Audit Sector Reform in the European Union - Essay Example

Table of Contents Introduction 2 Effect on Companies 2 Choice of auditor 3 Perception about the company 3 New auditor recruitment and restricted services 4 Effect on shareholders 5 Increased Quality 5 Increased Accountability towards Shareholders 6 More Efficient Market 8 Effect on Audit Firms 8 Independence 9 Audit Market 10 Works Cited 11 Audit Sector Reform in European Union Introduction The reform of audit sector in the European Union is considered by making alterations to the audit rules and guidelines so as to improve the quality of audit. The aim of the reform is to increase the investors’ interest in the audit by significantly raising the audit quality. Several of the elements of the audit are changed and altered in accordance with the quality assurance in audit. Role of the auditors towards the society is explained and enhanced so as to realize the auditor their importance and value to the environment. By enhancing the quality, transparency and accountability in the audit their impact upon the environment is realized. More focus upon ensuring the independence of the auditors is made. Limitations and restrictions upon the non-audit services provided by the auditors shall remove much of the threat to the independence of the auditors along with the alterations in the mandatory audit rotation. Making it more dynamic and competitive makes the audit market in the European Union much efficient. Encouraging joint audits shall be able to overcome the dominance of the big fours in the market and thus shall increase the competition in the market. The harmonization of the audit standards in the European Union shall be expanding the audit market in the European Union. With the enhanced supervision of the audit sector and much reforms made in the audit sector it shall be affecting various stakeholders and its impact along with the difficulties are elaborated. Effect on Companies The long awaited audit reforms have been completed by the EU however now awaits their practical implication it would reveal their impact over the companies. Audit reforms are move that come after the financial crisis that corporates have faced and proximity seen in the relation of the auditors to their clients. Reforms are not only the challenge for the audit firms but also for the companies, they would be required to adapt to new regulations. Some of the factors that would deeply affect companies that undergo are discussed as follow: Choice of auditor Even changing of engagement partner was considered auditor rotation however changed reforms require change in audit firm maximum after 24 years including extension period. Companies would have to be more vigilant in their choice of auditor as relationship would be of limited period (more than previous 3 years) and non-audit services would be restricted. Changing of auditors before 10 years would not be appreciated; reforms do not aim to increase the competition in the audit market thus the replacement during first tenure would be considered as harmful for future audit and management operations (Suzanne, 2013). However companies and their management would be at ease as once the auditor appointed would provide services for 10 years therefore removing, managing and thus not letting any future back logs to be created. Perception about the company It is obvious that the objective of audit reforms is to strengthen the overall market that due to the recent financial crisis, recession, fraudulent activities, law suits both on the companies and the audit firms has lost the trust and the confidence of potential investors, financial institutions and shareholders. Concern is not only of B2C matters of the corporates however B2B relations have also suffered due to ambiguous activities manipulating actions taken by the influential factors of the market thus hampering future and long term prospects of the market and shareholders. New reforms would increase the auditor independence; regulation regarding the auditor rotation after 10 years extension of maximum 14 years would eliminate the factor of familiarity. Larger corporates under new reforms might also have to go under joint audit as under the tenders audit firms would not be providing their full human resource, as they would be restricted of to perform non-audit services for the same client. It is the probability that joint audits would increase the costs for the companies and they would have to share the information and the data with two auditing firms however the scrutiny would increase over them. Auditor not performing any non-audit services and the limit to the period of auditor engagement threats has been minimized over the independence of the auditor. Management and the processes of the companies would become more organized with lesser chances of manipulations and misstatements thus reviving and gaining the trust and confidence of the shareholders, market and strengthening their B2B relations. New auditor recruitment and restricted services It is an obvious fact that if auditor performs non-audit services for the client it would be over involved and would also be over dependent regarding the fee being generated from the client. However as the regulations in the new audit reforms restrict the auditor it removes the threat of self-review however it increases the burden over the management, as they would have to engage in with different audit partner for non-audit services. It would increase the burden of information; evidence and the data to be provided and conflicts might emerge between the performing auditors. Besides the increase in administrative burden the credibility of the management reports, documents and financial statements would increase. It would also allow the companies to take auditor accountable for the services that they are providing thus in case of any haphazard unforeseen event it would not only be the company and its management that would be held responsible but also the auditors or the professionals providing audit and non-audit services (TOM, 2013). It was a threat that auditor performing non-audit services can hide the manipulations of both management and his own work however restriction would increase the scrutiny and would provide double check over the company accounts. New reforms for the audit would deeply impact the market if implemented with their full strength. The status that “Big Four” are enjoying right now would not be same as reforms offer more space in the market and position to the smaller audit firms thus increasing the options for the companies and their interests in the scrutiny of the tenders. Companies have to become adaptable to the changes as it would directly their operations. The audit relations would allow the company to remove its backlogs and maintain up to date records however rotation of auditor within the limited period would bring the threat of backlogs as new appointment is being made. Company would again