Interrelation of Capital Markets in the Context of Increased Audit Oversight in the European Union – Evidence on Third-Country Auditors

Abstract

We identified a notable lack of academic literature on the issue of third-country auditors and the main contribution of our article is to address this gap. This research builds on adjacent audit oversight and capital markets literature and we extend this literature by providing evidence on third-country auditors. Specifically, we test the relationship between market capitalization and number of foreign IPOs of listed companies in representative EU countries (on one hand) and the existence of third-country auditors in those respective countries (on the other hand). Our research was performed in the second half of 2018 and is based on the latest data available. We have found that there are about 200 third-country auditors present in the public registers of audit oversight bodies in 11 EU countries. According to our network analysis, only European countries with a developed capital market have attracted third-country auditors. Most of the relationships of these developed EU capital markets are nurtured with non-EU capital markets that are at the same level of development (e.g. USA, Switzerland, Canada, Israel, and Australia). Our research hypotheses were validated: (1) the higher the market capitalization of a EU country, the higher the likelihood for the registration of third-country auditors; (2) the higher the number of foreign IPOs relative to the total IPOs on the stock exchange market, the higher the likelihood for the registration of third-country auditors.

Audit of Budget Programs in European Union Countries

“…M. Mocanu and O. Iancu Ionescu [22] emphasize the importance of statutory audit in order to protect the interests of interested parties and increase confidence in capital markets at the level of European Union. Efforts to harmonize the audit supervisory system and promote transparency in the audit market based on Directive 2006/43/EC [20] and the new Directive 2014/56/EU [21] promote high quality auditing.…”

“…These directives aim to harmonize the requirements of statutory audit as well as the audit of budget programs. They recognize that the function of state auditors, which is conducive to the public good, determines the level of public confidence in the state, enterprises, institutions and organizations and depends on the quality of work performed by state auditors [22].…”

The relevance of the European Audit Reform from the perspective of auditors

“…The occurrence of these scandals, namely that of Enron in 2001, led to the usefulness of the audit being called into question and the role played by the auditors to be strongly criticized (Cooper & Neu, 2015;Mocanu & Ionescu, 2020).…”

“…In view of the occurrence of these financial scandals, which resulted in a crisis of confidence by investors and society in general regarding the work performed by auditors (Mocanu & Ionescu, 2020), the need of creating capable mechanisms in order to respond to and reverse the situation caused by them arose. Thus, to minimize conflicts of interest and guarantee the independence of auditors, the Sarbanes-Oxley Act was passed in the USA in July 2002 with the ultimate purpose of protecting investors' interests and increasing confidence in the markets (Mayoral & Sánchez-Segura, 2008apud Santos et al, 2015 While the transposition of the Directive was in course, the 2008 global financial crisis occurred.…”