Comments. on the Green Paper of the EU Commission. Audit Policy: Lessons from the Crisis

Transcription

1 Comments on the Green Paper of the EU Commission Audit Policy: Lessons from the Crisis Contribution of the German Insurance Association (GDV) ID-Number Gesamtverband der Deutschen Versicherungswirtschaft e. V. German Insurance Association Wilhelmstraße 43 / 43 G, D Berlin Phone: Fax: , avenue de Cortenbergh B Brüssel Phone: Fax: Contact: Dr. Axel Wehling Phone: Fax: a.wehling@gdv.de Hans-Jürgen Säglitz Phone: Fax: h.saeglitz@gdv.de

2 Summary The EU Commission seeks to open a debate whether the role and scope of the audit can be enhanced to contribute to increased financial stability. The Green Paper addresses a number of concerns regarding the audit of financial institutions and raised a number of questions as to the future role of auditors or to the market structure of the audit service in general. Since audit is an integral part of the financial environment a discussion in light of the financial crisis seems reasonable. However, to the best of our knowledge, the recent financial crisis did not highlight any major failings in the audit system across Europe nor where auditors responsible for the financial crisis either. Rather, the use of inappropriate accounting rules has contributed to the crisis especially in a way that relevant market risks (e.g., included in securitized products) could not be adequately identified by market participants. The EU Commission has recognized this problem and has already taken action by reviewing existing accounting standards. Furthermore, consideration should be given to the fact that in many areas addressed by the EU Commission sufficient legal requirements exist already today. There are a number of instruments at the EU level (e.g., the Statutory Audit Directive (2006/43/EC)) and various national binding requirements for the conduct of audits to be met by audit firms. From the point of view of the GDV, in the future, it should be ensured to a greater extend that these requirements are adhered to before new legislative initiatives are implemented. Otherwise there would be a risk of excessive regulation and unnecessary bureaucracy which would not automatically lead to the intended enhancement of audit quality. We principally welcome the intention of the EU commission to enhance and harmonise the European audit market and to strengthen the independence of audit firms. However, for the majority of concerns raised in the Green Paper we do not see a need for immediate action. The analysis of the German auditing market for insurance companies - where audit is already based on international standards of auditing (ISA) - provides a satisfactory result. The current level of audit quality seems appropriate. Although we provide a German point of view on the addressed questions we think that our comments are also relevant for the European market in general. Since we assume that there are no major problems in the German audit market any negative trends in other European countries might not be a result of insufficient standards but rather a problem of insufficient implementation of existing auditing rules. Further, we like to point out, that our comments not only represent the view of the insurance industry from the perspective of clients of audit services but also from the perspective of investors who rely on the appropriateness of audited financial statements. Page 2 / 21

3 Communication by auditors to stakeholders In our view, the communication between the audit firms and relevant stakeholders, i.e., communication to undertakings, authorities, and users of financial statements is organised and handled sufficiently. External auditors should not be granted any additional role as advisors beyond the individual auditing mandate with a company. Otherwise, auditors would reach their professional and mandate-related limits. In particular, auditors should not be obliged to make a clear statement about the financial stability of the client firm nor should the auditor communicate other information of public interest to the public. It should be the client who decides which information may be disclosed and which not. The separation of functions between auditor and client (mainly the supervisory board) has been proven valid in the past and should remain unchanged. Introduction of international standards of auditing We welcome the approach to harmonise statutory audit requirements between EU jurisdictions to enhance the overall audit quality in the EU. A harmonisation of auditing standards across Europe would not only enhance transparency with respect to the veracity of financial statements but also would facilitate the cross border mobility of audit professionals. Independence of auditors From our point of view, no new insights have resulted from the financial crises which would require fundamental changes with regard to auditor s independency. Insurers should retain the authorization to appoint the audit firm and to agree on the fees of such audit. The latter point is also relevant for audit services by smaller firms. Any restriction of the maximum level of fees would hinder smaller audit firms to perform audits for bigger insurers. Moreover, we speak out against a mandatory rotation system to ensure independence of auditors. The engagement of audit firms should not be limited beyond what is already required today. A high level of audit quality can not be maintained in a mandatory rotation system. Both the initial training period for a new audit firm as well as the loss of audit history will have a negative effect on audit quality and efficiency. Further, we do not think that a general prohibition of non-audit services by audit firm would mainly contribute to auditor s independence. The provision of non audit services by auditors to their client is already today subject to strict regulation. The respective requirements are considered to be sufficient to avoid conflict of interest between relevant parties. Supervision We generally support the idea to improve further the integration and cooperation on audit firm supervision at EU level. It might be appropriate to establish a European supervisory authority or an equivalent institution to supervise European wide operating audit firms to ensure supervisory convergence among the supervision of different parts of the same audit network. However, we do not Page 3 / 21