have to go through the process of recruitment with new relation and understanding to be developed with the audit firm. Effect on shareholders The changes in the statutory audit rules shall be affecting the shareholders of the companies with much intensity. The independence of he auditors is a factor that determines that the auditor shall be able to provide an unbiased opinion upon the financial statements of the company. With the improved independence the quality of the report shall be affected positively and the auditors shall be much neutral in their opinion and shall be able to enhance the quality of the statutory audit (Silvia, 2010). With improvement in the quality of the audit the shareholders’ trust upon the financial reports of the company shall enhanced. With the enhanced trust of the shareholders upon the reports of the companies the company shall be able to attract more investments. Increased Quality The independence of the auditors indicates the dominance of the management of the company upon the audit report. Independence of the auditor shall be ensuring that the auditors shall be providing unbiased report and shall be reporting about true condition of the company. The quality of the audit report shall be affecting the opinion of the shareholders about the company. Improved quality of the audit reports shall be increasing the trust of the shareholders and with the increases trust the shareholders shall be investing more in the companies. The reduction in the expectation gap of the audit the responsibilities and the liabilities the shareholders shall be get much aware of the responsibilities of the respected parties. The expectation gap refers to the gap between the perceptions that people carry about the scope of audit work and auditors’ responsibilities and what auditors are trained and directed to be responsible for. With the responsibilities clearly identified and explained in the audit report this shall clearing the shareholders perception upon the auditor and will be able to better determine the reliability of the audit report. The better quality of the audit shall be enhancing the trust of the shareholders along with the reduction in the expectation gap the evaluation of the company performance shall be better examined and analyzed by the shareholders. With the reliability of the information provided in the financial reports of the company the analysis of the company shall be better measured, as the figures presented are more factual and trustworthy. The performance of the company thus measured shall be reflecting true picture so the investments of the shareholders can thus be analyzed with confidence. The accountability of the auditors is increased as with the collaborations with the national supervisors and international cooperation on audit oversight. The increased in accountability of the auditors shall increase the responsibility (James & Lee, 2014). With the increased responsibility of the auditors and their impact upon the society it shall be much clear to them to provide quality in the audit and thus shall be enhancing the trust of the shareholders upon the audited reports so as to measure the performance of the company more efficiently. Increased Accountability towards Shareholders The increase in the accountability of the auditors towards shareholders can be reflected in the altered package of the reform where 5% of the shareholders can initiate the actions to dismiss the auditors. The increased accountability of the auditor shall be increasing the responsibilities of the auditors along with realization of the impact of the quality of the audit report upon the shareholders. With much less percentage of the shareholders requirement so as to dismiss the auditor the self-interest threat to the independence of the auditor shall be minimized. Thus with the independence of the auditors enhanced the reliability of the audit report for the shareholders shall increase. The accountability of the auditors towards the shareholders can be mistreated there can be formations of the small groups in the shareholders of the company so as to the removal of the auditors. The threat to the removal of the auditors with such small number of shareholders might compromise the audit quality as the auditors might manipulate the report. The counter to this issue is accounted for in this reform, as the enhanced transparency of the auditors by stronger reporting obligations shall remove this threat. Thus the enhanced accountability of the auditors towards shareholders shall increase the interest and trust of the shareholders in the company. With the realization of the responsiveness of the environment and society upon audit it is much concerned that the audit sector in the European Union shall be enhanced (Kim, 2013). The reform in the audit sector includes enhanced transparency of the auditors and thus enhancing the accountability towards the shareholders of the company. With the reforms there are strict rules that are to be followed by the auditors regarding transparency. The obligations are tough so as to disclosures and there are meetings and communication with the internal audit committee so as to increase the transparency in the audit. The management of the company ensured maximization of the shareholders wealth and so do they form the audit committee. The internal audit committee ensures the effectiveness of the internal controls. The communications of the external auditors with the internal audit committee shall increase the transparency towards the shareholders, as they shall be much aware of the familiarity of the auditors with the company operations and management. With the disclosure of the familiarity of the auditors with the management of the company the transparency of the auditors will enhance and thus there shall be minimal chances of shareholders to be misguided. The external auditor shall be providing reports upon the effectiveness of the internal audit committee and thus it shall be much clear to the shareholder about the performance of the audit committee (Yan & Li, 2007). More Efficient Market Auditors are appointed by those charged with governance of the company and are approved by the shareholders. The increase in the accountability of the auditors shall be increasing the shareholders’ trust in the company and towards the auditors. The increased interest and trust of the shareholders shall be increasing the audit value and market of the audit. The increase in the market of the auditor the competition shall increase. In order to compete in the competitive market the auditor shall be able to provide the quality and thus the quality of the audit in the region shall increase (AKM Waresul & Tony, 2013). The more efficient the audit market is the more quality that it will deliver to the shareholders. With the increase in the efficiency of the market the quality of the audit shall increase and the beneficiary of the efficiency shall be the shareholder of the