Verbatim report of proceedings

Monday, 12 September 2011 - Strasbourg

24. Audit policy - lessons from the crisis (short presentation)

  President. – The next item is the report by Antonio Masip Hidalgo, on behalf of the Committee on Legal Affairs, on audit policy: lessons from the crisis (2011/2037(INI)) (A7-0200/2011).

  Antonio Masip Hidalgo, rapporteur. − (ES) Madam President, confidence is what the European companies and economy needs. Audit companies are currently weighed down by a concentration and lack of independence of auditors, and they do not help to generate the much-desired confidence to get our economy going again.

A proposal for eliminating the legal obligation for account auditing cannot be ruled out. Why not? If we want to recover the confidence of the markets and market stability, we must carry out a deep reform of the audits, so that they provide genuine added value, and not merely a legal burden.

The big auditing firms use auditing services as a business card for their future customers. Once familiar with the company, they offer more burdensome additional services through which they often compensate for the low prices of auditing itself.

We have a price distortion problem within the sector. These additional services already comprise almost 50% of turnover, which is why the big auditing firms do not wish to lose the auditing services, not for the auditing itself, but rather to maintain and increase the additional services.

The second major obstacle to free competition in the sector is the oligopoly comprised of the four big firms that account for over 90% of the European market. As an oligopoly, they control prices and place barriers against new competition, using intangible ideas such as the brand’s international image.

It is true that this brand image can provide advantages, but it does not always mean greater efficiency, given the legislative diversity in terms of accounting statements liable to be processed in a special way in each Member State.

I share the aims of the Green Paper, in terms of the independence and deconcentration of the sector, and the means to be used: rotation, group audits, tendering, fortifying professional scepticism, prevalence of substance over form, and the separation of auditing services from non-auditing services. I have tried to apply them to my report within what is permitted by the parliamentary majorities and the report’s modest reach.

Ladies and gentlemen, this is nothing more than a small step towards achieving new legislation that rights the wrongs in the audit sector, which have led us to this terrible economic crisis.

(FR) Good luck, Mr Barnier! May you continue along this path and achieve a good result!

  Monika Flašíková Beňová (S&D). - (SK) Madam President, it is indeed a paradox that throughout the debate on the crisis and the anti-crisis measures the scale of the accountability of the banks and the extent of the non-transparency, which increases systemic risk, have been absent.

In the period before the crisis the banks were awarded outstanding certificates from their auditors and all of a sudden we hear that many of them have so many worthless assets on their books, that they are at risk of collapse even on small fluctuations. We must consider that fact seriously and we must effectively ensure that such a situation does not re-occur in the future. One of the reasons for the inconsistency of audit reviews and their poor quality is mainly the concentration of large firms in this type of business. Four large companies depend on revenue from the rated financial institutions, and they therefore gave them good ratings regardless of the actual situation. I therefore support the rapporteur’s proposal that this monopoly should be broken up and that real competition should be introduced in the audit market so that smaller companies might get a chance. I would therefore ask the Commission, namely the Directorate-General for Competition, to hold a detailed review of the audit market and to develop a pan-European system of professional liability for auditors.

  Evelyn Regner (S&D). – (DE) Madam President, Commissioner, numerous banks posted losses both on and off the balance sheet between 2007 and 2009, while still receiving a clean bill of health from the auditors. Auditors are appointed and paid by the audited companies themselves, something that naturally diminishes their independence. On top of this, liability privileges also apply in many European countries. Consequently, I would like to start by making it clear that the Commission has taken a step in the right direction with its Green Paper. This is absolutely essential if we are not just to address the issue of credit rating agencies that are worthy of criticism, but also the role of those auditors who have failed to perform their duties correctly.

I would like to mention one more aspect that I consider to be particularly important, namely external rotation. Again and again we are made aware of how important it is that courtesy audits should not be allowed to take place. This also requires external rotation at regular intervals.