4 agree to increase consultation and communication between the auditor and the national regulator. There is already sufficient cooperation between auditor and supervisory authorities. For instance, in Germany, the supervisory authority is provided with a detailed long-form audit report of the annual auditor, which describes all critical auditing policies and practices to be used in an explicit and comprehensible way. Moreover, the supervisor has the possibility of a special audit and also the right to participate in supervisory board meeting where the auditor reports its findings. Concentration and market structure In our judgement, the audit market does not present a systemic risk as described in the Green Paper. Based on past experiences we do not assume any major disruption in the audit market if one of the large audit networks fails. The experiences show that if a systemic firm became insolvent parts of the company have been overtaken by other systemic firms or new small and medium size audit firms have been founded. Moreover, former employees or partners of the insolvent firm can take along their clients to a new audit firm and could continue any ongoing business. From the viewpoint of enhancing the structure of audit markets we do not think that mandatory rotation or mandatory foundation of an audit consortium has the desired positive effect on audit market concentration. Apart from cost/quality aspects, we do not assume that a joint audit or mandatory rotation will break the market power of the Big Four. It is questioned whether clients will choose the appointment of smaller audit firms when these measures are enforced. Page 4 / 21

5 1. General Questions Question 1 - Do you have general remarks on the approach and purposes of this Green Paper? The GDV welcomes the initiative of the EU Commission to take measures to enhance and harmonise the European audit market in order to mitigate any future financial risk. In the light of the financial crisis a discussion at this point in time seems reasonable. However, to the best of our knowledge, the recent financial crisis did not highlight any major failings in the audit system across Europe nor were auditors responsible for the financial crisis. Rather, the use of inappropriate accounting rules contributed to the crisis. The EU Commission has recognized this problem and has already taken action by reviewing existing accounting standards. The Green Paper addresses a number of concerns regarding the audit of financial institutions and raises a number of questions as to the future role of auditors or to the configuration of the audit market in general. Against the background of different national rules and guidelines for the conduct of audits it would have been also useful to know the impact of various approaches (e.g., regarding appointment and remuneration of auditors, different rotation rules, or formation of an audit firm consortium) on the quality of audit and whether or not certain instruments might contribute more to financial stability than others. Such comparative analyses would have contributed to the discussion. Our comments represent the point of view of the German insurance audit market. The analysis of the German auditing market for insurance companies so far provides a satisfactory result. We did not get the impression that the present audit system facilitated the financial crisis. Instead the current level of audit quality seems appropriate. Although we provide a German point of view on the addressed questions we think that our comments are also relevant for the European market in general. Audit firms in Germany already examine financial statements according to international standards of auditing (ISA). These standards have been implemented into German national law. Since we assume that there are no major problems in the German audit market any negative trends in other European countries might not be a result of insufficient Page 5 / 21

6 standards but rather a problem of insufficient implementation of existing auditing rules. Question 2 - Do you believe that there is a need to better set out the societal role of the audit with regard to the veracity of financial statements? From our point of view, it does not seem necessary to revise the societal role of the audit. The existing principles for the audit or review of reports as defined in the audit standards IDW PS 200 of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer (IDW)) seem sufficient and (at least in Germany) have proven their value. The societal function of the auditor could rather be strengthened if accounting standards will be enhanced or adjusted due to structural changes in the financial environment. This topic will be further addressed in other questions of this document. Question 3 - Do you believe that the general level of "audit quality" could be further enhanced? According to our knowledge, the financial crisis did not reveal any weak spots in the German audit system. Therefore we consider the current level of audit quality as appropriate. Regardless of that, further improvements of audit quality are generally positive and also desirable. However, audit quality should be enhanced only within existing frameworks, i.e., there should be no additional regulation of auditing. Rather, certain accounting principles should be more emphasized, e.g., the principle of substance over form or the going concern approach. Page 6 / 21

