Entrance requirements to the audit profession within the EU and audit quality

• Date: 01 November 2018
• Published date: 01 November 2018
• Author: Kris Hardies,Christophe Van Linden
• DOI: http://doi.org/10.1111/ijau.12127

SPECIAL ISSUE ARTICLES

Entrance requirements to the audit profession within the EU

and audit quality

Christophe Van Linden

1

|Kris Hardies

2

1

Belmont University, Nashville, TN, USA

2

University of Antwerp, Antwerp, Belgium

Correspondence

Kris Hardies, University of Antwerp,

Accounting and Finance, Pleinlaan 13,

Antwerp 2000, Belgium.

Email: kris.hardies@uantwerpen.be

This paper examines the relation between the stringency of entrance requirements to

the audit profession within the EU and audit quality. Regulators and standard setters

generally believe that such entrance requirements have beneficial effects by increas-

ing audit quality. Whether this is indeed the case, however, is an empirical question

given that regulations governing the entry to the audit profession are not the product

of competitive market forces. We argue that a higher educational degree and longer

traineeship period will result in higher audit quality. We also hypothesize that a pro-

fessional oath will be positively associated with audit quality. Based on a sample of

3,782 firms from 20 different EU member states, we assess the relation between

these requirements and abnormal working capital accruals. Our findings indicate that

the requirement of a master's degree compared with a bachelor's degree is signifi-

cantly associated with better accruals quality of audited financial statements. Second,

we find that abnormal working capital accruals are lower in countries that require a

traineeship period of at least 3 years. Finally, we find mixed evidence for the effect

of a professional oath as part of the entrance requirements on audit quality.

KEYWORDS

Audit quality, education/training, professionalism

1|INTRODUCTION

The purpose of this study is to empirically assess whether differences

in entrance requirements to the audit profession within the EU are

associated with audit quality. In particular, we examine the importance

of (1) a master's degree requirement, (2) the length of the traineeship

period, and (3) the inclusion of a professional oath as requirements to

enter the audit profession. By doing so we provide guidance for uni-

form entrance requirements that would support the single European

market and we contribute to a prior debate in the literature on the

150‐hour rule in the USA.

In the aftermath of the financial crisis, the European Commis-

sion (EC) proposed a series of measures to increase the competitive-

ness of the European audit market and to safeguard audit quality

(EC, 2010). One of the thoughts raised was the creation of a single

European audit passport in order to increase the mobility of audit

professionals within the EU.

1

This would require the creation of a

European‐wide registration mechanism with common professional

qualification requirements. The responses to the EU Green Paper

proposals put forward that differences in local generally accepted

accounting practice and national legislation are a hurdle for the cre-

ation of such a single passport and that an aptitude test to operate

in different member states should remain a requirement. The pro-

posal to amend Directive 2006/43/EC stated: “In order to ensure

more convergence of the educational qualifications of auditors at

Union level, the competent national authorities in charge of the pub-

lic oversight for statutory auditors must cooperate.”(EC, 2011, p. 7)

The newly issued audit directive (EC, 2014) does not contain stipu-

lations for a single EU audit passport because no consensus was

reached on the matter. However, initiatives at EU level, like the

Transatlantic Trade and Investment Partnership (Fédération des

Experts‐comptables Européens [FEE], 2015) continue to put pressure

on the current situation of heterogeneous entrance requirements to

the profession within the EU. The debate to be held by national

authorities at EU level will have similarities with debates previously

held in the USA, which resulted in the requirement to have more

Received: 23 November 2017 Revised: 23 April 2018 Accepted: 17 May 2018

DOI: 10.1111/ijau.12127

360 © 2018 John Wiley & Sons Ltd Int J Audit. 2018;22:360–373.wileyonlinelibrary.com/journal/ijau