The EAR was launched following the 2008 global financial crisis. Though banks, rating agencies and hedge funds were the primary suspects, the European Commission (EC) also raised the issue of the role of auditors and their failure to detect the necessary warning signs leading up to the crisis. We invite you to learn more about why the EC adopted this reform in 2014 and what this means for the European audit market.
After the financial crisis of 2008, it became essential to restore investors’ confidence in audits by eliminating conflicts of interest, ensuring independence, providing sound supervision and facilitating greater competition in what is an overly concentrated audit market. In addition, EAR sought to ensure that the role of statutory auditors was clarified and upheld as they facilitated a more vibrant audit marketplace, and to make it more accessible for new firms to participate.
Although corporate history is replete with examples of financial malfeasance, the European Commission (EC) determined that in this instance, auditors played a part. Under ideal circumstances, auditors are mandated to identify potential problems, and then communicate their findings to shareholders so they can make informed decisions as to whether or not to continue investing in the company’s shares. The audit’s essential purpose is to introduce a level of professional scepticism. Instead, the EC discovered that, in some cases, conflicts of interest were high, and auditors failed to detect errors, compromising the quality of audits.
In addition, with the consolidation of the audit market over the past several years, it severely limited the possibility for new firms to enter the marketplace, thereby challenging the prospects for innovation that are vital to the ongoing growth, health and professionalism of any industry.
The publication of the Green Paper in 2010 entitled "Audit Policy: Lessons from the Crisis” helped materialize the EAR’s objective. Constituting a stepping stone, it set off a three-year legislative process that has led to the adoption of a new Regulation and amended Directive:
- the Directive 2014/56/EU amends the Directive 2006/43/EC, and applies to all statutory audits;
- the Regulation (EU) No 537/2014 includes new requirements governing statutory audits of Public Interest Entities (PIEs).
Smooth implementation at Member State level will be vital to ensure a secure environment in which:
- companies have the opportunity to improve the external control of their financial information;
- investors’ can regain confidence through better and more dependable financial reporting;
- greater choice, innovation and easier market access will promote the emergence of a competitive and secure European market reinforced by a European oversight system.