The New European Audit Regulation Arena: Discussion of New Rules and Ideas for Future Research

• DOI: http://doi.org/10.1111/ijau.12078
• Author: Reiner Quick,Marleen Willekens,Annette G. Köhler
• Date: 01 November 2016
• Published date: 01 November 2016

The New European Audit Regulation Arena: Discussion of New Rules and Ideas for

Future Research

Annette G. Köhler,

1

Reiner Quick

2

and Marleen Willekens

3

1

University of Duisburg Essen, Germany

2

Darmstadt University of Technology,German/University of Southern Denmark, Germany

3

KU Leuven, Belgium

INTRODUCTION

Auditing is a heavily regulated activity. Both demand and

supply and production of auditing are subject to various

forms of regulation, and there is also a risk of litigation

against the auditor in case of malpractice. In the past

decade in particular we have seen a large increase in

auditor-related regulation globally as various accounting

and auditing scandals triggered more and heavy audit

regulation under the premise of improving audit quality.

The best known example is the Sarbanes-Oxley Act in the

US. The latestEuropean audit legislation(European Union,

2014a, 2014b) is one of the more recent regulatory changes

that fits under this umbrella.

Audit quality is not only of interest to regulators,

preparers and users, it is probably also the number one

research topic of auditing scholars over the past couple of

decades, and itis likely to continue to be so for a whileinto

the future. The study of audit quality effects of new audit

regulations has filled the audit research agenda in the past

and it will be interestingto see whether the new European

legislation further enhances audit quality. In this editorial

we first briefly discuss the major regulatory innovations

in the EU relating to auditing and then provide some

general ideas for future research. Next, we elaborate in

more detail on what is probably the major regulatory

innovation in the auditing arena in recent years, namely

the extended auditor report.

DISCUSSION OF NEW REGULATION AND

SOME IDEAS FOR RESEARCH

In the aftermath of the financial crisis, the European

Commission (EC) questioned the suitability andadequacy

of the current legislative auditing framework. In 2010, it

launched its famous Green Paper (European Commission,

2010) to open the debate on potential measures for an

enhancement of the audit function in order to contribute

to financial stability.

1

The EC stressed the key function

of audits in re-establishing trust and market confidence,

its contribution to investor protection and the reduction

of costs of capital, and therefore, the audit profession's

societal role in forming an opinion on the true and fair

view of audited financial statements. In particular, the

independence of auditors as the bedrock of the audit

environment, the existence of an expectation gap, and

the risks caused by the high concentration of the audit

market were the main issues identified.

With the publication of the Green Paper, the EC

initiated a public consultation which finally resulted in

the amendment of the Directive on statutory audits of

annual accounts (European Union, 2014a) and the EU

Regulation on specific requirements regarding statutory

audit of public-interest entities (European Union, 2014b).

Both wereapproved by the European Parliament on 3 April

2014. The new regulatory setting is intended to enhance

audit quality across the EU. The revised Directive includes

measures to improve auditor independence, to increase

the informative value of the auditor's report and to enhance

audit supervision. The Directive encompasses provisions

for all statutory audits. In contrast, the Regulation

introduces a series of rather strict requirements for the

statutory audits of public-interest entities, like listed

companies, credit institutions and insurance companies, to

reduce risks of excessive familiarity between statutory

auditors and their clients, to encourage professional

scepticism, and to limit conflicts of interest. Its main

objective is to

enhancethe integrity, independence,objectivity,responsibility,

transparency and reliability of statutory auditors and audit

firms carrying out statutory audits of public-interest entities,

contributing to the quality of statutory audits in the Union,

thus to the smooth functioning of the internal market, while

achieving a high level of consumer and investor protection

(European Union, 2014b, note (3)).

To achieve these objectives the Regulation addresses

a number of issues, including new rules with regard to

audit fees and non-audit services, the introduction of

mandatory audi t firm rotation, th e reinforcement of

the role of the audit committee for the appointment

of the auditor, an expansion of audit firm transparency

reports, rules regarding the surveillance of the audit

activity and last but not least the introduction of the

extended auditor report.

Audit fees

A first issue relates to audit fees. In particular, there is a

prohibitionof contingent fees and a cap is installed for fees

related to non-audit services at 70 percent of the audit fees

earned on the audit engagement. In addition, specific

proceduresare to be followed when auditfees from a single

client are significant, i.e. whenthey represent 15 per cent or

more of totalfees. In particular,this fact should be disclosed

to and discussed with the audit committee, and the latter

should consider whether the audit engagement should be

subject to an engagementquality control reviewby another

statutory auditor. An idea for research regarding the new

audit fee rulesis to examine whether this rule makessense.

More specifically, one could investigate retrospectively

whether indeed audit quality is lower, ceteris paribus,for

audit engagements where the incumbent auditor is

engaged in non-audit services for which (s)he receives

Correspondence to: Prof. Dr. Reiner Quick, Darmstadt University of

Technology, Department of Accounting and Auditing, Hochschulstrasse

1, 64289 Darmstadt, Germany. Email: quick@bwl.tu-darmstadt

International Journal of Auditing doi: 10.1111/ijau.12078

Int. J. Audit. 20:211–214 (2016)

©2016 John Wiley& Sons Ltd ISSN 1090-6738