Max Planck Institute Working Group on Auditor Independence - Comments on the European Commission Green Paper: Audit Policy – Lessons from the Crisis

Abstract:     
Auditor independence is essential for the functioning of markets. In our view structural weaknesses currently impair auditor independence. We propose several measures, to enhance auditor independence. One possible source of conflicts of interest arises from intensive consulting engagements of statutory auditors for audited companies. We therefore propose to set limits for consulting engagements. Also, full disclosure for the amount fees generated by an audited company should be required.
In addition, auditors should be appointed for a multi-year fixed period, starting with an initial term of four years. Conditional on an internal rotation after the first term, one renewal should be possible. Thereafter, the auditor, the audit firm and audit firms of the same network should be excluded from performing the statutory audit for the company (external rotation) for one subsequent term.

Note: An updated version of this paper, taking into account the draft presented by the European Commission in November 2011, has appeared as Max Planck Private Law Research Paper No. 12/1, http://ssrn.com/abstract=1983204

Keywords: audit, auditing, independence, auditor independence, statutory audit, internal rotation, external rotation, consulting, green paper, fees, disclosure, audit market, Big-Four, Big Four, market concentration

Accepted Paper Series