  Rui Tavares (Verts/ALE). – (PT) Madam President, ladies and gentlemen, in the economic crisis into which we have been driven precisely by the audit system, or in which the audit system has played such a key role, it is symptomatic that this oligopoly of the four credit rating agencies has still not been seriously targeted with legislation by the European institutions. I should therefore like to congratulate Mr Masip Hidalgo for having addressed the matter in his report and for having attempted to push forward this issue, which is certainly not taboo. Spending a lifetime waiting for these firms to suddenly meet ethical standards out of the blue that they decide to follow alone is not an option; nor is it a future for our economies or for the credibility of our banking systems or the European markets.

We can only hope that a public supervisory body will assess the credibility of these audit agencies. However, I believe that even more needs to be done: the audit system itself needs to be pluralistic; the audit firms must not all be stimulated and motivated in the same way, as they are essentially being paid by their customers and speculators; and furthermore they must not be replaced by a mere public system that has little credibility itself. They must be tempered with real pluralism, which emerges, for example, from the academic and university system, from statistical institutes and from European audit agencies, and all of these audit centres must be regulated in order to create a real pluralistic and credible audit system.

  Kay Swinburne (ECR). - Madam President, I would like to congratulate Mr Masip Hidalgo on guiding this report through the Legal Affairs Committee and on the excellent and productive collaboration with the ECON Committee, particularly on matters of competition in the audit sector.

We have worked collaboratively to recognise the specificities of audit in financial services, including communication between auditors and financial supervisors and regulators and the role of audit in systemically important financial institutions (SIFIs). We have raised the importance of audit committees in corporate governance matters and the conflicts of interest which may occur.

The report calls for further analysis of the costs and benefits to the companies who use audit, of compulsory tendering on a regular basis, and of the impact on competition, and costs, of introducing any form of compulsory joint audit. Increasing competition in the audit sector and improving audit quality had been the central themes of both committees, and I hope the Commission will take this on board when they produce the legislative text.

  Jaroslav Paška (EFD). - (SK) Madam President, I would like to support the various proposals contained in the report by Mr Masip Hidalgo. In particular, the adoption of international auditing standards by the European Commission would allow us to harmonise audits at a European level, which would certainly simplify the work of supervisory bodies. When audits of financial institutions are conducted the reports should also include enhanced disclosure requirements for the valuation of less liquid assets. The auditors should also have an obligation to notify the supervisory authorities of any problems found which may jeopardise the continuation of the activities of an entity being audited. Division of the audit market may also help improve the competitive environment and improve the quality of audit work. I firmly believe that through continual improvement and an increase in the quality of the work of auditors we can also improve correct valuation and property management, and it is therefore good that the European Parliament has addressed this issue once again.

  Michel Barnier, Member of the Commission. − (FR) Madam President, I remember very clearly what I said during my hearing before the European Parliament in January 2010. On that occasion, Ms Flašíková Beňová, I gave an undertaking, in accordance with the G20 road map and with the commitment made by the Heads of State or Government of the European Union, that no sector, product or financial market would escape from intelligent regulation and effective supervision.

Since then, Ms Flašíková Beňová, I and all of my teams have been busy drafting legislative texts aimed at establishing – or re-establishing – rules and ensuring transparency and responsibility. I was going to say restoring ethics where they had disappeared, in the financial markets, so that those markets, which we need, really do work for the benefit of the real economy. Rest assured, Ms Flašíková Beňová, that we will be carrying out this work for all the other sectors, in addition to the audit sector being discussed today. We have already done part of it with you, and you have many texts on your legislator’s table that are already being discussed and that will come to fruition by the end of the year.

We are talking today about one of those sectors, about some of its operators, namely external auditors, not all of whom, as we well know, did their job and managed to sound the alarm early enough during the financial crisis – which, incidentally, is not over. We have taken time to reflect because, in this area as in others, I want us to work together, seriously and without improvising. We have done a great deal of consulting and listening on this complex subject, and the European Parliament has been instrumental in this consultation work. For my part, I am very pleased that Parliament, thanks to the very high-quality report by Mr Masip Hidalgo, broadly supports this idea that I myself have of taking determined action at EU level to make up for the failings of the past.

