Matthew Lawson, Accountancy Age, Friday 22 October 2010 at 09:46:00

Michel Barnier?s green paper on audit reform would increase risks forauditors, but remains silent on the issue of liability, argues Matthew Lawson


The green paper on audit policypublished 13 October by Europe's internal market commissioner, Michel Barnier,is full of contradictions. While recognising that auditors were not responsiblefor the banking crisis, it nevertheless puts forward proposals for consultationwhich, if adopted, might lead to the break up of the Big Four, a regulatory fatenot so far visited on the naughtiest of Europe's problem banks.

While the aim of increasing competition in the audit market is a laudableone, the immediate problem is that only the largest firms tend to have theresource required to audit the largest companies. It will not be straightforwardin the short term to open up the audit of those companies to more players whileat the same time maintaining quality and controlling risk and cost. Artificiallyforcing the "ramping up" of smaller practices to allow them a share in largerscale audit work will pose additional risk (and cost) to the company and itsinvestors if such work cannot be appropriately resourced.

And while the ideas in the green paper around increasing the usefulness ofthe audit report will be welcomed by many as a valuable contribution to thedebate, that debate is already ongoing and has been for many months in the UKand elsewhere. A consensus is emerging that auditors should give more subjectiveopinions for the benefit of shareholders and regulators. But any step to widenthe scope of audit will undoubtedly increase the liability risk to auditors andon this thorny topic the green paper is unhelpfully silent. Having identifiedone of the imperatives for action as the risk to the stability of the financialsystem of a Big Four firm failing, it seems counter-intuitive for Mr Barnier toconsult on proposals that increase the risk of that happening without, at thesame time, re-opening the debate on allowing audit firms to limit theirliability for audit work in some meaningful way. The existing law on this in theUK is, for all practical purposes, redundant and it is going to take a politicaldialogue between the UK or EU and the US to change that.

Mr Barnier is at pains to point out that this is a deliberately wide-rangingconsultation in which no subject is taboo and so it is clear he is looking toprovoke a vigorous and open debate. This is to be welcomed, but in reading thegreen paper it is sometimes difficult to avoid the impression that the many andwide-ranging proposals put forward are potential solutions in search of aproblem that no-one has quite yet been able to put their finger on. It would beironic if the legacy of this green paper was to increase the liability on andforce the break-up of successful businesses, which by its own admission werebit-players in the financial crisis, while the institutions and investors whotook the risks that led to that crisis, and the regulators who watched as itsailed by, escape largely unmolested.

Matthew Lawson is a partner in the litigation department at Mayer Brownin London where he specialises in work for accountancy firms