Audit market regulation – what’s appropriate, what’s proportionate?

26 Jun 2014

At a time of unprecedented scrutiny, it’s vital that regulators choose the right reforms that will enhance audit quality

It has been a period of unprecedented scrutiny for the audit market and the firms operating within it. In some cases the scrutiny has resulted in regulation, as in the case of the statutory audit market legislation introduced in the EU in June 2014. In other cases, proposals for reform have been considered and dismissed, as in the case of the PCAOB and its call for views on mandatory audit firm rotation that received a 90% negative response and a ‘no’ from Congress in the US. What’s clear is that this is a time of change and that there could be more on the way as stakeholders reflect on the critical importance of audit to the capital markets.

There has been a great deal of debate about how to underpin independence, reinforce objectivity and professional scepticism of auditors, and address the perception of over-familiarity between the auditor and management. The primary aims, beyond improving quality have been to increase competition, encourage the creation and empowerment of audit committees and avoid disruption to the efficient functioning of the financial markets.

The public conversation over what changes are both appropriate and proportionate has been varied. In the papers below, PwC’s specialists consider mandatory audit firm rotation, the auditor’s scope of services and the benefits of scale, discussing impacts and offering solutions.

  • Mandatory audit firm rotation: why rotating firms on a statutory basis is likely to damage audit quality, result in loss of knowledge and disrupt the market; and what other, more effective ways exist to reinforce auditor independence and audit quality, including stronger national regulators and increased transparency by auditors to audit committees and by companies to the public
  • The auditor’s scope of services: why the audit committee is best placed to decide what services their auditor can provide; why it’s important to move towards a globally consistent list of prohibited services and why the suggested regulations might prove difficult, arbitrary and possibly damaging to audit quality
  • Benefits of scale: why large audit firms are necessary to service the needs of the market and how scale lends itself to better methodologies and technologies and more skilled people. What reforms could encourage new entrants to the market, whilst allowing existing audit firms to compete and grow