The Efficiency of the Auditing Sector within the EU Nations - Essay Example

The Audit Framework Table of Contents Introduction 3 2. Review of the Proposals and Identifying Possible Issues that they are attempting to Deal With 4 3. Potential Problems that the Implementation of the Proposal Might Bring 7 4. Current Financial Reporting Council (FRC) Guidance/Standards on the Issues with Real World Examples 10 5. Conclusion 13 References 15 1. Introduction The auditing standards within the United Kingdom have long been witnessed to incorporate significant auditing provisions and principles that enable to improve the auditing and accounting functions of the commercial companies, audit firms and a number of shareholders. The noteworthy agreement between the European Parliament and EU Member States has been considered as a phenomenal step concerning the reformation of the auditing policies and practices across the EU and its allies. The reformation phase in this particular sector has been conducted to increase the efficiency and quality of auditing practices (Gul & et. al., 2007). Nevertheless, the reformation in the auditing sector has also been accepted to reinvent the interest and confidence of the valuable investors which is viewed to be recognised as a major attribute for both investment and economic stability of the European nations (Barnier, 2013). With regard to the recently announced proposals by the EU, the reformation plan encompasses a number of vital factors in order to increase the societal role of auditors. Moreover, the proposals have also provided new provisions associated with the independence of the auditors in accordance with the rising competitiveness in the recent EU audit market. Although the agreement regarding the audit sector has incorporated a wide range of beneficial aspects, the principles limit the equal independence of the auditors with respect to the companies, shareholders and audit firms’ perspectives (Barnier, 2013). In this regard, the primary purpose of this study is to critically review and analyse the key issues that the proposals are attempting to deal with. Moreover, the study also intends to demonstrate arguments related to the problems with regard to the proposals in the context of shareholders, companies and audit firms. 2. Review of the Proposals and Identifying Possible Issues that they are attempting to Deal With With reference to the recent proposals of European Commission, there are a number of attributes that can be witnessed which increase the efficiency of the auditing sector within the EU nations. The recent agreement amid the European Parliament and European Member States has constituted a set of effective guidelines and standards that improve the current auditing policies and practices of the auditors (Barnier, 2013). With reference to the review of the proposals, it has been ascertained that the agreement among the states with regard to the reformation of audit sector provides a number of positive outcomes not only to increase auditing efficiency, but also to strengthen the indolence level of the auditors to perform fair auditing practices. According to the observation of the Barnier’s proposal, it is apparent that the agreement concerning the present audit sector enables to increase the audit quality along with ensuring to re-generate interests and confidence of the investors across the different European Nations. In this context, it can be stated that an adequate quality of auditing practices is an essential attribute for the auditors to maintain transparency and accountability of each financial entity. It enables to reenergise the process of sharing appropriate financial records to each group of stakeholders which in turn further motivates the valuable stakeholders to make their effective investment decisions (Beattie & Fearnley, 1998). Additionally, the agreements also emphasise to maintain continuous development of the auditing principles so as to leverage and promote fair accounting policies and practices. According to the unabated trend in the global auditing system, the accounting principles and practices have transformed the economic stability at diverse levels including global, national and local perspectives (Beattie & Fearnley, 1998). These transformations attempt in the auditing principles are fostered in order to efficiently modernise and rationalise each of the financial information with respect to the liabilities and interests of individual stakeholders. Therefore, the rapid transformations through reaching agreements in the audit sector signify the efficiency along with facilitating to recover the accountability and transparency of financial records of the nations (Biondi & Soverchia, 2011). The proposal has demonstrated a number of effective measures that are significantly enabling to deal with various types of issues. In this regard, the following discussion demonstrates the major issues to be addressed through the implementation of the proposals concerning reformation of audit frameworks. In relation to the agreement, it has also recognised few essential regulations that also provide adequate assurance of mitigating various types of issues associated with conflict of interest. According to the reformation of the auditing standards, the regulatory framework also ascertains ‘black list’ that prohibits various types of no-audited services and ensures to avoid self-review related risks (European Commission, 2011). With reference to the immediate measures concerning the self-review related risks, the stringent perimeters on tax advices regarding the financial and investment strategy can be considered to increase the efficient practice and compliance with the auditing regulations. In the similar context, the adherence to acceptable measures associated with the global auditing standards has been considered as well to improve and strengthen the quality of the auditing practices across the European Union (European Commission, 2011). In the context of the overall observation of the proposal, Barnier has also stated various key elements of the new issues that play different roles on the auditing practices within the EU audit market. According to the memo, it has been ascertained