European Auditing Regulations Begin to Take Effect

In 2016, a number of new rules regarding the auditing of large financial institutions within Europe were established. The regulations had a number of aims and we will discuss them in today’s post, but one of the major aims was to ensure further transparency when it came to the auditing of PIEs, or ‘Public-Interest Entities’. Interestingly, this designation allows the EU to capture financial institutions that hail from outside of the EU, and in today’s news the first test of those regulations was passed when Goldman Sachs announced that its new auditor from 2021, in complying with the rotational elements of the regulation, would be Mazars, marking the Bank’s first move outside the so-called ‘Big Four’ auditors in its history.

The regulations that came into force in 2016 have a number of aims including: ensuring further transparency; providing statutory auditors with a strong mandate to be independent; develop a more dynamic audit market; and to improve the supervision of auditors within the EU. There are, as one would imagine, a number of elements to the reforms, but we shall focus on one in particular and that is that PIEs need to change their statutory auditors every 10 years. The EU maintain that there are obvious risks with PIEs having links to the same auditors for 50 or 100 years, and that ‘mandatory rotation will hence contribute to a better audit quality’. There are variations that the EU allow for, like the ability for member states to reduce this period to 7 or 8 years, and allow for a maximum of an additional 10 years with the same auditor. The EU pair this with increased restrictions on the non-audit services an auditor can offer to a PIE whilst simultaneously performing auditory services. Quite rightly, these include aspects such as tax, consultancy, or advisory services, decisions that lead to the auditor playing any part in the management of the PIE, and also services linked to structuring, allocation, financing, and investment strategies. It was accepted that there would be a delay before we saw the actual effect of these reforms given that PIE-auditing contracts were due to be renewed on individual bases, and today we saw the first instance of these regulations taking effect.

One would assume that if a PIE would have to move away from the Big Four, then they would just filter down the accepted hierarchy within the industry. In the UK, the fifth player within the industry was, until recently, Grant Thornton. It has therefore caused huge interest within today’s business press that rather than acquire the services of Grant Thornton, Goldman Sachs has decided that its next contract for the auditing of its European Business will be with Mazars, not with Grant Thornton or BDO – now recognised as the fifth largest player - who many had imagined would be in the running. It has been suggested that this decision was not altogether voluntary, with it being reported that the Prudential Regulation Authority questioned Grant Thornton’s ability to conduct the audit, in what will be a massive blow to the company if this is true. Nevertheless, the Financial Times discusses how, via Professor Gordon of the University of Michigan, ‘it is a step forward… Mazars has the opportunity to dispel the myth that only the Big Four are capable of auditing the largest, most complex companies’. The business press have been clear that this is a massive coup for Mazars, who whilst recording revenues of €1 billion+, have still struggled to break the stranglehold of the Big Four.

For Goldman Sachs, the picture is arguably quite clear. It cannot select another member of the Big Four after PwC – with whom they have a historic connection – because all of the other members of the oligopoly currently provide a number of ancillary services. Yet, in moving down the list to Mazars – recognised as being the eighth largest firm – the Bank has potentially done something that it will fundamentally benefit from. All eyes will be on Mazars now to see how it performs, so its audits and the auditing process should be remarkably clean and above board. Goldman will also receive favour for engaging with the spirit of the regulation and leading the way for something which the EU has injected a lot of capital. Whether Mazars will step up to the plate and ‘dispel the myth’ only time will tell, but one imagines they will do. The question then will be how will the Big Four respond, because it has been reported that EY have already taken legal action against the EU in order to change, or postpone the reforms. History tells us they will not go down without a fight.

Keywords – audit, Goldman Sachs, Banking, Mazars, business, @finregmatters