Financial Director

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Auditors in a spin?

Filed in: , corporate finance, business, italy, auditing, parmalat, accounting

Parmalat is likely to go down in history as Italy’s, and probably Europe’s Enron. Its impact will reverberate through political and financial circles for years to come and not least among audit firms.

Auditors in a spin?
Parmalat is likely to go down in history as Italy’s, and probably Europe’s Enron. Its impact will reverberate through political and financial circles for years to come and not least among audit firms, writes Richard Willsher.

Italy is one of the few jurisdictions in the world to have adopted a policy of audit rotation. The principle that auditors should be replaced periodically by another firm or at least another audit partner in order to ensure probity and that any wrongdoing is brought to light. Some would argue that such a policy didn’t work too well in the Parmalat case where skulduggery is alleged to have gone on for some time. Others, such Dottore Lino de Vecchi a council member of the Consiglio Nazionale dei Dottori Commercialisti (CNDC) the Italian Chartered Accountants body, argues to the contrary.

“From the Parmalat case we can see that some kind of audit rotation is a good thing. Deloittes was the newly appointed firm that took over from Grant Thornton in June 2003. Once they had had time to understand the situation they raised doubts and that started the process of discovery.”

He adds that, from his personal point of view, rotation is common sense. “If you know someone is coming along after you to check up on you and you know you are going to have to respond to them then the chances are that you will pay more attention.  At the same time if you know you are going to move on at the end of your period as auditor then you will be less inclined to close one eye on anything not totally above board. After all if you work with the same people at the firm you are auditing year in year out there is a risk that you become over familiar.”

EU confrontation
Meanwhile a battle is brewing in Brussels. Among proposals being considered by the European Commission is a suggestion that might require member states to adopt compulsory rotation either of lead audit partners on a particular account every five years or of the audit firm every seven years.  Perhaps unsurprisingly the Big Four accounting firms are resisting such a move. When asked for a view for the purposes of this article however PriceWaterhouseCoopers and KPMG declined to comment.

“To maintain the same firm in the job is completely useless,” comments Dottore De Vecchi. “And at the same time top audit partners don’t review the accounts anyway.” He goes on to say that one of the arguments auditors make against rotation is that it is expensive for the client for each new audit firm to have to get to know the business it is auditing. But may be it is a worthwhile expense if it prevents a scandal of Parmalat proportions although, he continues, there is little or nothing the auditors can necessarily do when faced with wilful wrongdoing as is alleged in the Parmalat case.

One change which came into effect in Italy in 2003 and which does seem to have been effective is the so-called “principle 600.” This requires that the main audit firm audits not only the largest part, i.e. 51% of the business by sales but also by importance to the business. In the Parmalat case pressure was applied by the Commissione Nazionale per le Società e la Borsa (CONSOB), the Italian securities regulatory commission, to observe the requirements of principle 600 as a result of which incoming lead auditor Deloitte took over a greater part of the Parmalat audit from Grant Thornton and in particular that of offshore funds located in Cayman Islands about which there was something of a black hole as regards information. Deloittes is reported to have shed light on these controlled offshore activities whereas Grant Thornton is alleged to have accepted without too much further investigation what little they received by way of information from Parmalat.

The future?
The question of what Italy and the European Commission will do next about audit discipline is likely to take sometime to answer. As we go to press submissions and deliberations are continuing in Brussels. In Rome two parliamentary commissions are currently examining a so-called “final text” of a legal draft which unifies several pieces of previous legislation and which will incorporate new, more stringent regulations for auditors in the wake of Parmalat.

In its submission before a commission comprised of representatives from both houses of the Italian Parliament on 20th January this year CONSOB made proposals that included greater powers for itself to revoke companies’ appointment of auditors. There was also a proposal to separate audit and other advisory roles performed by the same firm a la Andersen / Enron and increased powers to suspend auditors pending further investigations of possible malpractice.

The Italian parliament has so far delayed the debate and approval of the new legislation a couple of times but insiders understand that approval is thought likely before the European Elections on 12th-13th June this year.

In conclusion, audit rotation seems in the opinion of Italian experts to have been effective in brining to light the alleged wrongdoing at Parmalat, however others will still argue that it wasn’t able to do so soon enough.

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Filed in: financial director, euro, eu, sepa, payment

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