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A Chartered Accountant, then TD, and then Minister for Finance, Charlie McCreevy has enjoyed a high profile in Ireland for nearly three decades. As Minister for Finance, his handling of the Irish economy won him widespread respect at home and abroad. Recently made European Commissioner for Internal Market and Services he speaks to Shane McGinley about his current work.

“Returning to the accounting and auditing world after some 30 years away I have to admit I was rather surprised that work had not advanced more quickly," remarked Charlie McCreevy in a speech to the Global Public Policy Symposium in London in October this year. However Mr McCreevy, who qualified as a Chartered Accountant in 1973 and is a paid up member of the Institute of Chartered Accountants in Ireland, plans to use his new position as European Commissioner for Internal Market and Services to make up for lost time.

AUDITOR LIABILITY An important issue that the Commissioner plans to target is auditor liability, currently the subject of much debate both within the profession and at large. “I was particularly interested in this subject, even before I became an EU Commissioner”, Mr McCreevy states emphatically. Unlike some other member states, Ireland and the UK do not have any cap on auditor liability.1 But Mr McCreevy says that the great debate on the subject in the UK looks set to see our neighbours over the water move towards introducing some form of proportional liability. And where Britain leads Ireland usually follows suit. Last year when Mr McCreevy first made the trip to Brussels to become a Commissioner, the 8th Company Law Directive was in its later stages and winding its way through the European Parliament. At the time it did not address the subject of auditor liability. A Dutch MEP, Mr. Bert Doorn, had taken a keen interest in the debate and was lobbying on the subject. He found a supporter and welcome ear in the new Irish Commissioner. “Even though the 8th Company Law Directive had nothing to do with auditor liability, Mr. Doorn thought this idea should be addressed and I, as a new Commissioner, also thought it should be addressed so between one thing and another it was raised”, Mr McCreevy observes recalling his early work on the subject. At the time the system was in motion and he remembers that it was too late and wasn't possible to get it up for agreement among Member States to see which way it should go. However between them Mr McCreevy and Mr Doorn did manage to get the subject added to the revised proposal that has gone through the European Parliament, where it states that the Commission has been asked to do a study of this particular area. “The consultants are going to be appointed and the study will be available next year to me as Commissioner so then we will have a study on auditor liability and then we will see where we will progress from there”, says the Commissioner on progress on the issue so far. While the issue now on the agenda may be working its way through the EU institutions McCreevy's personal opinion on the debate is very clear. “Personally I make no secret I have been in favour of having some cap on auditor liability for as long as I've been a Chartered Accountant.”

The loss of one of the big accountancy firms in the US he believes was a major issue: “I look at it in the broader perspective - across to the United States - it's now the Big Four, a few years ago it was the Big Six and now it's only the Big Four. “You can look at this in different ways, if [the Big Four] was reduced even further there would be less competition and who would want to take on these added responsibilities?” A matter of morality “Also I think myself it is a matter of morality that even partners who are retired some years are liable for something that happened in some other part of the world for actions that are being taken. Our study will look at these types of things and we will see where we progress from there.”

“We can make a living doing something else so why would we take on this work and leave ourselves exposed?” asks Mr McCreevy, adding that, without a cap, high risk companies and high risk sectors will find it difficult to get accounting firms to take them on because of the risk of liability.

“The audit cost would be so high that it wouldn't be worth being in business because most of your profit would go on the audit”, observes McCreevy of the practical consequences. On recent trips to the US the Commissioner has spoken to auditors in some of the biggest firms.

“There is a possibility that some enormous claim could bankrupt the Big Four, but then who is going to take on that area of work? When Andersen went the others firms took up the slack but there is no guarantee that if another one went that would be able to happen.”

There is the real fear that accountants will be put off entering the audit profession because the liability is too great a risk. The Commissioner also acknowledges the burden the liability places on auditing firms in the form of indemnity insurance. Taking into account certain levels of auditor liability I put a scenario to the Commissioner that both sides were in a no win situation. High risk companies or those in perceived high risk sectors would find it difficult to get auditors and when they did it was at a large cost. Accountants would become reluctant to enter the auditing profession, further decreasing the pool of available auditors. Those who do remain in the profession would be burdened by high insurance costs. This would leave a small pool of auditors heavily burdened by insurance and companies burdened by the huge fees auditors would have to charge. Although possible this is the most pessimistic outlook.