company. The shareholders of the company shall be able to take decisions in a much effective way as the improved quality of the audit shall be providing more reliable information regarding the company and thus the performance of the company can be measured much effectively (Hossein & Svetlana, 2008). The increased efficiency of the market shall be providing much of the options to the shareholders as the dominance of the Big Four in the market shall be reduced and there are other auditors that can be hired thus the dependence of the company over hiring a particular auditor will change to a range of auditors and thus shareholders will have much of the choices available for engaging the auditors. Effect on Audit Firms The audit reform that is to be brought in the European Union with the amendments in the audit regulations shall be directly affecting the audit firms. There are various factors in this reform that shall be affecting the audit firms in which the improvement of the quality is focused. As the reform is aimed to improve the quality of the audit thus the main target of the reform will be the audit firm. For the increase in the quality of the audit the increase in independence of the auditors are considered along with increasing the competition in the audit so as to ensure the quality of audit. By realization of the responsibilities of the auditors towards the society the ethical impact of the auditors are targeted so as to provide quality audit. The impacts of the issues that the reform shall bring to the audit firms along with the problems in the implementations of these proposals are elaborated. Independence The independence of the auditors is one of the biggest factors that hamper the quality of audit. The increase in the independence of the audit shall be increasing the quality of the audit. There are several threats to the independence of the auditors that are accounted for in this reform. The structure of the report that is to be much more refined so as to gather information that is crucial for the investors. The increased in the detail of the report shall be reducing the expectation gap regarding audit. The reduction in expectation gap shall be resulting in the increased trust and interest of the user upon the audit report and thus the quality of the audit shall increase. The threat to the independence of the auditors is countered by restricting the non-audit assignments for the auditors. When the non-audit assignments are limited then it shall be reducing the risk of dependency of the auditor upon the fees from the client. The impairment of the independence of the auditor is ensured when the audit tenure is short and this shall not impair the independence when the audit tenure is long (Ferdinand, Bikki, & Gopal, 2007). With the limitations imposed upon the non-audit assignments and long with the change in the tenure of the audit the independence of the auditors are increased as the dependency of self-interest is mitigated to the minimum level. The restrictions imposed upon the audit tenure and the non-audit assignments shall be facing challenges in implementation, as the audit firms shall be resisting the change. Audit firms had enjoyed long tenures with the clients, as PWC has been the auditor of Marks & Spencer since 1926 till 2013 (Richard, 2013). With the limitation upon the tenure and the non-audit assignments the independence of the auditor shall surely be enhanced and thus the quality but the restriction shall be impacting the earnings of the audit firms, which they shall be restricting. Audit Market The reform suggests the efficiency of the audit market by improving various conditions prevailing in the audit market. The competition between the auditors will be increased. The reform aimed at improving the quality of the audit by increasing the competition in the audit market. Removing the clause of the necessary audit from the big fours eliminates the dominance of the Big Fours and thus the chances of the other firms are increased. With the increasing audit firms in the market and the dominance of the big fours eliminated the audit market shall be much affective and competitive. The increase in the competition in the market will be increasing the competition and the firms shall be facing challenges. The increased competition in the audit marker shall be increasing the quality of the audit along side it shall be providing much intense competition for the audit firms which they shall not be entertaining and the audit firms shall be resisting the reform. The increased competition shall be providing opportunities for the small audit firms to coordinate with the big audit firms and their engagements in clients shall be jointly with the big audit firms. The increase in the joint operations shall be increasing learning of the firms and thus shall ultimately will enhancing the quality of audit. The increased competition in the audit market will be improving audit quality as there are number of audit firms available to be engaged. Wit the availability of the large number of audit firms along with the elimination of dominance of the big fours the reform alters the audit rotation rules in which the auditor should be rotated every ten years. The audit market is enhanced by reforming the audit sector with implementation of the rules and regulations that shall be benefiting for the companies, shareholder and audit firms. Works Cited AKM Waresul, K., & Tony, v. Z. (2013). Efficiency and opportunism in auditor quality choice in emerging audit services markets: The case of Bangladesh. International Journal of Accounting and Information Management , 21 (3), 241 - 256. Ferdinand, A. G., Bikki, L. J., & Gopal, V. K. (2007). Auditor Independence: Evidence on the Joint Effects of Auditor Tenure and Nonaudit Fees . AUDITING: A JOURNAL OF PRACTICE & THEORY , 26 (2), 117-142. Hossein, V., & Svetlana, K. (2008). esting Market Efficiency for Different Market Capitalization Funds. American Journal of Business , 23 (2), 17-28. James, G., & Lee, D. P. (2014). The global accounting academic: what counts! . Accounting, Auditing & Accountability Journal , 27 (1), 2-14. Kim, I. (2013). Market reactions to qualified audit reports: research approaches. Accounting Research Journal , 25 (1), 8-24. Richard, C. (2013). Last minute deal pushes through EU audit reform. Accountnacy Age , 12 (1), 1-10. Silvia, R. (2010). Auditor independence: third party hiring and paying auditors. EuroMed Journal of Business , 5 (3), 298 - 314. Suzanne, L. (2013, December 18). Business/ Financial Services. Retrieved from The Irish Times: http://www.irishtimes.com/business/sectors/financial-services/eu-agrees-rules-to-overhaul-auditing-firms-1.1631227 TOM, F. (2013, December 17). Markets. Retrieved from The Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702303949504579264362822635796 Yan, J., & Li, D. (2007). Performance audit in the service of internal audit. Managerial Auditing Journal , 12 (4/5), 192-195. Read More