission  as  guardian  of  the  Treaty.  The  Commission  will  monitor  whether 
Member  States  transpose  the  relevant  obligations  into  national  law.  It  will  monitor,  in 
cooperation  with  ESMA,  whether  the  competent  authorities  are  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/transitional period). 

(3) The evaluation of the policy 

A full evaluation of the effects of the policy choices could, however, only be undertaken in 
the  longer  term.  Some  of  the  important  policy  choices  will  need  time  to  have  any  impact, 
particularly  (but  not  only)  as  regards  market  concentration  levels:  e.g.  conversion  of  audit 
firms  into  pure  audit  firms,  maximum  duration  (9  years)  of  audit  engagements  with  an 
obligation to change statutory 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/transitional  period,  a  report  on  selected  issues  :  changes  in 
audit  market  structure;  changes  in  the  patterns  of  cross-border  activity  (e.g. 
functioning of the aptitude test 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  additional  information, 
the Commission could prepare its 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  years)  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  evaluation  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 

267 

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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 audit opinions; evolution 
of the quality of audit reports; audit committee satisfaction (e.g. with the additional 
internal  report);  assessment  of  quality  assurance  reviews  by  supervisors; 
auditors/firms  obtaining  the  European  quality  certificate;  investors  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 qualitative assessment of such work; investigations 
carried out; intra-EU cooperation activity. 

EN 

268 

   EN 

 
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González-Páramo (2011), The management of the banking sector and the economy: what have 
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Haapamäki,  Järvinen,  Niemi  and  Zerni  (2011),  Do  Joint  Audits  Offer  Value  for  Money? 
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Hoyle,  J.  (1978),  Mandatory  auditor  rotation:  Arguments  and  alternative.  Journal  of 
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Kittsteiner and Selvaggi (April 2008), Concentration, Auditor Switching and Fees in the UK 
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Köhler et al. (June 2009), University of Duisburg-Essen, Evaluation of the Possible Adoption 
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Huber (March 2011), Rising from the ashes, Accountancy Magazine, March 2011.  

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IAASA (2009), Irish Auditing and Accounting Supervisory Authority, Annual Report 2009. 
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IAASB  (2009),  International  Auditing  and  Assurance  Standards  Board,  Applying  ISAs 
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audit  –  Report  on  the  ICAEW  Assurance  Service  consultation,  2009.  Available  at: 
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IFAC  (2010),  International  Federation  of  Accountants,  Guide  to  using  International 
Standards on Auditing in the audits of small- and medium-sized entities, October 2010. 

International  Monetary  Fund  (2004),  Decision  No.  13323-(04/78),  August  5,  2004,  Article 
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to the audit of publicly listed companies - Comment letters, MS05/10, October 2010.  

Jean  (2011),  A  hindrance  to  the  development  and  the  emergence  of  audit  firms  of 
international stature? The Journal of Regulation n°6, January/February 2011, p. 480. 

London  Economics  (September  2006)  Study  on  the  Economic  Impact  of  Auditors’  Liability 
Regimes,  September  2006.  Study  conducted  for  the  European  Commission.  Available  at: 
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Maaijoor  (2011),  Keynote  speech  of  Steven  Maaijoor,  chair  of  ESMA,  at  the  IFRS 
Conference, ESMA/2011/202, 5 July 2011. 

Nyberg  (2011),  Report  of  The  Commission  of  Investigation  into  the  Banking  Sector  in 
Ireland:  Misjudging  Risk:  Causes  of  the  Systemic  Banking  Crisis  in  Ireland,  March  2011. 
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OECD  (2009).  Report  on  Competition  and  Regulation  in  Auditing  and  Related  Professions, 
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OFT (2010), Office of Fair Trading, Submission to the House of Lords Select Committee on 
Economic Affairs from the Office of Fair Trading, September 2010. 

OFT (2011), Office of Fair Trading, OFT announces next steps in audit market, 17 May 2011. 
Available at: http://www.oft.gov.uk/news-and-updates/press/2011/59-11 

Oxera  (April  2006)  Competition  and  choice  in  the  UK  audit  market,  study  prepared  for 
Department of Trade and Industry and Financial Reporting Council, UK. 

Prat  et  Hauret  (2006),  Christian  Prat  et  Dit  Hauret,  L'independence  percue  de  l'auditeur, 
Revue francaise de gestion 2003/6 no 147, p.105. 

PWC  (2011),  YouGovStone  European  Audit  Committee  Chair  and  CFO  Poll:  Exploring 
attitudes to audit quality and potential reforms, June 2011. 

Sikka (2009), Financial crisis and the silence of the auditors, Accounting, Organizations and 
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Private Enterprise, Findings and Recommendations, 2003. 

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GAO-08-163, 

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Preventing Another Financial Crisis, 6 April 2011.  

Woolfe (2011), Shaking up audit, Accountancy Magazine, March 2011. 

Legislative References 

Banking Directive: Directive 2006/48/EC of the European Parliament and of the Council of 
14  June  2006  on  the  taking  up  and  pursuit  of  the  business  of  credit  institutions,  OJ  L  177, 
30.6.2006. p.1. 

