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Public Hearing: Improving audit quality across the European Union Henkel AG & Co. KGaA – Member audit committee Merck KGaA– Chair audit committee „Enhancing.

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Presentation on theme: "Public Hearing: Improving audit quality across the European Union Henkel AG & Co. KGaA – Member audit committee Merck KGaA– Chair audit committee „Enhancing."— Presentation transcript:

1 Public Hearing: Improving audit quality across the European Union Henkel AG & Co. KGaA – Member audit committee Merck KGaA– Chair audit committee „Enhancing the role of the audit committee and the chair of the audit committee“ Brussels, 27.03.2012 Deutsche Bank AG – Member audit committee E.ON AG– Chair audit committee Theo Siegert 1 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de

2 Agenda 1.The problem to be addressed The origin 2.How does an Audit Committee (AC) work ? Typical time table 3.What is the content of an AC work ? Typical rolling agenda 4.The DAX 30 audit chair recommendations 5.Conclusion 2 Public Hearing: Improving audit quality across the European Union Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de

3 1. The problem to be addressed:The origin The financial crisis:Long list of the culprits: Central banks (loose money) Housing agencies (loose underwriting standards) Governments(encouragement of house-ownership beyond means) The financial system(de-regulation) Mortgage backed securities(slicing / intransparent risk-ownership) Greedy bankers (inadequate incentive systems) Corporate Governance (in general) Subsegment: auditing standards/ expectation gap Improving audit quality The market for „credence goods“: „trust goods“ High reputational capital at risk Market concentration:Rating agencies Hospitals (high frequency surgery) Quality assurance companies Auditors Brand recognition (the winner takes it all) 3 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de

4 4 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de 1. The problem to be addressed :improving audit quality Auditors should work closer with AC (“muppets of management ?”) AC: Conduction of the auditor – appointment process Tendering process vs. enforced rotation Authorization of non-audit work by AC 10% threshold too low (Quarterly audits are considered in the non-audit services category) How does an AC actually work ?

5 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de (Auditors & AC : muppets of management) ? 2. How does an AC work ? : Typical time table Quarter IMonthChairman of the Supervisory Board Chairman of the AC ACAuditorChief Executive Officer Chief Financial Officer Supervisory board Shareholders AGM Checking CallsDecember January XX Preparation of AC- Meeting January XX Setting the AgendaMarch XXX -Independence declaration auditor -Proposal to AGM : auditor selection -Authorization of auditor’s Budget March XXX XXXX AC – MeetingMarch XXXXXX Supervisory Board Meeting March XX AGM: -Appointment of the auditor April Mai X 5

6 IssueFebruary/ March Annual General Meeting MayAugustNovember Year-end Financial Reporting X Q IV Quarterly Financial Reporting X Q I X Q II X Q III Auditors Independence ReviewX Proposal for the Appointment of auditors X X Risk ManagementXXXX Internal AuditXXXX Internal Control Systems (IKS)XXXX Legal / ComplianceXXXX Tax / InsuranceXX etc. misc. 3. How does an AC work ? : Typical rolling agenda 6 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de

7 4. The DAX 30 audit chair recommendations (I) 7 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de “Enhancing the role of the AC” 1.Strengthening the relationship between audit committee and statutory auditor to increase the independence of the auditor 2.Preference of tendering the audit engagement on a regular basis (instead of a general limitation of the duration of the audit engagement) 3.Do not limit the authority of the AC to only 10% provision of non-audit-services

8 4. The DAX 30 audit chair recommendations (II) 8 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de Regulation of the European Parliament and of the Council Appraisement of the DAX 30 audit committee chairman Art. 32, 2: The audit committee shall submit a recommendation to the administrative or supervisory board of the audited entity for the appointment of statutory auditors or audit firms. The audit committee shall justify the recommendation made. Art. 9, 2: When the statutory auditor or audit firm provides to the audited entity related financial audit services, as referred to in Article 10 (2), the fees for such services shall be limited to no more than 10 % of the fees paid by the audited entity for the statutory audit.

9 4. The DAX 30 audit chair recommendations (III) 9 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de Regulation of the European Parliament and of the Council Appraisement of the DAX 30 audit committee chairman Art. 10, 3: A statutory auditor or an audit firm carrying out statutory audit of public-interest entities shall not directly or indirectly provide to the audited entity, to its parent undertaking and to its controlled under- takings non-audit services. Art. 10, 3 b) i) – ii): Services which may entail conflict of interest: (i) human resources services, including recrui-ting senior management; (ii) providing comfort letters for investors in the context of the issuance of an un-dertaking's securities; By derogation from the first and second subpara- graphs, the services mentioned in point (b)(i) and (ii) may be provided by the statutory auditor or the audit firm, subject to prior approval by the audit committee as referred to in Article 31 of this Regulation. Art. 33, 1: The public-interest entity shall appoint a statutory auditor or audit firm for an initial engage- ment that shall not be shorter than two years. […] The maximum duration of the combined two engagements shall not exceed 6 years.

10 4. The DAX 30 audit chair recommendations (IV) 10 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de Regulation of the European Parliament and of the Council Appraisement of the DAX 30 audit committee chairman Art. 33, 1: Where throughout a continuous engage- ment of 6 years two statutory auditors or audit firms have been appointed, the maximum duration of the engagement of each statutory auditor or audit firm shall not exceed 9 years. Art. 20: Use of international standards on auditing Art. 31, 1: Each public-interest entity shall have an audit committee. The audit committee shall be com- posed of non-executive members of the adminis- trative body and/or members of the supervisory body of the audited entity and/or members appointed by the general meeting of shareholders of the audited entity or, for entities without shareholders, by an equivalent body. At least one member of the audit committee shall have competence in auditing and another member in accounting and/or auditing. The committee members as a whole shall have compe- tence relevant to the sector in which the audited entity is operating.

11 5. Conclusion Regulations& unintended consequences Missions achieved:Turgot & the potatoes Bidding process & Professional scepticism US Military : The Quality advice 11 Theo Siegert – de Haen-Carstanjen & Söhne, Düsseldorf HR A1E-Mail: siegert@dhcs.de Enhancing the quality and independence of the auditing process 1.The DAX 30 audit chair recommendations : enhance the role of the AC 2.Reducing the expectation gap: strengthen the EU-quality review for auditors 3.Professional scepticism and regulation


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