Audit Makeover Worldover!

From Lehman to Olympus, from mortgage bonds to sovereign debt - the global audit business is in the eye of a storm. In an attempt to enhance auditor independence, objectivity and professional skepticism, the Public Company Accounting Oversight Board in the US and the European Commission in Europe have proposed big changes to the way audit firm's function- joint audits, auditor rotation, and audit only firms. Payaswini Upadhyay finds out what's on the anvil!

28 years- that's the average auditor tenure for the 100 largest American companies by market capitalization... For the top 500, this number stands at 21. In most European Union member states, the Big 4 audit more than 85% of listed companies. These are statistics regulators in the US and EU are not very happy about, especially given the recent turmoil in the financial markets. Michael Young
Partner, Willkie Farr & Gallagher
Former Member, Financial Accounting Standards Advisory Council
"Investors, regulators, political leaders have watched in horror as assets values have collapsed. They have watched in horror as institutions and companies thought to be sound have declines an in some instances gone out of existence. They have watched in horror as the economy has gone down and they are wondering what about our financial reporting system, how could it have taken us, without warning- does this mean that our financial system reporting needs to be improved."
The PCAOB in the US, and the European Commission certainly think so. That's why they have suggested several landmark changes to the way auditors operate. (Video Courtesy: corporatelawandgovernance.blogspot.com)
Claire Bury
Acting Director of Capital & Companies
European Commission
Director General- Internal Market & Services
"The primary objective is to improve auditor independence and audit quality. Secondly inject some more dynamism, competition into the audit market, and thirdly improve the situation as regards the internal market in audit and to reinforce supervision in this sector."
So what are these big changes from the EU? One- mandatory audit firm rotation after every six years, with a 4-year cooling off period before the same firm is appointed again. In the case of a joint audit, where a company appoints more than one auditor, a 9 year audit term has been proposed. In the US, the PCAOB Concept Paper suggests mandatory audit firm rotation every 10 years.
But experts are not confident these changes will work as intended. Jim Peterson
Professor-Risk Management, University of Chicago Law School 
Accountancy Lawyer 
"Where the marketplace has tested joint audits - the users have elected against it- that's the history in Scandinavia. There is no indication that the user community finds value in t he joint audit process. The other area is mandatory rotation. The only significant market in which it has been tried is Italy where there have been two adverse consequences- one is higher concentration of the audit market at the upper end of the large firms and the other one is the recent catastrophe of Parmalat - which was both a joint audit and a mandated rotation- now if that's the case to be made for either one of those, then its definitely fair to say that the case is not made." Michael Young
Partner, Willkie Farr & Gallagher
Former Member, Financial Accounting Standards Advisory Council
"For companies, it is not a happy idea and the main reason is the potential disruption. The notion here is that you've got one auditor on Tuesday and the rule kicks in and you've got to have a different auditor on Wednesday. If you're a smaller company with operations in a single city, single country- yeah, that doesn't sound so bad. If you're a multinational conglomerate, say in a 110 different companies, then you are talking about a potential significant disruption and at all levels. At the top you've got the audit committee which looks to the auditor as an important source of information and suddenly you've got a new auditor on the ground who knows less than what the audit committee does. At the other end, at the ground level, you've got operating people who have been interacting with auditors in this hypothetical 110 different countries- now they've got a new auditor who ahs to learn the systems, people- so those are some significant downsides for companies."
But the EU has grabbed a whole different bull by the horns, by trying to dilute the concentration of the Big 4 in Europe. The Commission has suggested that contracts between companies and third parties, like banks, be reviewed so that clauses in these agreements limiting a company's choice of audit firm be removed. Simple on paper, but this may open Pandora