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You may well have seen the news last week that the European Parliament approved a package of accounting reforms relating to the relationship between Public Interest Entities (PIE) and their auditors operating within the European Union. The headlines include expansion of the auditors’ report, a cap on the level of non-audit services that a PIE can obtain from its auditor, the removal of so-called ‘Big-4 clauses’ which exclude other firms from the tendering process, auditor rotation at 10 years (although this can be extended in certain circumstances) and mandatory communications with the audit committee.
We have been calling for action on accounting reform and welcome the agreement, but I want to be clear as to why.
I will not deny that the proposals may help our business to grow by breaking down the institutional prejudice against challenger firms such as Grant Thornton. But the principal point is that investors want to see changes in auditor-company relationships. As auditors, we should embrace these changes.
Importantly, the EU reforms target investor desire for an informative audit report, and their concerns about long auditor tenures and volume of other services provided by a company’s auditor. You only have to look at the reaction to the FTSE250 firm Interserve recently awarding their audit contract to our UK firm to see the depth of desire among investors for more competition in the audit market. Discussions in the EU, the UK, the Netherlands, India and elsewhere have raised the profile of these concerns, and now enshrining these changes in law ensures that change will be permanent.
The impact on the market for tax and advisory services is potentially even more significant as the reforms cap the level of work an auditor’s firm can provide to its client (at 70% of the audit fee). Of course, much of this work is already done outside the Big-4; we do tax and advisory work for some of the largest banks and commercial companies in the world and our UK firm currently delivers services for 40 of the FTSE100. But the overriding tendency for PIEs to engage their auditors for these services will now have to change. Indeed, our sense is that the current environment is already encouraging more large companies to use a wider range of accounting firms.
There are certain administrative processes which now need to be completed in Brussels before we learn of the precise effective date of the law, but we expect it to come into effect in mid-July 2016. The challenge for firms like ours in the meantime is to demonstrate to PIEs across Europe that we have the capability and capacity – as well as the hunger – to handle large, complex assignments; to provide a real choice to businesses across the region. The ten investors who recently wrote to the Financial Times applauding the Interserve decision pointed out that we have a “torchbearer’s responsibility” and I would agree; we are worthy of more large appointments and need to prove that by continuing to deliver the high quality work that shareholders demand.
I am confident we can do this but would reiterate the point that the purpose of the reforms is to improve choice, competition and transparency. Putting tax, advisory and audit work out for tender is sound governance. There is no guarantee we will win any of these contracts, but a level playing field can only be good for business and for society.