7 2. Specific questions about the role of the auditor 2.1. Communication by auditor to stakeholders Question 4 - Do you believe that audits should provide comfort on the financial health of companies? Are audits fit for such a purpose? The audit objective is to ensure that the financial statements are prepared in accordance with the applicable financial reporting requirements, i.e., whether the information presented is correct and free from material misstatements. Here, the auditor also has to arrive at an opinion on the firm as a going concern. However, the audit function should not be extended by the requirement to assess the firm s financial situation. The auditor should not be obliged to make a statement about the financial stability of the firm being audited. This should remain part of the duty of firms supervisory board. The separation of functions between auditor and supervisory board has been proven valid in the past and should remain unchanged. Question 5 - To bridge the expectation gap and in order to clarify the role of audits, should the audit methodology employed be better explained to users? As mentioned in the Green Paper as an example for better internal communication, auditors in the German market have to submit a longform report to the supervisory board and management in addition to the normal audit report which is addressed to the public. Whilst the public audit report contains a summary of the overall conclusion reached in the audit, the long-form report describes all critical auditing policies and practices to be used in an explicit and comprehensible way. Therefore an additional specification of the audit methodology does not seem necessary, especially because such extra explanation would have no substantial influence on the actual audit result. It might be rather of interest to users to clarify that a positive audit result does not assure the solvency of the firm for the foreseeable future and that the audit report does not include the assessment of firms management performance. Page 7 / 21

8 Since our experience with the additional long-form report has been very positive so far, this dual approach to report statutory audit results might be also of interest for other European jurisdictions. Question 6 - Should "professional scepticism" be reinforced? How could this be achieved? The existing audit requirements (e.g., audit standards of the IDW) seem sufficient to enforce due diligence of auditors. Moreover there are several independent institutions or frameworks in Germany which impose diligence to ensure a high level of audit quality, e.g., the German law for supervision of audit firms (Abschlussprüferaufsichtsgesetz (APAG)), the German financial reporting enforcement panel (Deutsche Prüfstelle für Rechnungslegung (DPR)) or the German Federal Financial Supervisory Authority (BaFin). If auditors follow those principles due diligence is sufficiently given. Question 7 - Should the negative perception attached to qualifications in audit reports be reconsidered? If so, how? In our view, it can t be avoided by the firm being audited or by the auditor itself that users of financial statements do not perceive a qualified audit report negatively. A qualified audit report implies that the auditor encountered situations which do not comply with generally accepted accounting principles. This information or signal might be relevant for economic decisions of users of financial statements and should therefore not be reconsidered. Apart from this, the insurance industry itself supports such a quality statement. The Green Paper further proposes that auditors should provide additional information, e.g. about the audit process or firms specific risks in the audit report to be able to compare the relative quality of financial statements between different reporting entities. This information might be of interest for some stakeholders but we do not see how this information will contribute to a noticeable higher level of audit quality. Page 8 / 21

9 Question 8 - What additional information should be provided to external stakeholders and how? The information needs of external stakeholders are covered sufficiently by the management report and the annual audit. External auditors should not be granted any additional role as advisors beyond the individual auditing mandate with a company. Otherwise, auditors would reach their professional and mandate-related limits. In particular, it is questionable to communicate to the public certain information of public interest available to auditors. With regard to competition law and data protection, the information derived from the annual audit should not be disclosed to the public. It should be the client who decides which information may be disclosed and which not (excluding the legal requirements regarding disclosure). Moreover, it is not clear who should be authorized to decide that certain information is of public interest. Therefore, we do not see a necessity for providing additional information to external stakeholders. Question 9 - Is there adequate and regular dialogue between the external auditors, internal auditors and the Audit Committee? If not, how can this communication be improved? From the client s perspective, the dialogue between the external auditors, internal auditors and the Audit Committee is regulated appropriately, in particular with respect to the meetings of the Audit Committee in which the auditor participates regularly. Question 10 - Do you think auditors should play a role in ensuring the reliability of the information companies are reporting in the field of CSR? We do not see a need for an independent external check on the reporting information regarding the firm s CSR activities. Information on how firms integrate social and environmental concerns into their business operations do not belong to the field of accounting or do not significantly affect accounting practices. Moreover, CSR activities are subject to management judgement and thus inherently subjective. It will be difficult or even impossible for the auditor to verify CSR activities in a neutral way. Furthermore, information about CSR activities are part of the management Page 9 / 21

