Auditing changes ‘could damage foreign investment into Ireland’

A green paper on auditing, launched by the European Commissioner Michel Barnier, could have damaging consequences for foreign direct investment into Ireland and many businesses located in the IFSC, say sources familiar with the situation.

Legislative changes proposed in the discussion document include a stipulation that companies be legally obliged to change auditor every six years. It is also proposed that certain firms be ordered to conduct joint audits.

A senior partner at one of the big four accountancy firms warns that these proposals will greatly add to the cost of doing business across the eurozone, which will weigh on Ireland’s attractiveness as a location for foreign investment.

“There are roughly 200 insurance firms in the IFSC. Most of their parent companies come from outside the EU, so they will not be bound by this regulation. But this is going to great increase costs and I have heard from a number of companies that this may threaten future investment,” said the senior partner, who did not want to be named.

“Also, if you look at most of the multinationals in Ireland, their parent companies come from outside the EU.”

The green paper is a response to the role auditing firms played in the financial crisis.

There are huge logistic and cost issues involved with changing auditors. It is estimated that it takes a company 500 hours to advertise, appraise, and appoint an auditor. Moreover, it involves a huge logistics challenge to physically change auditor for many of the big multinationals, because those companies’ systems may not be compatible with the new auditing firm.

Moreover, there is a body of knowledge that is gradually accumulated through auditing a firm that will be lost every six years.

Another proposal in the paper would prohibit audit firms from generating more than 10% in non-audit fees from a company it is auditing. This has the potential to backfire, says the senior partner. “Things like review of the quarterly accounts and cash reporting to the Central Bank would cost more than 10% of the audit fee and it is important that they are done by the audit firm.”

The green paper is with the European Parliament and the European Council. Its implementation into law could coincide with Ireland’s EU presidency in 2013.