Comments on the European Commission Green Paper

Abstract

Trust in the independence of auditors is essential for the functioning of markets. If auditors are not independent or not believed to be independent, transaction costs will rise. In our view, structural weaknesses currently impair auditor independence. We therefore put forward several reform proposals: consulting engagements of statutory auditors should be limited; the fees generated from an audited company should be disclosed; auditors should be appointed for a fixed multi-year period; following an internal rotation, one renewal should be possible; thereafter, an external rotation should be required, excluding the current audit firm from performing the statutory audit for one subsequent term. With these and related measures, trust in the independence of auditors will be restored and strengthened.

Note: This post-print is published in the Max Planck Private Law Research Paper Series with the permission of the rights owners, Giuffrè Editore. As printed in: Rivista delle società 56 (2011), 485–493. 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, independence, rotation, Big Four, market concentration, internationalization, legal harmonization, standardization

JEL Classification: D43, G15, G18, G38, K22, M42, M48