In its response to a recent European Commission (EC) green paper, Audit Policy: Lessons from the Crisis, the AICPA said that any resulting recommendations for improvements to the audit profession should be subject to robust cost/benefit analyses and impact assessments. The Institute also challenged any implication that the “audit profession somehow contributed to the financial crisis.”


The EC’s green paper is available at The AICPA’s response to the green paper is available at


The AICPA agreed that the “audit profession plays an important role in maintaining trust and confidence in the capital markets” and that “there may be lessons learned that could possibly improve the role and quality of the audit.” The AICPA’s letter, which was signed by Board Chairman Paul Stahlin and President and CEO Barry Melancon, also said that many of the issues addressed in the green paper need to be considered in the broader context of the responsibilities of regulators, audit committees and boards of directors and the roles they play with respect to high-quality audits. The AICPA also noted that the EC should take into account the global marketplace in which audits are conducted and recognize that any measures implemented in the European Union will very likely impact audit practice and regulatory regimes outside the EU.


The green paper said that, in the aftermath of the global financial crisis, “limited attention has been given so far to how the audit function could be enhanced in order to contribute to increased financial stability.” The paper addresses issues in the following areas: (1) the role of the auditor; (2) governance of independence of audit firms; (3) supervision; (4) concentration and market structure; (5) creation of a European market; and (6) simplification for small and medium-size enterprises and practitioners.


The AICPA said that any discussion of audit quality processes should consider users’ needs of the audit and their willingness to absorb the added costs for incremental increases in quality, stressing the need for a balance between the additional costs of audit enhancements and the resulting benefits to users of audits.


The AICPA said that certain measures the green paper recommended to enhance independence (such as prohibitions of nonaudit services by auditors, appointment of the auditor by third party, and mandatory firm rotation) are unnecessary and that the existing safeguards and prohibitions contained in the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants are sufficient to ensure auditor independence. The Institute argues that “some of these measures may actually undermine audit quality.”


The comment letter cited several studies that show that mandatory audit firm rotation “is not a desirable approach and can result in significant costs and inefficiencies for companies and their shareholders.” The AICPA believes that existing safeguards and restrictions, including rotation of the key audit partner for listed entities, are sufficient to safeguard auditor independence.


While the AICPA recognized that certain nonaudit services may result in threats to independence that cannot be mitigated, such as taking on management responsibilities, it argued that many nonaudit services do not impose a significant threat provided appropriate safeguards are implemented. The AICPA also listed the following factors in favor of having auditors perform nonaudit services:

  1. The diversity of skills offered by firms enhances quality and efficiency of the audit and nonaudit services performed;
  2. A prohibition of nonaudit services could result in clients’ losing the breadth of knowledge and skills offered by multidisciplinary firms; and
  3. The opportunity to offer nonaudit services within a firm enhances the recruitment and retention of high-quality professionals.

The EC noted a concern for the systemic risk inherent in a market dominated by the Big Four audit firms, whose market share of audits for listed companies “exceeds 90% in a vast majority of EU member states.” The green paper warns that “[t]he market appears to be too concentrated in certain segments and den[ies] clients sufficient choice when deciding on their auditors.”


While the AICPA said it does not support the mandatory formation of audit firm consortiums, the Institute said the EC “should continue its focus on measures that will assist small and medium-size practitioners (SMPs) with entering the audit market but refrain from taking any action where it intervenes directly in the market since such actions have unintended consequences.”


With regard to promoting SMP growth in the market, the AICPA recommended that the EC consider:

  1. Public disclosure of third-party agreements that limit auditor choice;
  2. Including representatives of small auditing firms in committees, public forums, fellowships and other engagements; and
  3. Addressing other barriers to audit firm growth such as liability risks and the ability to obtain adequate liability insurance.

The AICPA said that, although SMPs in the U.S. currently have access to commercially available liability insurance, the substantial expansion of these firms could result in increased insurance costs and could ultimately result in insurers’ being unwilling to provide coverage to these firms.


The Institute also expressed support for mutual recognition agreements (MRAs) among accounting bodies and regulators to provide cross-border audit rights, which it said are critical to the facilitation of cross-border mobility of auditors. The AICPA also noted that it is imperative that regulators across the globe work together toward a common oversight and regulatory framework with reliance placed on the home country regulator.



  The IASB issued amendments to IAS 12, Income Taxes, and what it called “narrow amendments” to IFRS 1, First-time Adoption of International Financial Reporting Standards.


The amendments to IAS 12 were proposed in an exposure draft in September.


IAS 12 requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. The IASB said in a press release that it can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40, Investment Property. The IASB said the amendment provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will normally be through sale.


As a result of the amendments, SIC-21, Income Taxes—Recovery of Revalued Non- Depreciable Assets, will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC-21, which is withdrawn.


The amendments to IFRS 1 were published as separate EDs in August and September. They include replacing references to a fixed date of “1 January 2004” with “the date of transition to IFRSs,” eliminating the need for companies adopting IFRS for the first time to restate derecognition transactions that occurred before the IFRS transition date.


The amendments to IFRS 1, set out in Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters, are effective from July 1, 2011. Earlier application is permitted.


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