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Need for change in the audit market? An analysis of the measures proposed to reduce audit market concentration in the European Commission’s Green Paper on Audit Policy: Lessons from the Crisis

Sundin, Erik and Hedlund, Marika (2011)
Department of Business Administration
Abstract
Background and problem: In October 2010 the European Commission issued a Green Paper on Audit Policy in which they set out to draw lessons of the auditors’ role in the recent financial crisis. The European Commission considers the function of the audit to be a key contributor to investor confidence and suggests a number of controversial measures with the aim of ensuring financial stability in the European financial markets. If and when the ideas mentioned in the Green Paper are transposed into new Regulations and Directives, various legal issues will arise, between auditors, within audit firms as well as between auditors and their clients. Our main research question is based on these and relates to how these measures can influence auditor... (More)
Background and problem: In October 2010 the European Commission issued a Green Paper on Audit Policy in which they set out to draw lessons of the auditors’ role in the recent financial crisis. The European Commission considers the function of the audit to be a key contributor to investor confidence and suggests a number of controversial measures with the aim of ensuring financial stability in the European financial markets. If and when the ideas mentioned in the Green Paper are transposed into new Regulations and Directives, various legal issues will arise, between auditors, within audit firms as well as between auditors and their clients. Our main research question is based on these and relates to how these measures can influence auditor independence and the audit process. Purpose: Our purpose with this thesis is to analyse the suggested disadvantages associated with the current audit market structure, and the measures to mitigate those that are brought up for discussion in the European Commission’s Green Paper on audit policy. This analysis will be done from a European as well as a national Swedish perspective. Methodology: The thesis follows a qualitative methodology where five interviews with Swedish auditors make up the primary data. The primary data is then compared with the secondary data in an analysis leading to the thesis conclusions. Theoretical Perspectives: In order to illuminate the different measures that are suggested in the Green Paper’s fifth section, relevant academic research and other studies are used. Different perspectives are given regarding a number of topics; auditor independence and audit quality, concentration and market structure, joint audits, mandatory rotation of auditors, Big Four bias, contingency plans, consolidations, auditor designation and auditors legal liability. Empirical Foundation: The empirical research of the thesis is built upon five interviews with Swedish auditors from different firms. Two of them are working at Big Four firms, while three of them are working at smaller firms. These interviews provide the thesis with the view on the Green Paper from the perspective of the Swedish audit profession. Conclusions: We believe that the top-down approach that the European Commission uses in the Green Paper can be a disadvantage, and thereby making the market players react negatively to the suggested measures. Instead, the Green Paper might have been more effective by adopting a different approach, with which it could have generated more constructive responses. Furthermore, the Big Four bias that the European Commission wishes to address is something that receives diverse opinions. We believe that it is very hard, maybe impossible, to assess exactly how much of this bias that is attributable to merit and how much to perceptions. When it comes to the comparison of our empirical research and the reviewed responses to the Green Paper, the results indicate that national differences may occur. One measure can be considered appropriate in the Swedish audit market, while the same measure might be inappropriate for some other Member State’s audit market. National differences in attitudes are something that the European Commission may need to address. (Less)
Please use this url to cite or link to this publication:
author
Sundin, Erik and Hedlund, Marika
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
Företagsledning, Management of enterprises, Joint Audits, Big Four, Systemic risk, Green Paper, Audit market concentration, management
language
Swedish
id
1982314
date added to LUP
2011-05-31
date last changed
2012-11-12 11:41:54
@misc{1982314,
  abstract     = {Background and problem: In October 2010 the European Commission issued a Green Paper on Audit Policy in which they set out to draw lessons of the auditors’ role in the recent financial crisis. The European Commission considers the function of the audit to be a key contributor to investor confidence and suggests a number of controversial measures with the aim of ensuring financial stability in the European financial markets. If and when the ideas mentioned in the Green Paper are transposed into new Regulations and Directives, various legal issues will arise, between auditors, within audit firms as well as between auditors and their clients. Our main research question is based on these and relates to how these measures can influence auditor independence and the audit process. Purpose: Our purpose with this thesis is to analyse the suggested disadvantages associated with the current audit market structure, and the measures to mitigate those that are brought up for discussion in the European Commission’s Green Paper on audit policy. This analysis will be done from a European as well as a national Swedish perspective. Methodology: The thesis follows a qualitative methodology where five interviews with Swedish auditors make up the primary data. The primary data is then compared with the secondary data in an analysis leading to the thesis conclusions. Theoretical Perspectives: In order to illuminate the different measures that are suggested in the Green Paper’s fifth section, relevant academic research and other studies are used. Different perspectives are given regarding a number of topics; auditor independence and audit quality, concentration and market structure, joint audits, mandatory rotation of auditors, Big Four bias, contingency plans, consolidations, auditor designation and auditors legal liability. Empirical Foundation: The empirical research of the thesis is built upon five interviews with Swedish auditors from different firms. Two of them are working at Big Four firms, while three of them are working at smaller firms. These interviews provide the thesis with the view on the Green Paper from the perspective of the Swedish audit profession. Conclusions: We believe that the top-down approach that the European Commission uses in the Green Paper can be a disadvantage, and thereby making the market players react negatively to the suggested measures. Instead, the Green Paper might have been more effective by adopting a different approach, with which it could have generated more constructive responses. Furthermore, the Big Four bias that the European Commission wishes to address is something that receives diverse opinions. We believe that it is very hard, maybe impossible, to assess exactly how much of this bias that is attributable to merit and how much to perceptions. When it comes to the comparison of our empirical research and the reviewed responses to the Green Paper, the results indicate that national differences may occur. One measure can be considered appropriate in the Swedish audit market, while the same measure might be inappropriate for some other Member State’s audit market. National differences in attitudes are something that the European Commission may need to address.},
  author       = {Sundin, Erik and Hedlund, Marika},
  keyword      = {Företagsledning,Management of enterprises,Joint Audits,Big Four,Systemic risk,Green Paper,Audit market concentration,management},
  language     = {swe},
  note         = {Student Paper},
  title        = {Need for change in the audit market? An analysis of the measures proposed to reduce audit market concentration in the European Commission’s Green Paper on Audit Policy: Lessons from the Crisis},
  year         = {2011},
}