José María Bové
President of Bové Montero y Asociados
In Spain it is used “residually”, despite the European recommendations
Law requires that auditing professionals and companies perform audits of Public Interest Entities (PIEs), with the aim of boosting public confidence in their annual financial statements and consolidated financial statements. A (high) quality of audit helps to keep markets functioning properly, as it improves the integrity and efficiency of financial statements, and assures transparency and accuracy in financial information.
The PIE category can be applied to credit institutions, insurance companies, issuers of securities on regulated markets, payment institutions, undertakings for collective investment in transferable securities (UCITS), electronic money institutions, and alternative investment funds, among others. While it is true that these are often large groups, the definition also applies to a host of relatively small businesses that do not present any serious technical difficulties from the perspective of the preparation of the corresponding audit of accounts.
Regulation (EU) 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities states that, “the appointment of more than one statutory auditor or audit firm by public-interest entities would reinforce professional scepticism and help to increase audit quality”, concluding, “public-interest entities should be encouraged and incentivised to appoint more than one statutory auditor or audit firm to carry out the statutory audit.”
Let us remember the great reform of 2014, which comprised the passing of Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014, as well as the previously mentioned Regulation. The legislator’s reaction stemmed from a perception that the role of the auditor needed reviewing in light of the financial scandals that had shaken the world’s largest economies, beginning with Enron, followed by the banking crisis and others. Spain has not been immune to these regrettable events and its courts have seen, and continue to see, trials with considerable economic, political and social repercussions.
According to recently published data from the Institute of Accounting and Auditing (ICAC), the Spanish regulatory body, there are over 1,400 PIEs in Spain. However, what is most worrying in this context is the fact that, in this country, joint audit has been used in a residual way for years, meaning it is only applied in an insignificant number of cases.
This represents a real incongruity, especially if we consider the positive effects of this practice in terms of stimulating competition (and innovation, in response to market needs) between the firms of the sector, and increasing quality and independence.
The act of performing the audit with another professional of trust and proven competence – the four eyes principle – means that strengths and risks are shared, complementary experience and perspectives are combined, debate and critical analysis are enriched, and, in short, scepticism is incentivised. Moreover, joint audit minimises the risk of familiarity (or, equivalently, the loss of independence), while simultaneously strengthening the position of both professionals against possible assaults from Management and the Audit Committee.
If we cross the Pyrenees, we find the French reality is quite different to the situation in Spain. For over half a century, our neighbours have employed a system of joint audit for both public interest entities and corporate groups required to present consolidated accounts. In practice, the effects of each country’s respective models are worlds apart. According to the ICAC’s data, as of June 2018, the big four auditing firms’ market share had risen to 99.8% on the Spanish stock exchange’s continuous market. Meanwhile, a total of 18 of the 120 companies listed on the French stock exchange (SBF 120) are audited by firms outside of the big four’s select group.
This last figure is taken from a recent study by the Competition and Markets Authority (CMA), a governmental body in the UK that was set up to promote competition and prevent anticompetitive practices). Let us take a short hop once more, this time over the English Channel, now that we know what is going on in the auditing sector in France. It is only fair to highlight that the UK is an authentic power when it comes to accounting law and auditing regulations. London is home to the International Accounting Standards Board, the organisation responsible for developing international accounting regulations, applied worldwide as the basis of accounting law.
Behind this report is the British legislator’s realisation that the previously mentioned EU measures introduced as part of the great reform of 2014 have not been enough to avoid major financial scandals. After all, bankruptcies such as those of construction giant Carillion and department store chain BHS have shown that deficiencies are the order of the day in the British auditing sector.
Very well then. Could you hazard a guess as to one of the main recommendations put forward in the CMA report? Obligatory joint audits. It also included a stipulation with the aim of lifting the barriers that currently restrict access to the auditing market in many countries, Spain included: at least one of the participating firms should be a challenger firm. For the common good, it is time for collective reflection on this issue.
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