10 report (at least in Germany), which has to be audited as well. Specifically, the management report has to be examined to determine whether the management report agrees with the audited financial statement and whether the other information included in the management report gives a appropriate impression of the position of the company (see 317 (2) No. 1 German Commercial Code (HGB)). In our opinion, this statutory rule seems sufficient to audit the quality and credibility of CSR activities. Question 11 - Should there be more regular communication by the auditor to stakeholders? Also, should the time gap between the year end and the date of the audit opinion be reduced? We doubt that a more regular communication to the public will enhance the quality of the audit process. The existing reporting frequencies especially for listed companies seem more than sufficient. Due to interim financial reporting auditors already communicate to stakeholder on a very frequent basis. Moreover, learning from past experiences has shown that an increase in reporting frequency does not automatically leads to an improved quality of auditing. This also applies to the time gap between the year end and the date of the audit opinion. This time gap is already very tight and we do not expect any improvement in quality when reducing this time gap any further. Moreover, according to German as well as international accounting standards ( 289 (2) No. 1 HGB, IAS 10) companies are required to disclose any favourable or unfavourable events that occur between the end of the reporting period and the date when the financial statements are authorised for issue in a separate section of the report. Thus, from our point of view there is no need to reduce the existing timelines of communication by the auditor to the users. Question 12 - What other measures could be envisaged to enhance the value of audits? Generally, we welcome any approach which would further enhance audit quality. However, the existing standards of auditing in Germany seem sufficient to foster a high level of audit quality. Page 10 / 21

11 2.2. International standards on auditing (ISAs) Question 13 - What are your views on the introduction of ISAs in the EU? We welcome the approach to harmonise statutory audit requirements between EU jurisdictions to enhance the overall audit quality in the EU. The presence of international firms calls for greater harmonisation efforts in relation to international auditing standards as this would facilitate their group auditing with respect to efficiency and cost aspects. Therefore, an adaption of common auditing standards is generally supported. Apart from that, the German auditing standards are already based on the international auditing standards, i.e. Art. 26 (1) of the EU Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts is already enforced into German law. Question 14 - Should ISAs be made legally binding throughout the EU? If so, should a similar endorsement approach be chosen to the one existing for the endorsement of International Financial reporting Standards (IFRS)? Alternatively, and given the current widespread use of ISAs in the EU, should the use of ISAs be further encouraged through non-binding legal instruments (Recommendation, Code of Conduct)? As stated before, we generally welcome the idea of harmonised auditing standards throughout the EU. However, there is no clear consensus whether harmonisation should be achieved via binding or non-binding legal instruments. This has to be discussed further. Question 15 - Should ISAs be further adapted to meet the needs of SMEs and SMPs? In our opinion, if ISAs are also being applied for small and medium sized companies then audits should be based on the same professional framework. In other words an audit is an audit, i.e., the same standards have to be applied for all companies. The user of financial statements must be able to rely on the appropriateness of financial statements. A common benchmark for audit quality seems thus essential. However, it Page 11 / 21

12 might be considered that member states can choose whether to apply ISAs to smaller audits or to develop their own local standards. 3. Specific questions about governance and independence of audit firms Question 16 - Is there a conflict in the auditor being appointed and remunerated by the audited entity? What alternative arrangements would you recommend in this context? No, we do not see an issue with respect to the auditor being appointed and remunerated by the audited entity. In general, the annual general meeting of a company appoints the auditor. With respect to insurers, the auditor is appointed by the company s supervisory body which also reviews the annual report. Moreover, in Germany insurers have to inform the supervisory authority about the appointed auditor which itself has the right to reject this appointment. In appointing an auditor, the supervisory body not only accounts the costs of an audit but also considers the quality of an audit due to its in-depth knowledge of the insurer. If a third party would be entitled to appoint the auditor, the consideration of such knowledge is not possible. Moreover, costs would be increased in such case. Finally, pursuant to Art. 22 of the Directive 2006/43/EC, auditors are required to act independently. If this is not possible, auditors should resign from their audit engagement. Question 17 - Would the appointment by a third party be justified in certain cases? The rules put in place are sufficient in this regard as sufficient powers of supervisory authorities already exist. In particular, the German Federal Financial Supervisory Authority (BaFin) is authorized to order a special audit. Moreover, the supervisory body and the stakeholders are entitled to initiate a special audit (see 318 HGB). Please note further, that the appointment by a third party may not cause more transparency in this regard. The criteria of such an appointment must also be published as done today. Moreover, any central appointment would cause common Page 12 / 21