that the agreement tends to empower the societal responsibility through increasing audit quality along with enhancing transparency and acknowledging better accountability. The reformation of standards would require the auditors to maintain comprehensiveness along with adequate informative practice while representing audit report to the major stakeholder groups. Correspondingly, the strict requirement of maintaining adequate transparency of the financial information for the auditors would also improve the communication process while they are likely to communicate with the audit committee. Furthermore, maintaining continuous monitoring of the auditors’ practices by the committee can also ensure to build strong accountability in a particular auditing function (Barnier, 2013; European Commission, 2011). Moreover, the proposals also demonstrate major attributes associated with the independence of the auditors that is likely aid in effectively dealing with the issues relating to non-audit services. In order to maintain the efficacy of the audit standards, the proposals also reveal few major attributes in line with the increasing competitive pace in the recent EU audit market (Barnier, 2013; European Commission, 2011). Correspondingly, enhancing cross-border mobility and emphasising adequate compliance with the International Standards on Auditing (ISAs) regulations within the agreement of audit standard reformation also enable to avert various risks. 3. Potential Problems that the Implementation of the Proposal Might Bring Although the proposals regarding the reformation of audit frameworks along with their policies and practices provide various improvement factors, they might bring about significant problems from their implementation. Though the proposals have defined major roles in improving quality, transparency and accountability; they could also incorporate few key ethical policies with respect to the practice of various auditing standards (Chan & et. al., 2014). In this regard, the continuous focus on improving quality, transparency and accountability can also require significant contribution of ethical norms which can protect the audit firms or any commercial organisations from various types of issues. From a company perspective, the detailed disclosure of financial information along with auditing tools to be utilised can also mitigate various issues associated with the ethical concern of an organisation. The adherence to ethical regulations can further enhance the transparency and accountability of the organisation (Barnier, 2013; European Commission, 2011). Moreover, the mandatory rotation of audit firms stated in the proposals might ascertain significant problem for the companies as well. According to the proposals, the mandatory requirement of rotating audit firms after an engagement period of 10 years may raise a potential auditing problem and lead to reduce the confidence level of the shareholders and other investors of the company (EYGM Limited, 2013). With respect to the extension of tender up to 10 additional years, the company may also face significant problem in terms of maintaining their quality and accountability to disclose financial information. In order to avoid uncertain challenges, the audit standards should highly focus on aligning principles with the globally accepted accounting and auditing standards in terms of conducting rotation of the audit firms. The process can enable both the audit firms and the commercial organisations to avert uncertain risks and strengthen integrity and accountability of the audit functions. Correspondingly, the audit function of the firms may also have certain problems associated with the regulation of ‘cap on the provision of non-audit services’ (Barnier, 2013). Although the provision tends to reduce the risk associated with conflict of interests, it can also raise ethical concern and might have negative influence on the audit quality and accountability. The mandatory rotation of the audit firms may have a negative influence on the companies to maintain adequate quality and reliability of financial information. A longer tenure with the audit firm helps organisations to develop auditing skills along with credibility of the accounting elements to maintain a clear and apparent view of the company’s financial information. The longer tenure with the audit firms can also enhance the judgemental skills of the auditors to establish a number of effective measures while disclosing financial performance of the company with its shareholders (PricewaterhouseCoopers, 2013). More significantly, the frequent changes of the audit firms or changing auditor firms at the midst of the business transaction may also lead a company to face severe risks and can also raise significant issue associated with company’s auditing cost. From a company perspective, the mandatory requirement of making rotation of the audit firms in 10 years period might raise problems for the company to maintain uniformity of the globally accepted audit regulations. The regulatory framework tends to satisfy the public interests to strengthen accountability and reinforce trust along with confidence in financial reporting of a particular organisation. Consequently, the regulations underneath the International Auditing Standards Board (IASB) significantly focus on the quality of the financial reports along with aiding to reduce the irregularity of information among the various hierarchies of the organisation and its stakeholders (PricewaterhouseCoopers, 2013). Therefore, the provision of mandatory rotation of audit firms in each 10 year period might increase the probability of risks by a company. In the context of shareholder’s point of view, the reformation of auditing standards may also lead to bring significant challenges to the organisations. In relation to the present competitive scenario in the UK auditing market, the aversion or disqualification of ethical norms and cap on the provision of non-audit services may lead to negatively influence the organisation to retain the major investors within a particular business market. In order to cope up with the changing trends in the competitive audit market, it is highly essential for the