Regulating the International Audit Market and the removal of barriers to entry: The provision of non audit services by audit firms and the 2006 Statutory Audit Directive

Also published in "Regulation of Financial Institutions Journal CMBO" (December 2009). From the responses received from the European Commission’s consultation on control structures in audit firms and their consequences on the audit market, a consultation which was launched in November 2008, and whose deadline was scheduled for the end of February 2009, the role played by the facilitation of greater access to external financial capital as a means of increasing access to the audit market, hence opening up the market for the audit of international companies to more suppliers, and encouraging new market players, was acknowledged. However, this factor on its own, coupled with the need to amend current rules on the control of audit firms, namely through a relaxation of the rules – beyond that which is currently permitted under Article 3 of the 2006 Statutory Audit Directive, was not considered to be the most important source of impediment to the emergence of new players. Other further possible catalysts, both on the supply side (namely auditors) and the demand side (companies), were also considered vital to efforts aimed at encouraging more players in gaining access to the international audit market. This paper will focus on greater access to external financial capital - as a means of lowering barriers to the international audit market. In arriving at the conclusion that the benefits associated with the external investor model outweigh the possible risks it generates, the paper not only considers theories on managerial behaviour and ownership structure, but also gives attention to the safeguards for audit independence as listed under the 2002 Statutory Auditors’ Independence in the EU: A Set of Fundamental Principles, and the 2006 Statutory Audit Directive. It will also consider why, in view of the limitations and restrictions placed on audit firms, with particular reference to the Sarbanes Oxley Act of 2002, actions aimed at encouraging new market players at EU level, whilst ensuring that auditors’ independence and audit quality are not compromised, would also require a consideration of an international dimension of issues involved in lowering barriers to entry.