E-money Directive: Directive 2009/110/EC of the European Parliament and of the Council of 
16  September  2009  on  the  taking  up,  pursuit  and  prudential  supervision  of  the  business  of 
electronic  money  institutions  amending  Directive  2005/60/EC  and  2006/48  and  repealing 
Directive 2000/46/EC, OJ L 267, 10.10.2009, p.7.  

ESMA  Regulation:  Regulation  (EU)  No  1095/2010  of  the  European  Parliament  and  of  the 
Council  of  24  November  2010  establishing  a  European  Supervisory  Authority  (European 
Securities  and  Markets  Authority),  amending  decision  No  716/2009/EC  and  repealing 
Commisison Decision 2009/77/EC, OJ L 331, 15.12.2010, p.84.  

First Company Law Directive: Directive 2009/101/EC of the European Parliament and of the 
Council of 16 September 2009 on coordination of safeguards which, for the protection of the 
interests of members and third parties, are required by Member States of companies within the 
meaning  of  the  second  paragraph  of  Article  48  of  the  Treaty,  with  a  view  to  making  such 
safeguards equivalent, OJ L 258, 1.10.2009, p. 11.  

Fourth Company Law Directive: Fourth Council Directive 78/660/EEC of 25 July 1978 on the 
annual accounts of certain types of companies, OJ L 222, 14.8.1978, p.11. 

MIFID:  Directive  2004/39/EC  of  the  European  Parliament  and  of  the  Council  of  21  April 
2004  on  Markets  in  Financial  Instruments  amending  Council  Directives  85/611/EEC  and 
93/6/EEC  and  Directive  2000/12/EC  of  the  European  Parliament  and  of  the  Council  and 
repealing Council Directive 93/22/EEC, OJ L 145, 30.4.2004, p. 1. 

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MIFID  Implementing  Directive:  Commission  Directive  2006/73/EC  of  10  August  2006 
implementing Directive 2004/39/EC of the European Parliament and of the Council as regards 
organisational requirements and operating conditions for investment firms and defined terms 
for the purposes of that Directive, OJ L 241, 2.9.2006, p. 26 

Payment  Services  Directive:  Directive  2007/64/EC  of  the  European  Parliament  and  of  the 
Council  of  13  November  2007  on  payment  services  in  the  internal  market  amending 
Directives  97/7/ECC,  2002/65/EC,  2005/60/EC  and  2006/48/EC  and  repealing  Directive 
97/5/EC, OJ L 319, 5.12.2007, p. 1. 

Seventh Company Law Directive: Seventh Council Directive 83/349/EEC of 13 June 1983 on 
consolidated accounts, OJ L 193, 18.7.1983. 

Solvency II Directive: Directive 2009/138/EC of the European Parliament and of the Council 
of  25  November  2009  on  the  taking-up  and  pursuit  of  the  business  of  Insurance  and 
Reinsurance (Solvency II), OJ L 335, 17.12.2009, p. 1.  

Statutory  Audit  Directive:  Directive  2006/43/EC  of  the  European  Parliament  and  of  the 
Council  of  17  May  2006  on  statutory  audits  of  annual  accounts  and  consolidated  accounts, 
amending  Council  Directives  78/660/EEC  and  83/349/EEC  and  repealing  Council  Directive 
84/253/EEC, OJ L 157, 9.6.2006, p. 87. 

Transparency  Directive:  Directive  2004/109/EC  of  the  European  Parliament  and  of  the 
Council of 15 December 2004 on the harmonisation of transparency requirements in relation 
to  information  about  issuers  whose  securities  are  admitted  to  trading  on  a  regulated  market 
and amending Directive 2001/34/EC, OJ L 390, 15.12.2004, p. 38.  

UCITS Directive: 2009/65/EC of the European Parliament and of the Council of 13 July 2009 
on the coordination of laws, regulations and administrative provisions relating to undertakings 
for collective investment in transferable securities (UCITS), OJ L 302, 17.11.2009, p. 32.  

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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 stocks 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 des 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 Deutscher 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 

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FEE – Fédération des Experts Comptables Européens  

FTSE 100/ 250/ 350 – 100/ 101st to 350th/ 350 largest companies listed on the London Stock 
Exchange 

G8 – The countries of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, 
and the United States 

G20 – The Group of Twenty (G-20) Finance Ministers and Central Bank Governors. The G-
20 is made up of the finance ministers and central bank governors of 19 countries: Argentina, 
Australia,  Brazil,  Canada,  China,  France,  Germany,  India,  Indonesia,  Italy,  Japan,  Mexico, 
Russia,  Saudi  Arabia,  South  Africa,  Republic  of  Korea,  Turkey,  United  Kingdom,  United 
States  of  America.  The  European  Union,  who  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 Continuous Market, which is comprised of the 35 
most liquid stocks traded on the market 

ICAEW – Institute of Chartered Accountants 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  

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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 

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