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European flag outside the Commission (Photo credit: Wikipedia)

CPA Trendlines have recently run a few articles highlighting a rather brisk upturn in the fees taken by audit firms in the States, and together with that an increase in salaries as well as movement in the market for hires in audit in that country.

Europe may or may not follow the trend in the USA – on the one hand we all went down together in 2007, so hopefully we will start to rise together also, but on the other hand Europe is author of some of its own problems. The Euro crisis is far from over, credit is still not flowing in the way people had become accustomed to in those halcyon pre 2007 days, and even where there is talk about green shoots of grass out on the Eastern European green fields, it seems to be a case of “two steppes forward, one steppe back”.

Europe has been discussing the Barnier proposals for audit reform which would have given more teeth to the profession as well as reduced the oligopolistic effect of the Big Four, who seem to be using their oligopoly so as to sour the market for the middle tier and thus cement their place as fairly unthreatened by competition from the mid-tier audit firms.  In this, the smaller firms with low audit quality are their natural allies, and in places like Poland where the Big Four took effective control of the local audit chambers, the previous initiatives to force the small pensioner firms to either level up or get out of the market have been unravelled and tiny micro firms of auditors manned by geriatric owners still get to pronounce on the financial statements of even listed companies in exchange for fees which simply guarantee that they cannot possibly have done the work required to be able to make such pronouncements and back them up. Should they ever land in court they will probably not need to worry as they will be too old to get into trouble or endure sanctions for long.  Even though this status quo means that governance is largely bogus, the Oversight boards don’t seem to care and the Companies themselves are not complaining, as they save money and also don’t need to put themselves to the trouble of a proper audit, where they might actually need to answer questions and furnish documents to an auditor following a proper audit plan. And behind all this is the Big Four, knowing that this state of affairs squeezes hardest on the mid tier, as the largest companies simply must use the Big Four, and they are fighting the mid-tier for the medium sized business since the recession started and every euro counts.

Before 2007, they tended to bother less with mid-tier clients as they themselves are aware that they are not really geared up to give them what they want, and that is what the mid-tier audit firms are designed for.

The Barnier proposals initially struck hard at the Big Four, and they responded by sending armies of lobbyists to Brussels and to national governments. As a reesult of this, the European Commission is already arguing over a watered-down version of Barnier, and there is the opposing threat that has appeared from nowhere of upping the audit thresholds again.

Now it seems crazy that exactly at a time when many European governments are going to be increasing tax burdens in order to fund their return to lower sovereign debts, and therefore the motivation for taxpaying companies to cheat will be intensified, governments at the same time are talking about reducing seriously the percentage of the economies which are subjected to proper audit.

It makes no sense, but it seems that they don’t appreciate at all the value of the audit system. They are aware of the failures when they occur and concern themselves with the 1% of audits that have gone astray and ignore and legislate in an adverse way for the 99% of audits that have not gone astray. As a result the markets for audit firms have been skewed and more pressure on our prices occured and more and more pressure on time available for audits, which in turn doesn’t do much to improve auditors’ chances to spot abuses and irregularities.

So we hope that the situation will be on the mend in Europe as well, but the politicians need to wise up in order for this to happen. They need to understand that  an audit profession that is choking to death in this continent is not in anybody’s interests, and least of all in their own.

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