.jpg)
Thank you [Jeremy] for those kind words of introduction. Let me also wish you all here my compliments of the season.
My speech will be short because the dinner should go on. We have also had the opportunity to discuss many issues at the FEE conference earlier today. I will limit myself to three issues:
- your role and contribution, as auditors, to restore the confidence needed by markets
- the structure of the European audit market; and
- co-operation between the EU and US.
1. Role of the auditors in the context of the financial crisis
So far, auditors have not been criticised for their role in the crisis, in contrast to other players like credit rating agencies. Indeed, this might be one sector where jobs will remain in demand. But, as I said this afternoon at the FEE Conference, the need to restore trust is crucial at this time. Re-establishing trust requires auditors to provide high-quality audits. Can auditors contribute?
The year-end is here again and the signing-off period will start soon. I am asking you, therefore: how are you going to master the challenges brought by the crisis? Markets and users need a clear picture of companies' accounts. For this, they rely on auditors, especially in the current environment, where banks use increasingly complex financial instruments and have adopted stricter lending practices.
I recognise that the audit of fair value accounting estimates in times of market uncertainty is a challenge for auditors. What the markets need are top-class auditors, able to audit financial products, able to test the valuation techniques first applied by their clients, and able to check the disclosures on risks and on off-balance sheet exposures. The international regulatory community acknowledges the role of auditors.
We know that, in the current context, access to finance is a problem for many companies. In Europe, accounting standards are clear: management have primary responsibility for assessing the ability of their companies to continue as "going concerns" and to make the appropriate disclosures.
But if they do not fulfil their responsibilities, how will the auditors, in line with auditing standards, pass on the message to the markets? If a negative message needs to be conveyed, it risks becoming a "self-fulfilling prophecy". But markets deserve to be trusted. Public interest overrides a company's interest when an auditor faces going concern issues.
One might argue that such reasoning does not follow where there is a risk of a major bank not continuing as a going concern, and going "bust" instead. I do not agree. In Europe, auditors have specific obligations towards banking regulators, under the so-called "post BCCI Directive" . Through this channel and the early warning alerts that you, as auditors, should give to the regulators, solutions might be found before the accounts are published.
2. Structure of the European audit market
Let me turn now to another issue, where I would like your input.
In the last five years, we have worked to increase audit quality and we still need to deepen reforms. But do we need to launch another debate on whether we have a sustainable audit market?
I am not talking here about the US market. I am, first of all, talking about the EU market, the "Internal Market". What I see for auditing is a fragmented market. Auditors forge complex networks to compete and to cope with differences in regulations. Is this really what the market needs and wants? Does the European Union offer the proper framework within its laws which would allow for more global European players (with apologies to our US colleagues)?
The gap between large and mid-tier audit firms is huge and the current financial turmoil might contribute to widening the existing gap. The current situation might also reinforce the lack of interest of mid-tier audit firms in competing for the audits of financial institutions.
More importantly, banks and investors who have lost money and confidence will rely even more on the brands and reputation of auditors. This might be a good thing for some of you, from a commercial point of view, but the financial crisis requires us as regulators to think about the public interest and the economy in the medium term.
In banking, we have now had Lehman Brothers, and in auditing we have already had Arthur Andersen.
We need to think more about an environment which encourages more market players without sacrificing audit quality.
As a first step, in June 2008, I recommended that Member States limit auditors' liability.
As a second step, last month, I launched a public consultation on the audit market. The aim is to explore possible catalysts to stimulate the emergence of new players - for the benefit of competition, companies and investors. Deregulating the capital structure of audit firms is one possibility.
But I do not have a fixed agenda here. I am convinced that we have to be more open minded: we need to discuss the internal market dimension of the audit market, and I want to collect ideas on this. I am glad that representatives from mid-tier audit firms are here tonight. Let us know your views!
3. Co-operation between the EU and US
Let me add a final point: the relation between EU and US. As accounting standards setters are not present, I shall not address those issues. Instead, I want to raise the issue of audit working papers and inspection reports, and the legal situation in the US.
We could spend hours debating this, which would risk spoiling tonight's dinner. But I just want to leave a message with the top level of US audit firms: this is getting so complex that it risks raising questions about major loopholes in the future supervisory system for auditors.
We can close the loophole in the EU by taking a decision implementing the 8th Directive. To become even more complex and legalistic, it is Article 47 of the Directive.
It is my responsibility to make proposals for moving forward. But I am unclear about the situation in the US. Do US audit firms actively support co-operation between independent public oversight bodies? Do US audit firms favour joint inspections or would they prefer public oversight bodies to rely on each other?
I do not ask you to build trust between auditor oversight bodies. This is an issue for me and Mark Olson. But I would like US firms to contribute constructively to the issue of access to audit working papers and inspection reports. We cannot continue to merely push the issue back to rules about professional secrecy and legal privilege and leave all this to the lawyers.
This is just passing the buck. I am reminded of US President Truman, who kept a sign on his desk saying, "The Buck Stops Here". I call on the CEOs to actively support regulators to find a solution and not just to present legal arguments.
Thank you for your attention. I look forward to continuing our discussions over dinner.
