TIEDOTUS

Lausunnot 2009

EU Consultation on market concentration
27.2.2009 to EU Commission

Comments given by the Association of HTM-Auditors in Finland
 

DIRECTORATE GENERAL FOR INTERNAL MARKET AND SERVICES WORKING PAPER:

CONSULTATION ON CONTROL STRUCTURES IN AUDIT FIRMS AND THEIR CONSEQUENCES ON THE AUDIT MARKET

1. Do you see a need for opening up the market for the audit of international companies in order to have more European wide audit service providers compared to the existing situation? Do we need a more integrated audit market? If yes, why?

The markets are open, but the gap between the big four and the next largest is too wide. Their market position is already dominant. The gap is very difficult to close.

In our country (Finland) the size of the big four audit firms is from ten to twenty times larger than the 5th largest audit firm (which is a national audit firm). Big four audit firms are also competing in other segments of the market. Their income from non-audit services is already around fifty percent. They are dominant in these services also.
 
There are some strongly emerging large audit firms in the Asian markets. It will be interesting to see how they will affect the market in the near future.

It must be taken into consideration also, that small networks might not even be interested in having multinational corporations as their audit clients, if they get a reasonable income from smaller and not so complicated clients.

2. Do you believe that the current number and structures of the audit firms' networks are sufficient?

There are at least 20 internationally operating audit networks, which are also present in Europe and new networks are able to establish themselves by opening contacts with local smaller audit firms and including them into their network

3. Is access to financial capital a key factor to accelerate further integration of audit firms and emergence of new players? Do you share the view that allowing for competing models (e.g. partnership model, investor model…) will create the opportunity for more investments resulting in more global players? Are other models conceivable?

Article 3, paragraph 4, (c), (d) of the directive should be reconsidered. In our opinion better access to financial capital might bring more competition to the audit market. To get talented and experienced human capital the audit firm must have sufficient financial resources. The competition of these (human) resources is very hard from the financial and other industries.

However, there should be some limitations when obtaining outside capital in order not to endanger the audit firms´ independence. Also other models should be considered, but we do not have solutions nor examples to this.

4. Would models other than the current one negatively affect auditors' independence? Is there a need for additional safeguards at European level to protect independence? If so, what safeguards should be strengthened?

We refer to our answer to Question 3 above. The stakeholders who invest in an audit firm should somehow be limited to protect the independence of an audit firm. Limitations to administrative role or having a significant role in the decision making process by other investors than auditors should be considered.

Also it should be investigated which kinds of investors would not cause an independence issue.

The non-audit services sector of audit firms presents pressures to bringing other partners than auditors. This might, however, bring a problem of independence.

5. Should the Commission examine other catalysts accelerating access to the international audit market? If so, which one and why?

Absolutely other catalysts should be examined. To normalise the audit market and decrease the concentration, completely different and new types of models for carrying out audits of large international corporations should be studied. Also other solutions should be considered than just the legal forms of audit companies. Can there be any other models to substitute the audit of these corporations?

The following matters cause obstacle for narrowing the gap between the Big Four and the other audit firms or networks:

- raising of the audit thresholds and thus enabling the required practice for authorisation to be obtained only thru the big firms, when smaller audit firms shrink in lack of audit clients
- the increasing supply of non-audit services by the big four makes it easier to offer audit services
- the use of assistants by the big firms in increasing numbers in the audits lowers the costs of audits thus in the short term increasing the competition and driving out smaller firms from the market. (This also lowers the reputation of audits)
- unlimited liability, the deep pocket
- interpretation of the ISA standards from a very theoretical viewpoint as well as a very heavy methodologies of large companies in smaller audits

In our country the audit market consist of ca. 140 listed companies and more than 96 % of small or very small companies, which means that in order to get an audit qualification, practice required by the Statutory Audit Directive can mainly be obtained in the big four audit firms, which mainly employ assistants.

We consider that altering Articles 10 and 11 in the Statutory Audit Directive and emphasizing the work experience obtained in the responsible financial positions such as CFO:s etc. in the business companies would give a sounder base for an auditor and more authority as well as respect to an auditor,  instead of favouring the so called ‘broiler route’ (ie. direct from university into an audit firm). 

In our opinion the auditors’ liability should be limited. The Board of Directors and the Managing Director should be responsible at first place. Auditors should have only secondary liability and the damage should be clearly shown to be caused by an auditor. The Board of Directors and the Managing Director should have an obligatory liability insurance to eliminate the ‘deep pocket syndrome’.  Premeditated malpractice by an auditor should naturally be penalized.

IFAC has commissioned a guide: Guide to Using International Standards on Auditing in the Audit of Small and Medium Sized Entities. This guide should be approved along with the ISA-standards at EU to be able to offer audit services in smaller companies costeffectively alongside with proper audit tools.

6. Are the current partnership forms of ownership indispensable in order to recruit, retain and further develop human capital? Could alternative structures under revised control rules allow audit firms to retain human capital and preserve audit quality?

We do not see the current partnership forms of ownership (as described in your consultation paper) a hinderance to recruit human capital. However, if persons functioning in the audit firms’ non-audit services wish to be partners, it can present an independence issue.

7. Is human capital a factor more important than financial capital to expand internationally? Do you see in the current regulation for the audit profession any obstacles related to human capital preventing further integration of audit firms?

Human capital is very important, but it requires financial capital. The required sophisticated ICT- systems and firms’ audit methodology programs etc. also need financial capital. Audits of very large firms require sophisticated and expensive audit programs.  Thus financial capital presents a problem. On one hand an audit firm cannot rapidly increase its income without increasing its human resources and required audit tools. On the other hand a smaller service provider cannot offer in the present audit environment its services to a very large globally operating corporation due to the lack of sufficient resources.

Helsinki, February 27, 2009
HTM-TILINTARKASTAJAT RY
(The Association of HTM-Auditors in Finland)