Regulering af den lovpligtige revision af virksomheder af offentlig interesse: Med udgangspunkt i forventningskløften og revisors dobbeltrolle

Yassir Sefrioui & Gunnar Freyr Gunnarsson

Student thesis: Master thesis

Abstract

According to Michael Power’s theories, financial bubbles and economics booms typically are followed by a financial crisis, in which the existing regulation often is deemed inadequate, which supports the theory of regulatory failures and increased focus on avoiding repetition. In the aftermath of the crisis, the European Commission launched a political process, consisting of a green paper and a multinational hearing, in order to reform the audit market. According to the Commission, “status quo is not an option” and stricter regulation is demanded in near future. This paper focuses on the potential impact, which EU legislation might cause particularly in the Danish market for statutory audit, based on a theoretical and empirical perspectives including leading researchers covering Power, Warming, Brenda Porter as well as own conducted empirical studies. The proposed legislation contains several initiatives to reform the audit market within the EU, and while several might have an impact, auditors independence and expectation gap are viewed as the being the ones with most crucial implications. The green paper criticizes the role of the financial auditor, both in terms of the services provided to audit client, as well as the communication with stakeholders. Followed by the green paper, some 700 stakeholders responded to the questions raised, including investors, large corporations, business-networks and large to small audit firms. The hearing process illustrated a profound cliff with legislators and investors on one side, and businesses with audit firms on the other. The expectation gap was evident, which creates foundation for discussion and potential regulation. The content of the legislation, which covers mandatory firm rotation and prohibition of non-audit services to audited PIE’s will, if approved by the Parliament and Council of Ministers, cause comprehensive impact on the current market structure. The Commission has with its impact assessment, failed to identify all potential traits and consequences, both positive as well as negative and is characterized by a political bias in favor of the opinions expressed in the green paper. Furthermore, the Commission fails to take important aspects into consideration, e.g. the distinction between auditor’s independence in mind and in appearance. The reason for the expectation gap is also not fully comprehended, which theorists argue, consists of a number of gaps, including performance- and reasonableness gap. If adopted in the current form, the regulation might result in creation of pure audit firms for the large audit networks, mandatory firm rotation after six years and a communication on the state of the company as well as internal controls, which resembles American SOX on internal controls. Based on theoretical and empirical evidence, the proposals might lead to higher audit fees, reduced knowledge spillover, lower audit quality, and a change in the role of the auditor from concluding on the financial statement, to be concluding on the clients overall well-being. Furthermore, board directors and business executives, fear they are loosing a valued partner in terms of advisory and consultancy, which will affect their companies negatively. The regulation of the statutory auditor might also provide certain benefits, most notably in the eyes of investors, since independence in appearance will be strengthened by the proposals and could lead to better understanding of the role of the auditor. The question that remains is whether the Commission’s proposal will be accepted or rejected, and at what price they come. The Parliament has expressed concerns over several of the most severe proposals, which could lead to some of the most critical parts being removed. In this connection, it could seem as if some of the most controversial proposals were included, in order to give the Commission political leverage and ground for further negotiations. The EU has proven capable of swift action in the aftermath of the crisis and in introducing similar reforms of other industries, covering hedge funds, investment banks and rating agencies. It therefore seems likely, that some parts of the proposal will be accepted, while some controversial parts might not be unveiled in the current economic climate of the European Union.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2012
Number of pages142