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Friday 21 November 2014

Statutory audits of financial statements in Europe: Is the European Union on the right track?

Martin Schmidt, ESCP Europe, together with Klaus Ruhnke, Freie Universität Berlin, published a scientific article titled “Changing the Institutional Framework of Statutory Audit: Internal Stakeholders' Perceptions of the Associated Benefit and Costs” in the European Accounting Review (EAR), one of the global top accounting journals and the prime academic publication outlet for research in accounting with a European focus. The EAR is published by the European Accounting Association.

This paper analyses the expected benefits and costs associated with five potential changes: mandatory external audit firm rotation (the audit firm cannot be re-appointed after a specified number of years and a new audit firm must be appointed as statutory auditor), auditor appointment by an independent regulator, a general ban on providing non-audit services (such as consultancy, tax or legal services, which would lead to so-called ‘audit-only firms’), a ban on providing non-audit services to audit clients, and mandatory joint audits (two audit firms are appointed as statutory auditors). The authors survey supervisory board members and management representatives from German companies to analyse how these changes affect the benefit and costs.

The results show that none of the proposed changes is expected to increase the benefit of audits. A ban on non-audit services to audit clients is perceived to have the least disadvantageous effect, followed by a general ban on non-audit services, mandatory external audit firm rotation, appointment by an independent regulator, and mandatory joint audits. Compared to supervisory board members, management representatives anticipate significantly larger decreases in the benefit of audits and significantly larger increases in costs.

In 2014, after extensive debates, the European Union adopted a legislative package, consisting of a Directive and a Regulation. The Regulation includes a restriction of providing non-audit services to audit clients for the audit public-interest entities. The EU’s policy choice to restrict non-audit services, rather than ban such services altogether, is consistent with the results of this empirical study.


Martin Schmidt is Assistant Professor of International Accounting within the Department of Financial Reporting and Audit at ESCP Europe and Academic Director of the Part-Time Master in Management at the Berlin campus. He received his education at the University of Technology Berlin, the University of California at Los Angeles (UCLA), and his PhD from the Freie Universität Berlin. Prior work experience includes auditing (Senior Manager, IFRS technical department of Deloitte & Touche Germany, Frankfurt/Main), banking, and accounting standard-setting (Accounting Standards Committee of Germany, the German standard-setting body).


Ruhnke, Klaus, and Schmidt, Martin (2014) Changing the Institutional Framework of Statutory Audit: Internal Stakeholders' Perceptions of the Associated Benefit and Costs, European Accounting Review

Please contact Martin Schmidt for further information.

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