Developing an audit quality oversight framework for European audit regulators

Abstract

The aim of this research was to develop an audit quality oversight framework for European audit regulators, grounded in the EU Acquis Communautaire for statutory audit, to guide the inspection of audit quality. The study explored the links between enhanced audit quality, improved reliability of financial reporting, strengthened investor confidence and greater market integrity. In doing so, it examined the influence of the external quality control system on audit quality. A mixed-methods approach was adopted, combining quantitative surveys and qualitative semi-structured interviews. The surveys targeted audit companies (auditors), professional audit organisations, European audit regulators, major financial regulators and public interest entities across Europe. The semi-structured interviews involved purposively selected participants from public interest entities. The research establishes the framework’s conceptual foundation (Level 1) by demonstrating how high-quality audits enhance financial reporting reliability, thereby fostering investor confidence and strengthening market integrity. This foundation is built on three pillars: securing audit quality, overseeing audit engagements and enhancing auditor independence and ethics. The study further outlines the framework’s monitoring and implementation strategies (Level 2) and emphasises its application benefits (Level 3), thus highlighting its practical value. A significant finding of the research is the differing reliance on the external quality control system between local audit companies and international networks. Local companies, which face greater financial and operational pressures from audit quality oversight, rely more heavily on the external quality control system, using it to supplement their internal control systems to enhance and maintain audit quality. In contrast, international networks, supported by more robust internal control systems due to access to greater resources, rely less on the external quality control system. The study underscores the importance of maintaining the independence of the external quality control system from non-audit professional influence since such influence can impair audit quality. Conversely, when the external quality control system is managed by audit professionals, it has a positive effect on audit quality, especially for local audit companies. A risk-based approach to audit quality oversight is recommended, focusing on high-risk audit engagements and areas where effective resource allocation and adherence to auditing standards and ethical requirements are most critical to achieving high audit quality.