FTSE 100 Audit Committee Chairs question rationale of EU audit reforms

FTSE 100 Audit Committee Chairs have questioned the rationale behind proposals currently being considered by the European Commission to reform the audit market but think some of the proposals have merit in their own right. According to research undertaken by Brunswick Research on behalf of ICAEW, they believe that, given the lack of evidence that a problem with audit either caused or accelerated the financial crisis, the case for reform has not been made.

Nonetheless the research, which was based on in-depth interviews with audit committee chairs of twenty five FTSE 100 companies, suggests that current market concentration is not ideal. The research also highlights a number of areas where change could help maintain audit quality, independence and overall market confidence. These include:-

• Increasing competition and choice - There were mixed views on tendering and rotation with support for greater openness around the tendering process. There were significant concerns around joint audits with the costs generally perceived to outweigh the benefits.

• Continuing focus and reassurance on auditor independence – Whilst the majority took the view that existing safeguards worked well and independence was reinforced by audit partner rotation, the need to demonstrate independence was acknowledged as a long-standing concern which needed to be addressed through more effective communication and greater transparency around the audit process.

• Greater use of third party and peer review of audit practices such as those carried out by the Audit Inspection Unit (AIU). These are already widely used and their scope could be increased.

In the wake of the financial crisis those interviewed spoke of a general increase in the activity of audit committees resulting in greater demands on their time. There was consensus that the audit committee’s role must be clearly delineated and shouldn’t compromise or replace the role of the main board especially when it comes to strategic risk decisions, the business model and signing of the annual report.

Commenting on the research, Michael Izza, ICAEW chief executive said:-

“When considering their proposals, the European Commission cannot ignore the voice of business. As this research shows, there is scepticism over the rationale for these proposals but a recognition that change is needed in a number of areas to ensure UK audit quality remains world leading.”

Download the The Future of Audit - research with FTSE100 Audit Committee Chairs (PowerPoint 598KB/33 slides).

Media enquiries: Contact Simon Thompson, ICAEW press office, on 020 7920 8515 or email simon.thompson@icaew.com