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CESR Response to the European Commission's Green Paper on Audit Policy Summary

Core Content

The Committee of European Securities Regulators (CESR) has responded to the European Commission's Green Paper on Audit Policy, highlighting the importance of audit quality, independence, and the alignment of audit practices with the broader interests of capital markets and investors. The response is part of a joint effort with CEBS and CEIOPS, focusing on the role of auditors, governance structures, and supervision mechanisms.

Main Topics and Key Views

1. Role of the Auditor

• Audit Purpose: The primary objective of an audit is to assess whether financial statements are prepared in accordance with applicable financial reporting frameworks and provide a true and fair view.
• Financial Health Evaluation: CESR does not believe that the audit process is currently equipped to provide comfort on a company's financial health, as this would require assessing broader business strategies and long-term risks.
• Audit Report Enhancements: Improvements in audit reports could be made through better communication and more narrative reporting, but caution is needed to avoid excessive boilerplate language.
• Professional Scepticism: Reinforcing professional scepticism is important, and CESR suggests that this can be achieved through better training, monitoring, and communication with audit committees.
• Qualified Audit Reports: Qualified reports are necessary to indicate material misstatements and are not inherently negative; they reflect the auditor's professional judgment.
• Additional Information: Auditors should explain their judgments on significant matters, such as accounting estimates and going concern issues, to enhance transparency and stakeholder understanding.

2. Communication and Stakeholder Engagement

• Expectation Gap: CESR supports clearer communication of audit methodologies to users but emphasizes the need for stakeholder dialogue to determine effective changes.
• Audit Committee Role: Audit committees should be more involved in discussions with auditors and have greater access to resources for additional assurance.
• Time Gap: CESR does not support reducing the time gap between year-end and audit opinion publication, as it is governed by the Transparency Directive.

3. Governance and Independence of Audit Firms

• Appointment and Remuneration: CESR supports reinforcing independence but is cautious about changes to the current appointment and remuneration system, as they may introduce new challenges.
• Audit Firm Rotation: Mandatory rotation of audit firms could enhance independence and objectivity, but CESR suggests exploring alternative measures such as a rebuttable presumption of rotation.
• Non-Audit Services: CESR advocates for stricter rules on non-audit services provided to the same audit client, with increased disclosure and audit committee involvement.
• Corporate Governance: Audit firms should adopt best practices in governance, including transparency, professionalism, and effective risk management. Legislative changes are not seen as necessary at this stage.
• Capital Access: CESR acknowledges the potential benefits of allowing audit firms to raise capital from external sources, but emphasizes that reputation and human capital are more critical factors for long-term audit quality.

4. Supervision and Integration

• EU-Level Supervision: CESR supports a more integrated and cooperative approach to audit firm supervision across the EU, with stronger involvement of the European Group of Auditing Oversight Bodies (EGAOB).
• Regulator-Auditor Dialogue: Enhanced communication between auditors and regulators is necessary, particularly in cases involving fraud or going concern issues. Convergence of reporting requirements across EU countries is recommended.
• Supervisory Role of ESMA: CESR believes that closer cooperation between EGAOB and ESMA could be beneficial, but a decision on the supervisory role of ESMA or an independent ESA is premature without greater harmonization.

5. Market Concentration

• Systemic Risk: CESR supports the Commission's initiative to discuss audit market concentration, but notes that the risks associated with audit firm exits are not equivalent to those in the banking sector. Therefore, measures like "living wills" are not appropriate.

Conclusion

CESR emphasizes the need for continued improvement in audit quality through harmonization of standards, better communication, and reinforced independence. While they support certain regulatory measures, they also highlight the importance of balancing these with the practical realities of audit practice and the existing structures of the audit market. Overall, CESR advocates for a nuanced and stakeholder-inclusive approach to reforming audit policy in the EU.