I thank you, Mr Masip Hidalgo, for your personal commitment. I also applaud the work of several of your colleagues: Ms Swinburne, from the Committee on Economic and Monetary Affairs, who spoke just now, and other Members who contributed to this consultation, Mr Gauzès, Mr Bodu, Mr López-Istúriz and Ms Berès.

This report – and I say this in all sincerity – is in my view a very good foundation on which to work on the proposals that we are going to present in November. There are undoubtedly differences on certain points, and I am very much counting – as Ms Swinburne also said just now – on the determination and the contribution of the two committees, the Committee on Legal Affairs and the Committee on Economic and Monetary Affairs, to develop, together and quickly over the coming months, the new regulatory tools that we need. I am not going to respond to all the recommendations in Mr Masip Hidalgo’s report. I would just like to mention briefly three main aspects of our proposals: the independence of this profession, the opening-up of this audit market, and the creation of a large, more integrated European market, with the strengthening of supervision.

Firstly, independence. Our main concern, which you also share, is the quality and credibility of audits. We need to restore confidence in companies’ accounts. This means that auditors must be independent from the entities they audit. Too often, we find that many companies keep the same auditing firms for long periods of time, decades even; they have even used them for a century – that has happened before now. The result is less confidence in the accounts of the companies concerned, which harms the profession and the companies being audited alike.

I am therefore not ruling out the idea of proposing, in November, the mandatory rotation of auditing firms, a well-managed rotation, after the appropriate period of time. Another factor contributing to the excessive familiarity between auditors and auditees is the provision, by auditors, of too many services described as ancillary or ‘non-audit’ services. For the majority of networks, these services generate more revenue than the audit itself. In these circumstances, are we really certain that objective judgments can be made and that completely independent audits can be carried out on a company that one is also advising on its development strategy? Ms Regner, you highlighted this point very clearly just now.

I am therefore determined to limit, and indeed to prohibit in certain cases, the ‘non-audit’ services provided to audit clients. I believe in uniform rules for the whole of Europe in this area. I also wonder whether we ought not to go so far as to propose 100% audit firms, which would be unable to provide any other services but audits. This would also offer the advantage of opening up these ‘non-audit’ markets to small and medium-sized enterprises. Without this kind of measure, they have no chance of competing with the might of the major firms, as we can see today. We are still discussing the actual feasibility of this option – I need a few weeks to work on it – and its proportionality with regard to the issues at stake in this proposal.

The second task is to ensure that the audit market is more open. Barely a generation ago, this market was shared between eight large auditing firms. Today, it is concentrated, and it is even more concentrated because the companies being audited are larger – Mr Tavares, you said this very clearly. Four firms control around 80% of the market in listed companies. This situation is even more concentrated in some countries, where we no longer talk about the ‘Big Four’ but about the ‘Big Three’ or the ‘Big Two’. In Germany, two firms alone hold 90% of the mandates of the main stock market index, the Dax 30. In Spain, we can even talk about the ‘Big One’, since a single firm certifies the accounts of the largest banks and holds 58% of the major listed companies.

I have no ideological position on this subject, nor on any other subject for that matter. I want to be determined and pragmatic. Neither am I on a crusade against the ‘Big Four’, but I do not accept the fact that the market in auditing large companies should be dominated at this point by four large networks alone, when there are at least as many firms that would like to access this market in Europe.

We want more operators, more competition and more dynamism, especially in this segment of the market. Several courses of action can be adopted, and we are working on this in order to boost the market: one is the joint audit solution. I am pleased to note, in this regard, that your report, Mr Masip Hidalgo, shares our view and that, if they are well balanced, joint audits could inject dynamism into the market. We are analysing the possible extension of this solution in Europe. I am also thinking about mandatory, regular, transparent and fairer calls for competition. In this context, I also hope to prohibit restrictive contractual clauses in favour of the ‘Big Four’. I feel that this current practice is unacceptable in a European market in which competition must be free, fair and genuine.