companies or the audit firms to ensure adequate compliance with the guiding principles of Financial Reporting Council (FRC) along with the other international guiding principles of auditing methods. From the shareholder perspective, the reformation proposal for auditing standards has also been recognised to overlook the major reasonable factors that are needed to be considered to increase the efficiency of an audit report. The financial reporting section frames a vital part of audit regulation. The key reasons for the extensive accounting regulations encompass economic and market condition, socio-political considerations, cultural factors and professional dimensions (Ball, 2006). In this regard, these diversified dimensions frame the basis of application related to the accounting regulations. In the era of modernisation, the entire world is interlinked with each other related to the financial terms. It has been further tracked down that many of developing countries are essentially moving towards the financial reporting regulations of International Financing Reporting Standards (IFRS). With respect to the proposed audit standard, the integration of economic and socio-political aspects has been significantly omitted that might also create a major constraint for the companies and audit firms to successfully disclose financial information in an auditing report (Fearnley & Hines, n.d.). 4. Current Financial Reporting Council (FRC) Guidance/Standards on the Issues with Real World Examples Developing robust audit has been widely accepted to enhance the capability of reinventing trust as well as market confidence. In relation to the recent guiding principles of FRC, the provisions incorporate a number of beneficial attributes that are highly effective to maintain adequate quality, accountability and transparency of financial information. The policies underneath the guiding principles of FRC also ensure to contribute a major support to the key shareholders through rendering easily accessible and trustworthy financial information regarding the current economic position and performance of the companies. The guiding principles of the council also potentially minimise the capital cost for audited organisations through ensuring sufficient level of reliability and transparency of the financial statements (European Commission, 2011). In relation to the issues associated with the independence, conflict of interest and confidentiality of the auditors, the FRC guidelines provide inter alia that is highly effective for the auditors to maintain adequate reliability and confidentiality of financial data. The guiding principles of the council also ensure to protect by depicting the further particular requirements for the members associated with a specific Audit Quality Review (AQR) team. The members within the AQR team are required to accept both initial and annual declarations ensuring that the detailed requirement compliances are highly adhered in each auditing activity (The Financial Reporting Council Limited, 2013). In relation to the recent observation, the European Council of Ministers has ascertained a new and effective set of guidelines linked with International Standard on Auditing (ISA). These newly developed regulations involve major principles and provisions that are likely to address a number of accounting and auditing issues over the last few decades. In addition to strengthening the capabilities of the audit standards, the principles and policies are also likely to comprehensively comply with the ISA regulatory norms that enable auditors to mitigate various conflicts and issues (The Financial Reporting Council Limited, 2013). With regard to the proposals, the mandatory rotation of the audit firms and their extension period may also have a significant issue for the companies or the audit firms. As the independence of the auditors to promote quality and rationality in the financial reporting activities in the UK, FRC seeks to emphasise higher and uniform standards in the auditing practices (The Financial Reporting Council Limited, 2013). In order to achieve this objective, the guiding principles of FRC believe that rotation of audit firms does not ensure to increase the quality and reliability of the auditing process of a company. According to the standards of FRC, the tendering process tends to provide an effective way through which the companies can critically examine the quality of the auditing practices of a particular audit team. The process increases the potential of a particular tender in terms of stimulating innovative auditing techniques as the audit firms try to find an effective mechanism to demonstrate the merit of their audit tender (The Financial Reporting Council Limited, 2013). Correspondingly, a number of real world-examples can be recognised that are likely to align their tender timing in line with the rotation period of the audit partner (The Financial Reporting Council Limited, 2013). In this context, the FTSE 350 companies can be considered as a major example. The code provisions especially for the FTSE 350 companies have been requisite to put their audit out to tender in each ten year period. A majority of the FTSE 350 companies tend to align their tender timings in accordance with the rotation period of their audit partners, i.e. during the end of the five years’ tenure with the audit partners. The practice regarding the rotation process of the FTSE 350 companies can be accepted to uphold adequate sense, however, auditing standards in FRC do not necessitate adopting the process and the companies have their own interests to ascertain their frequency of tendering. With respect to the proposals, the requirement of audit firm rotation within the stated period i.e. 10 years might have a negative implication for the companies and the audit firms as well. The code of ethics in the FRC standards provides companies to independently select a tenure or rotation period with the audit firms with respect to their requirement or interest. The code of ethics in FRC therefore, protects the interests of the companies to involve an effective and justifiable period of tenure with their most preferred audit firm(s) (KPMG LLP., 2012). The jurisdiction of the ethical codes in the FRC principles increases the quality and reliability of the financial performances and also enhances the independence of auditors to report the financial information. Owing to the fact that the code of ethics in FRC audit principles tends to confirm that the major audit partners must need to be rotated within each seven years along with two years of extension. In this context, it can be stated that the key audit partners of the companies might not be connected with the audited company (The Financial Reporting Council Limited, 2013; KPMG LLP., 2012). 