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 tax and advisory services market is significant, as reforms cap the work an auditor’s firm can provide to its client (at 70% of the audit fee). Much of this work is already done outside the Big-4; for example, we handle tax and advisory services for some of the largest banks and commercial companies globally, including 40 of the FTSE100. However, the tendency for PIEs to engage their auditors for these services will now shift. We believe the current environment is pushing large companies to diversify their use of accounting firms.
There are administrative processes to complete in Brussels before we learn the precise effective date of the law, but we expect it to come into effect in mid-July 2016. In the meantime, our challenge is to show PIEs across Europe that we have the capability, capacity, and drive to handle large, complex assignments, offering a genuine choice. Investors recently praised the Interserve decision, noting our "torchbearer's responsibility." I agree, and believe we are worthy of more large appointments, which we can prove by delivering 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.
Ed Nusbaum is global CEO at Grant Thornton