Lobbying and Audit Regulation in the EU

Abstract

In this paper, we analyze comment letters submitted in response to the European Commission (EC) Green Paper on audit policy. We find that consistent with the theory of incentives and the presence of information asymmetries between rule-making bodies and interest groups, the highest participation within the consultation process came from auditors and preparers of financial statements. Additionally, our results suggest that these interest groups exhibit different strategic lobbying behaviors in terms of employing more self-referential arguments than other interest groups. Moreover, we provide evidence that self-referential argumentation strategies are more influential when expressing opposing views, whereas conceptually based argumentation strategies are more influential when expressing supporting views. We contribute to a more detailed understanding of the role that lobbyists and argumentation strategies played in the recent EU audit policy reform, and we infer that lobbying activities might have led the EC to moderate its proposals to obtain interest groups’ support.

Keywords:

• lobbying
• audit regulation
• EU legislation
• standard-setting
• strategies of argumentation

JEL Classification:

• D72
• K20
• M42
• M48

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 For a concise overview regarding the current regulations within the EU, see, e.g. Böcking et al., 2011.

2 For a recent review, see Ewelt-Knauer, Gold, and Pott (2013).

3 For a recent review, see Ratzinger-Sakel, Audousset-Coulier, Kettunen, and Lesage (2013).

4 For a recent review, see Ratzinger-Sakel and Schönberger (2015).

5 The comment letters can be downloaded from the EC website: https://circabc.europa.eu/faces/jsp/extension/wai/navigation/container.jsp. For a detailed overview of the consultation process, see Böcking et al. 2011.

6 EC, Proposal for a Regulation of the European Parliament and of the Council on specific requirements regarding statutory audit of public-interest entities, COM(2011) 779 final; EC, Proposal for a Directive of the European Parliament and of the Council amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, COM(2011) 778 final.

7 For an overview regarding the regulatory reform of the audit market within the EU, see http://ec.europa.eu/internal_market/auditing/reform/index_en.htm. For further details regarding the co-decision legislative procedure (trilogue procedure) of the EU, see http://www.europarl.europa.eu/ aboutparliament/en/0081f4b3c7/Law-making-procedures-in-detail.html.

8 Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC (1), in Official Journal of the EU, L 158/77, Vol. 57, 27 May 2014; Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts, in Official Journal of the EU, L 158/196, Vol. 57, 27 May 2014.

9 A definition of public-interest entities is given in the amended Article 2 (13) of the Directive. Basically, public-interest entities are entities whose securities are admitted to trading on a regulated market of any EU Member State, in addition to certain banks and insurance companies.

10 Also, internal rotation of key audit partners is still in place, with a maximum duration of seven years and a ‘time out’ period of three years (article 17 (7) of the Regulation).

11 The Regulation also contains transitional provisions regarding companies with already historically long audit tenures (article 41 (1) and (2) of the Regulation).

12 However, Member States may allow certain non-audit services if they have an indirect or immaterial effect, if the estimation of the resulting effects is well documented and if the principles of independence according to Directive 2006/43/EC are complied with (article 5 (3) of the Regulation).

13 Please note that we did not exclude any comment letters due to language. To be able to evaluate comment letters submitted in languages other than English and German, we utilized professional translation services. Nonetheless, there is a risk that those translations or also the use of non-mother tongue by participants might have affected our results. For instance, see the recent study by Holthoff, Hoos, and Weissenberger (2015).

14 When analyzing lobbying activities regarding the development of IFRS 2 (Share-Based Payments), Giner and Arce (2012) noticed 116 identical comment letters submitted by high-tech preparers operating in Silicon Valley. In their statistical analysis, the authors treated these 116 comment letters as a single submission.

15 See the download area of the consultation process: https://circabc.europa.eu/faces/jsp/extension/wai/navigation/container.jsp.

16 The number of responses attributed to each interest group is discussed in the results regarding Hypothesis 1 (Section 5.1).

17 For instance, indirect lobbying might have an impact on the final regulation. The influence and ‘success’ of lobbying might also be overestimated, and regulators might agree with lobbyists ‘by chance’.

18 The EC Summary of responses to the Green Paper on audit policy is available at http://ec.europa.eu/internal_market/consultations/docs/2010/audit/summary_responses_en.pdf. This summary also provides further details regarding the participating interest groups.

19 Twenty-one comment letters were submitted by professors and other researchers from EU-based universities, individuals, or organizations, and two comment letters were submitted by professors and other researchers from US universities.

20 As a robustness measure, we also calculated the probabilities resulting when excluding the ‘none’ strategy from the pairwise comparisons. The results remained essentially the same.

21 However, there are only 39 evaluable single responses by audit committees, and the relevant results might therefore be biased.

22 However, when excluding the no arguments strategy from the pairwise comparison, the p-value increases to 0.0576, thus suggesting similar strategies of argumentation to some extent.