5. Conclusion The global auditing standards and reporting language has often been regarded as one of the major constituents in the growth of the global industrialisation. In the context of modern auditing and accounting standards in the EU, the framework can be stated to render an effective set of guidelines which are significantly structured to provide appropriate auditing report and assurance services. In the context of present scenario, the importance of global audit regulations has constructed a need for assistance and supervision in the process of auditing practices. With reference to the observation of proposals, the compliance of an effective set of regulatory policies and provisions plays a key role for the companies while developing financial statements. In relation to the modern auditing market in the UK, the changing regulatory guidelines in the accounting techniques have been recognised to streamline accounting performance in terms of representing financial information to each group of stakeholders along with building strong governance system of the companies. However, the changes within the regulatory frameworks often create various types of obstacles for the organisation to conserve viability of the financial reports. In the context of the memo, the proposal of mandatory rotation of the audit firms has been considered in terms of imposing various problems to the companies. The rotation of audit firm may also lead to impose risks for the companies. In order to minimise the emerging issues associated with rotation of audit firms, the organisations should highly focus on conserving adequate compliance of the regulatory guidelines of FRC and other globally accepted auditing regulations. The process of aligning accounting principles and practices with the universally accepted regulatory frameworks would also enable the modern organisations to reduce various potential challenges derived from the emerging changes of the accounting regulations. Additionally, the process of effective alignment within the auditing principles and regulations would also enable the organisations to reinforce the managing capability of the leaders and to build strong governance structure within any of the global business industries. References Ball, B., 2006. International Financial Reporting Standards (IFRS): Pros and Cons for Investors. International Accounting Policy Forum, pp. 5-27. Barnier, M., 2013. Commissioner Michel Barnier Welcomes Provisional Agreement in Trilogue on the Reform of the Audit Sector. Memo. [Online] Available at: http://europa.eu/rapid/press-release_MEMO-13-1171_en.htm?locale=en [Accessed March 03, 2014]. Beattie, V. & Fearnley, S., 1998. Auditor Changes and Tendering UK Interview Evidence. Accounting Auditing & Accountability Journal, Vol. 1, No. 1, pp. 72-98. Biondi, Y. & Soverchia, M., 2011. Accounting Rules for the European Communities: A Theoretical Analysis. Section I – Introduction. [Online] Available at: http://www.feb.ugent.be/accoeco/Papers_Cigar2011/2.%20Accounting%20Rules%20for%20the%20European%20Communities%20A%20Theoretical%20Analysis.pdf [Accessed March 03, 2014]. Chan, K. C. & et. al., 2014. Audit Firm Rotation – Concerns and Considerations. The Journal of Applied Business Research, Vol. 30, No. 1, pp. 227-232. European Commission, 2011. Proposal for a Directive of the European Parliament and of the Council. Internal Market. [Online] Available at: http://ec.europa.eu/internal_market/auditing/docs/reform/directive_en.pdf [Accessed March 03, 2014]. European Commission, 2011. Proposal for a Regulation of the European Parliament and of the Council. Reform. [Online] Available at: http://ec.europa.eu/internal_market/auditing/docs/reform/regulation_en.pdf [Accessed March 03, 2014]. EYGM Limited, 2013. Q&A on Mandatory Firm Rotation. Publication. [Online] Available at: http://www.ey.com/Publication/vwLUAssets/Point_of_view_-_QandA_on_mandatory_firm_rotation/$FILE/Point_of_view_Our_perspective_on_issues_of_concern_Q_and_A.pdf [Accessed March 03, 2014]. Fearnley, S. & Hines, T., No Date. The Adoption of International Accounting Standards in the UK: A Review of Attitudes. Portsmouth Business School, pp. 1-33. Gul, F. A., Jaggi, B. L. & Krishnan, G. V., 2007. Auditor Independence: Evidence on the Joint Effects of Auditor Tenure and Nonaudit Fees. Auditing, Vol. 26, No. 2, pp. 117-142. KPMG LLP, 2012. Mandatory Audit Firm Rotation. EC Audit Reform. [Online] Available at: http://www.kpmg.com/Global/en/services/Audit/EU-Audit-Reform/Documents/aci-ec-audit-reform.pdf [Accessed March 03, 2014]. PricewaterhouseCoopers, 2013. Summary Of Key Regulatory Actions, Initiatives And Draft Legislation Affecting Audit, Financial Reporting And Corporate Governance. Regulatory Briefing. [Online] Available at: http://www.pwc.com/en_GX/gx/audit-services/publications/regulatory-debate/assets/pwc-regulatory-briefing-nov-2013.pdf [Accessed March 03, 2014]. The Financial Reporting Council Limited, 2013. Audit Quality Inspections. Annual Report 2012/13 [Online] Available at: https://www.frc.org.uk/Our-Work/Conduct/Audit-Quality-Review.aspx [Accessed March 03, 2014]. The Financial Reporting Council Limited, 2013. Audit Quality Review (AQR). FRC. [Online] Available at: https://www.frc.org.uk/Our-Work/Publications/Audit-Quality-Review/AQR-Scope-of-Independent-Inspection-2014-15.pdf [Accessed March 03, 2014]. The Financial Reporting Council Limited, 2013. Audit Tenders: Notes on Best Practice. Financial Report Council. [Online] Available at: https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Audit-Tenders-Notes-on-best-practice.pdf [Accessed March 03, 2014]. Read More