13 fees, which would be applicable for all insurers. Against this background, the appointment by a third party is not necessary. Question 18 - Should the continuous engagement of audit firms be limited in time? If so, what should be the maximum length of an audit firm engagement? We understand the concern raised in the Green Paper that an ongoing engagement of audit firms might contradict the desirable standard of independence. However, to answer this question other aspects as the cost of implementing and carrying out mandatory rotation and the possibility of audit quality reduction have to be considered as well. It is argued that a high level of audit quality can not be maintained in a mandatory rotation system. Both the initial training period for a new audit firm as well as the loss of audit history will have a negative effect on audit quality and efficiency. Moreover, it is assumed that company specific problems can t be addressed in an appropriate way anymore. These arguments are supported by an empirical study about the US audit market. This study shows that short audit-firm tenures of two or three years go along with lower-quality financial reports. In contrast there is no evidence of reduced financial-reporting quality for longer engagements of audit firms (see Johnson et al. (2002)). Given our arguments we speak out against a mandatory rotation system. The recent approach to rotate key audit partners as mandated by the EU Directive 2006/43/EC on statutory audits seems sufficient to ensure independence of auditors whilst at the same time enabling a continuing high level of audit quality. Question 19 - Should the provision of non-audit services by audit firms be prohibited? Should any such prohibition be applied to all firms and their clients or should this be the case for certain types of institutions, such as systemic financial institutions? Rules for the independence of auditors are generally viewed as positive. However, a general reinforcement of the prohibition of non-audit services by audit firms is not appropriate. A general prohibition does not meet the principle of proportionality and thus should not be enforced. Page 13 / 21

14 The provision of non audit services by auditors to their client is already today subject to strict regulation. For example, audit service is prohibited if the auditor provides service which directly affects figures disclosed in the financial statement or if the auditor provide book keeping services. From our point of view, the regulations regarding the independence of auditors based on national rules (which are also in line with Art. 22 of the Directive) are considered to be sufficient to avoid conflict of interest between relevant parties. The provision of non audit services by audit firms is also beneficially for the public. Auditors are able to gain valuable knowledge and experiences in key risk areas. This know-how will improve the level of audit quality and thus will contribute to an overall enhancement of audit service. Question 20 - Should the maximum level of fees an audit firm can receive from a single client be regulated? 319 (3) No. 5 and 319a (1) No. 1 HGB contain such restrictions. These restrictions are based upon a proposal of the European Commission for a directive regarding audit firms which should cover the whole EU. Clients of audits firms are also required to disclose the fees paid in this regard (see 285 No. 17 HGB). Moreover, any further restriction of the maximum level of fees would hinder smaller audit firms to perform audits for bigger insurers. Furthermore, the bigger audits firms would concentrate on the big audits to relativise its quota with respect to audits of other big insurers. Question 21 - Should new rules be introduced regarding the transparency of the financial statements of audit firms? No. The rules currently existing are sufficient in this regard. Question 22 - What further measures could be envisaged in the governance of audit firms to enhance the independence of auditors? No further measures should be established. The rules currently existing are sufficient in this regard. They are based upon Directive 2006/43/EC in relation to which additional requirements regarding the independence and Page 14 / 21

15 objectivity of auditors/audit firms have been put in place. These requirements have been transformed into national German law where the German law was not sufficient. For example, pursuant to 321 (4a) HGB, the auditor shall state its independency. Moreover, it seems not appropriate to compare audit firms and rating agencies in this regard. Audit firms are subject to regulation. However, rating agencies were not regulated until the enforcement of European regulation 1060/2009. Question 23 - Should alternative structures be explored to allow audit firms to raise capital from external sources? It seems not promising to propose any such measures. With respect to potential liability claims, any audit firm should have in place adequate resources. Furthermore, an insurance-based solution should be considered to handle such issues. Moreover, it could be regarded to pool such risks. Limitations of liability of audit firms could be considered to avoid insolvencies of audit firms branches in certain countries. Further, any change in ownership structure, especially through external investors might limit the independence of audit firms. External owners could interfere with the audit work and thus influence the decision of auditors. Moreover, it is questioned whether or not sensitive information of clients can be kept confidential in such an alternative corporate structure. Question 24 - Do you support the suggestions regarding Group Auditors? Do you have any further ideas on the matter? We support a strengthening of the group auditor because such auditors have a better general idea of the audited group. However, such regulation has already been put in place in Germany. Page 15 / 21