Liability cap “I have discussed [auditor liability] with my colleagues in Ireland and there seems to be a window of opportunity to do something about the problem. In EU law it is not debarred to have liability capped but I think it should be addressed in the internal market context. EU states can introduce a cap but it should be addressed at an EU level.”

INDEPENDENCE AND AUDITOR ROTATION Another important area covered by the 8th Company Law Directive is the independence of auditors and auditor rotation.

“There is a lot of debate about this and some countries, like Italy for example, wanted to have mandatory rotation themselves, not just of the partners, but also of the audit firm. Other member states, like the UK and Ireland, didn't want to do that so we worked out a compromise to make it more discretionary but there are different cultures about this in many of the member states.”

I suggested to the Commissioner that one answer would be to have specialist firms that only carry out auditing services. “I don't personally favour that”, he says immediately. “There has to be some strictness in the system but I don't think it would be healthy for the accountancy profession to have strictly auditing firms, particularly if there is no cap on liability. I don't think it would be commercially possible ... Perhaps in an ideal situation that would be possible, I hear some of the bigger firms are thinking of setting up, or have set up, structures to try and move in that direction and perhaps that will come [in] time, I don't want to rule it out but I think that would be a very difficult thing to achieve.”

Readers will be all too aware that the background to all of this has come about because of the great financial scandals of the recent years on both sides of the Atlantic. “Auditors and the profession got a bad name so legislators responded. In the US they came in with Sarbanes-Oxley. Here we are a bit more measured in the way we do things. But the profession must realise, and they do, that they have to be seen to be independent and to act independently.”

The debate is similar to the issue of health and safety in the construction industry - you need regulation but not so much that it makes doing business impractical. “The job of all legislators, whether it is national ones or EU ones, is to try and have the balance. If you don't have regulation the situation will develop into anarchy in all areas of activity, but if you have too heavy regulation you will depress business and you won't generate sufficient economic activity. I favour the lightest possible touch regulation and a combination of the carrot and the stick and that's the approach I have lived by since I was an Irish Minister putting forward legislation in any area.”

“If you look in the States people think the Sarbanes Oxley has gone too far in depressing the capital market and some companies want to deregister ... because they think these requirements are too severe. In Europe it has been a little slower and little more measured and I think the balances we have struck are better.”

The system may be slower in the EU but the Commissioner believes it is less reactionary and often we get the better balance between regulation and practical business.

Earlier this year, in a speech at the 125th Anniversary of the Institute of Chartered Accountants in England and Wales, Mr McCreevy said: “Surely the time has now come to reach towards convergence of IAS and US GAAP. Our aim in global capital markets should be to reduce unnecessary costs. Imagine the reduction in costs which could be achieved for 300 European companies listed in the US if they could use just one set of accounts.”

It has been speculated that the different approaches of the US an EU on the subject has led to a deterioration in US and EU relations, a view dismissed by the Commissioner. “We are trying to work as closely as possible with our US counterparts. The EU and US have about 80% of the world's capital markets so we should be striving to try [to] have a convergence of standards.”

HARMONISATION OF TAX IN THE EU As we end our brief chat in his offices in Dublin, before he races of to his next meeting, I ask Mr McCreevy quickly about one financial subject where his personal beliefs would appear to be in conflict with his position as EU Commissioner representing all the member states - tax harmonisation.

“It is neither sensible nor realistic to seek convergence of tax rates across Europe. One of the tools and one of the key ingredients in the competitiveness mix is taxation. That's just one reason why harmonization is off the agenda”, the Commissioner told the European Business Initiative on Taxation in November.

“I had these views about tax harmonisation long before I was Minister for Finance”, he tells me, “I have the same personal views about them as EU Commissioner and I think I be having them in four or five years time too.”

With that he rushes off to his next appointment. Many critics scoff that the EU is an easy ticket consisting of expensive lunches and perks but as he said himself there is a lot of work to be done since he was a Chartered Accountant 30 years ago and he's only just over a year into the job.

Notes 1 For a good background piece on Auditor Liability see Aidan Lambe, ‘Auditor Liability - Time for Reform?’ in Accountancy Ireland, Vol. 37, No. 5, October 2005, pp 19-20.

Shane McGinley is a freelance journalist.