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UK Finance Directors speak out on the topic of external auditor reform

The Hundred Group represents the Finance Directors (CFO in other parts of the world) of the UK’s largest companies, primarily drawn from the largest 100. They have penned a letter to the European Commission, with their views on some of the proposals being floated in the EU.

Norman Marks
Norman Marks
The group didn’t mince their words. For example:
“We are deeply concerned to hear that the Commission is considering legislating for mandatory joint audits, mandatory auditor rotation, the creation of specialist audit firms and the widespread prohibition of non audit services. Such radical and untested proposals are likely to have very significant and profound implications for the way audits are conducted, none of which are likely to be positive to investors or other stakeholders.”

They continue with even more scathing criticism:
“In our view, these proposals show a fundamental misunderstanding of both the way that external audits are conducted and the current structure of the audit market. They will have the effect, both directly and indirectly, of reducing audit quality, increasing cost and diminishing the value of the audit opinion to investors, without any compensating tangible benefits.”

They attack the merits of appointing a second audit firm (common in France), and make this excellent point (with which I agree) when it comes to the effect of auditor rotation on quality:
“Rotation risks a reduction in audit quality in the initial and final years of the appointment.”

I don’t agree with their suggestion to loosen the rules about providing non-audit services, because the competition for the work alone could be perceived as impairing the independence of the auditor. Personally, I think the tax work that is often done is a conflict because the auditor is then put in a position of assessing the work of his tax experts.

I also agree with this statement, in the Appendix:
“The auditors are not responsible for, nor should be requested to present information on, the strategy, risks and management of the company. This is at best repetitive, and at worst fundamentally undermines the relationship between Directors and investors.”

What do you think of these proposals? Do you think auditor rotation is a good idea?

Norman Marks, CPA, is vice president, governance, risk, and compliance for SAP's BusinessObjects division, and has been a chief audit executive of major global corporations for more than 15 years. He is the contributing editor to Internal Auditor’s “Governance Perspectives” column.

Vendredi 14 Octobre 2011

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