16 4. Specific questions about supervision Question 25 - Which measures should be envisaged to improve further the integration and cooperation on audit firm supervision at EU level? We welcome the proposal to harmonise the European supervision of audit firms to reduce the mismatch between pan European audit networks and national supervision. It might be appropriate to establish a European supervisory authority or an equivalent institution to supervise European wide operating audit firms to ensure supervisory convergence among the supervision of different parts of the same audit network. However, it must be taken care off that only actually equal situations should be treated and regulated in an equal manner. There are still different local auditing standards within European jurisdictions. Further, the communication between national supervisory authorities could be improved further to strengthen the role of each national supervisory authority. Failures of audit might be identified earlier. Question 26 - How could increased consultation and communication between the auditor of large listed companies and the regulator be achieved? From our point of view, no new insights have resulted from the financial crisis, which would require fundamental changes with regard to consultation and communication between auditor and regulator. The existing rules seem sufficient and (at least in Germany) have proven their value. As said before, external auditors should not be granted any additional role as advisors beyond the individual auditing mandate with a company, which also applies in respect of supervisory authorities. Regardless of that, in Germany, within the scope of the respective auditing mandate, there is already sufficient cooperation between auditor and supervisory authorities. For instance, supervisory authorities are already provided with the long-form audit report of the annual auditor, which is very detailed. According to statutory ordinances to this effect, the contents of this audit report also refer to supervisory issues. Moreover, the supervisory authority has the possibility of a special audit. Furthermore, today, the auditor reports to the supervisory board in meetings where the supervisory authority has a right to be present. Additional there is a Page 16 / 21

17 reporting duty of the German financial reporting enforcement panel vis-àvis the supervisory authority in the case of noticed infringements of balance sheet rules. It should be ensured that these reporting duties are met rather than introducing further duties. 5. Specific questions about concentration and market structure Question 27 - Could the current configuration of the audit market present a systemic risk? In our judgement, the audit market does not present a systemic risk as described in the Green Paper: A collapse of a systemic firm or a firm which has reached systematic proportion could disrupt the whole market. Based on past experiences we would deny such scenario. The experiences show that if a systemically important company became insolvent parts of the company have been overtaken by other systemically important firms (as in the case of Arthur Anderson) or new small and medium size audit firms have been founded. Additionally, former employees or partners of the insolvent audit firm can change to other audit firms and could continue any ongoing business. Therefore, we do not see a risk that firms being subject to statutory audits won t find a suitable audit firm after a collapse of a systemic audit firm. Moreover, we believe that the market is self-regulating. Question 28 - Do you believe that the mandatory formation of an audit firm consortium with the inclusion of at least one smaller, non systemic audit firm could act as a catalyst for dynamising the audit market and allowing small and medium-sized firms to participate more substantially in the segment of larger audits? First of all the question arises whether or not joint audit consortiums are better suited to allow for a higher audit quality than single audits. We do not believe that this is the case. Moreover, joint audits will cause an additional administrative workload due to more complexity and need for coordination which will result in higher audit costs. It can be assumed that these extra costs do not correspond to an equivalent enhancement of audit quality. Page 17 / 21