Lastly, my colleague, the Commissioner responsible for competition, Joaquín Almunia, and I are following the efforts of the national competition authorities with interest, and we will certainly also be looking at what other measures can be taken at European level to encourage the emergence of new international auditing firms.

The third and final task is to create, as Mr Paška mentioned, a large European market and to strengthen supervision. Paradoxically, this market, which is concentrated in too few hands, is still very fragmented in each of our countries. European integration is one solution to that. Common European rules would facilitate the free movement of professionals and improve the quality of audits and their supervision by supervisory authorities.

In order to make the audit market more European, I intend to promote the idea of a European passport for auditors. We will take our inspiration, among other things, from certain solutions that have been found in the field of professional qualifications. I think it is unacceptable for auditors to have to take exams in every country they wish to work in.

I will also be proposing the automatic recognition of firms that have already been approved in other States and the granting of a European quality label demonstrating the ability of all the firms concerned to audit larger companies.

Then, lastly, there is another way of contributing to the harmonisation of auditing rules in the European Union and of ensuring professional mobility, and that is – as you said, Ms Flašíková Beňová – by introducing International Standards on Auditing, or ISAs. We are currently examining the best way of doing this, and I agree with the parliamentary report that provisions need to be made for small and medium-sized enterprises. Moreover, this is an issue on which my colleague Antonio Tajani focuses every day.

I wish to make three final, very important points. They concern the supervision of auditing firms and the transparency of their work. Firstly, we want the authorities supervising auditors to cooperate more. I am pleased that you share our view that this cooperation should take place within the European Securities and Markets Authority (ESMA). Now is not the time to create new bodies at European level. Let us use those that exist and make sure that they function properly, and in this way national supervisors – auditors – will also be able to benefit from ESMA’s experience.

Secondly, I also wish to make national supervisory authorities more independent. They must be completely independent from auditors and their professional organisations.

Thirdly and finally, as you put it very well in your report, Mr Masip Hidalgo, we will be recommending that audit reports contain more detail and more information. When carrying out their inspections, auditors gain an in-depth knowledge of the company they are auditing, and of its job types, organisation and risks. They have privileged access to a great deal of information. Unfortunately, it is not always reproduced in a structured way in their reports. This also applies to regulators, managers, audit committees and shareholders. This is another point that can be changed and improved, as Mr Masip Hidalgo has proposed.

I am very grateful to Parliament for its interest in and commitment to this issue. I wanted to give you the updated version of paragraph 13 of my deliberations myself, a few weeks away from the presentation by the Commission – which has been enlightened and encouraged by your report – of its legislative proposals.

  President. − The debate is closed.

The vote will take place tomorrow, Tuesday 13 September at 11.30.

Written statements (Rule 149)

  Luis de Grandes Pascual (PPE), in writing. – (ES) This report on audit policy, as its title states, aims to analyse lessons from the crisis. Given that one of the causes of that crisis was a loss of trust, which is the most important value for developed economies, with this resolution the European Parliament is proposing to strengthen that trust by means of auditing companies.

This report is the result of a convergence of opinions; these may have been divided at the outset, but they have succeeded in establishing clear rules to strengthen the role of auditors. Nevertheless, instead of changing the market structure by penalising some of the major companies, the decision was taken to guarantee free competition and give greater support to small and medium-sized enterprises so that they can establish themselves in the market.

On that point, may I congratulate Mr Masip Hidalgo for the work he has carried out in the Committee on Legal Affairs. This is an ambitious report that is going to require considerable development in order to accommodate everything that has been suggested. There were many lessons to be learned from the crisis, and this is a clear example of Europe’s will to draw the necessary impetus from the crisis in order to implement the mechanisms able to restore faith in the global economy. Audit policy is one of those.