Investors Push for Tougher Auditor Regulation

(September 20, 2012) — A panel of European investors has urged regulators to avoid bowing to pressure from lobby groups and maintain a push for stringent auditing rules that protect and inform potential and existing shareholders.

European institutional investors and investor associations – including the UK’s Universities Superannuation Scheme, RPMI Railpen, Local Authority Pension Fund Forum, and others, representing €750 billion in assets – have written to European Commissioner Michel Barnier to highlight concerns over the watering down of what they see as much‐needed reforms to the European audit industry.

The group said that in their current state the proposed reforms played into the hands of audit firms and companies, rather than helping potential and existing investors fully investigate accounts and reports and evaluate their holdings.

The letter highlights three main areas that the reforms either needed to tackle or would put shareholders at a disadvantage:

1. Improved Audit Committee transparency – investors need to know what the critical areas of debate have been between auditors and corporate audit committees.

2. Audit firm rotation at least every 15 years – regular audit firm rotation ensures a “fresh pair of eyes” and provides a necessary check on the incumbent audit firm’s work.

3. Limited non‐audit services – while some non‐audit work by audit firms may be permitted, it potentially threatens auditor independence. Non‐audit fees should therefore not exceed 50% of audit fees.

At the end of last year, associations representing corporations across Europe complained that reform proposals had gone too far and would unfairly punish business.

In December, several of these associations approached Commissioner Barnier, saying the proposals were unnecessary and would pile on costs for European businesses. These claims were echoed by the world’s largest auditing companies.

Today’s letter from investors hit back at these claims: “We are aware, of course, that the large audit firms have invested in an intense lobbying effort to weaken or reverse important reform proposals. We believe that it is vital that policy makers do not lose sight of the purpose of the audit. The audit is intended for shareholders, to permit them to rely on accounts as a basis for monitoring executives’ performance. The audit is not for executives, and it is not for the auditors.”