18 Apart from cost/benefit aspects, we do not believe that a joint audit with the inclusion of at least one smaller non systemic audit firm will break the market power of the Big Four. It appears unlikely that a small audit firm can gain acceptance in a consortium with one of the Big Four firms. Furthermore, it is questioned whether or not smaller audit firms have the capacity and the sector-specific know-how to be able to conduct large (international) audits. Moreover, it can be assumed that companies will still appoint a large audit firm as one of the firms in the audit consortium. Thus, we doubt that such a mandatory formation of an audit firm consortium will have the desired positive effect on audit market concentration. Question 29 - From the viewpoint of enhancing the structure of audit markets, do you agree to mandatory rotation and tendering after a fixed period? What should be the length of such a period? We do not think that mandatory rotation will enhance the structure of the audit market or remove market concentration. Rather, it would result in a rotation between the large audit firms. If the current audit systems remains valid (i.e., auditors are not appointed by a third party, e.g. the regulator) then the auditor should be appointed by the firm being audited. See also our comments on question 18. Question 30 - How should the "Big Four bias" be addressed? We welcome the idea to implement a European quality certification for audit firms which would formally recognise their ability to perform audits of large listed companies. However, we question whether this will help to dynamise the audit market and to reduce the market share of the Big Four. We rather suggest harmonising the auditing standards. Such harmonisation is appreciated because it facilitates the audit of multinational cooperation. Furthermore, the harmonisation of pan European auditing standards might reduce entry barriers into the audit market. Page 18 / 21

19 Question 31 - Do you agree that contingency plans, including living wills, could be key in addressing systemic risks and the risks of firm failure? In theory, the concept of contingency plans, including living wills, seems appropriate to address systemic and bankruptcy risks. However, it is difficult to imagine how such contingency plans should be implemented ex ante in practice. For example, it seems questionable that there will be a pre-agreement between two auditing firms that one firm will take over the business of the other firm in case of insolvency. Moreover, such preagreements are costly. To be able to evaluate the advantage of contingency plans a cost/benefit analysis must be conducted, i.e., the additional costs of contingency plans must be compared to the expected reduction in bankruptcy costs. However as already stated above (see Question 27), we do not think that the audit market present a systemic risk. Rather, we assume that auditors and partners of an insolvent audit firm will continue their work in one or several of the remaining firms at the audit market. Thus, we do not assume any major disruption in the audit market if one of the large audit networks fails. Question 32 - Is the broader rationale for consolidation of large audit firms over the past two decades (i.e. global offer, synergies) still valid? In which circumstances, could a reversal be envisaged? In our opinion, the broader rational for consolidation of large audit firms is still valid. International operating firms need an audit firm which operates in a global network itself. Otherwise, it can t be assured that a consolidated financial statement is audited in a qualified and efficient way. Audit firms need a profound industry-specific knowledge across national boarders to be able to identify any misrepresentation of financial statements at an early stage. Page 19 / 21

20 6. Specific questions about creation of a European market Question 33 - What in your view is the best manner to enhance cross border mobility of audit professionals? The basis for cross border mobility of audit professionals is the common recognition of professional qualifications across the European Member States. Moreover, common auditing standards and regulatory layers across Europe would further enhance the cross border operations of audit firms. Currently, different regulations with respect to auditing/accounting standards, quality assurance, or supervision complicate the cross border mobility of audit firms. Question 34 - Do you agree with "maximum harmonisation" combined with a single European passport for auditors and audit firms? Do you believe this should also apply for smaller firms? We principally welcome the idea of an European passport for auditors but we do not believe that such an approach is realizable. To be able to create a European-wide registration with common professional qualification requirements and common governance as proposed in the Green Paper a maximum harmonisation with respect to national accounting standards is also needed. In our point of view, such an agreement on common national accounting standards is not reachable in the near future. 7. Specific questions about simplification: Small and medium sized enterprises and practitioners Question 35 - Would you favour a lower level of service than an audit, a so called "limited audit" or "statutory review" for the financial statements of SMEs instead of a statutory audit? Should such a service be conditional depending on whether a suitably qualified (internal or external) accountant prepared the accounts? We reject an approach of mandating a limited review for small companies which are subject to statutory audit. If a company is obliged to be audited than the audit should be carried out according to the respective regulatory environment. There should be no restrictions regarding audit Page 20 / 21

21 requirements. However, we agree with the commercial regulation on general audit obligation according to the size of the company. See also our comments on Question 15. Question 36 - Should there be a "safe harbour" regarding any potential future prohibition of nonaudit services when servicing SME clients? The establishment of an additional safe harbour is not necessary. The provisions regarding independency are sufficient in this regard. Question 37 - Should a "limited audit" or "statutory review" be accompanied by less burdensome internal quality control rules and oversight by supervisors? Could you suggest examples of how this could be done in practice? No, a limited audit should not be established. 8. Specific questions about simplification: International cooperation Question 38 - What measures could in your view enhance the quality of the oversight of global audit players through international co-operation? No comment. Berlin, 3 December 2010 Page 21 / 21