Lobbying and Audit Regulation in the EU

Lobbying activities play an important role in the development of new rules and regulations but are controversially debated among policy makers and constituents. Since most lobbying behavior is not directly observable, there is still much to learn about lobbying strategies and their influence on the final regulatory output. In our paper ‘Lobbying and Audit Regulation in the EU’, we help fill this gap by analyzing 391 comment letters submitted in response to the European Commission (EC) Green Paper “Audit policy: Lessons from the Crisis” issued in 2010. The EC Green Paper was published as a reaction to the financial crisis that occurred between 2007 and 2009 and put forward several proposals for strengthening auditor regulations. Many of them were related to the independence and governance of auditors, the current (concentrated) audit market structure and the existing oligopoly of Big Four audit firms in European Union (EU) member states. The underlying goal was to improve overall audit quality and to break up the Big Four oligopoly, thereby allowing mid-tier firms, in particular, to increase their market shares.

Building on the Green Paper, in 2011, the EC issued a draft of a new Regulation and a revised Directive containing inter alia specifications regarding an external rotation of audit firms and a prohibition on simultaneously providing audit and non-audit services. In 2014, an amending Directive and a new Regulation were published in the Official Journal of the EU and became applicable in mid-2016. Most of the EC Green Paper’s proposals are at least to some extent reflected in the final regulatory output but were significantly moderated during the regulatory process. Accordingly, the EU reform on audit policy offers an opportunity to analyze the lobbying activities of interest groups in terms of employed lobbying strategies and their influence on the regulatory outcome.

In our paper, we focus on three research questions. First, we reveal which interest groups were most active in the consultation process on the EC Green Paper. Second, we analyze the different strategies of argumentation of the active interest groups. We follow prior research and classify the arguments of lobbying stakeholders into two categories: the conceptually based arguments and the self-referential ones. As a third research question, we apply an ex post perspective and examine which strategies of argumentation turned out to be influential.

Consistent with the theory of incentives and the presence of information asymmetries between rule-making bodies and interest groups, we find that auditors and preparers, i.e. individual companies and business associations, exhibit higher participation in the consultation process of the EC Green Paper compared with other interest groups. This finding is consistent with prior research on lobbying in an accounting standard-setting context, and it suggests that interest groups that have informational advantages regarding the relevance and possible effects of the proposed regulations and are potentially affected the most by regulatory changes have higher incentives to engage in lobbying activities.

Concerning our second research question, we find evidence for different strategic lobbying behaviors. Our findings suggest that interest groups use more conceptually based arguments when expressing supporting opinions and more self-referential arguments when expressing opposing opinions. In particular, we find that auditors, preparers and audit committees tend to employ self-referential arguments, whereas other interest groups employ conceptually based arguments. These outcomes indicate possible strategic considerations that depend on which interest group constituents belong to and on which attitude they express. Interest groups use lobbying to reduce information asymmetries by employing self-referential argumentation strategies.

Considering our third research question, we find weak evidence that the simultaneous use of conceptually based and self-referential arguments might (at least from an ex post perspective) turn out to be most influential. However, when distinguishing between supporting and opposing views, we find weak evidence that self-referential arguments might be more influential when expressing opposing views, whereas conceptually based arguments might be more influential when expressing supporting views. Our findings support the notion that lobbying can be informative and influential because it might have induced EU lawmakers to moderate the Green Paper proposals to obtain the interest groups’ support. Our paper contributes to a more detailed understanding of how rules and regulations are developed and which role lobbyists might play in this context.

Marius Gros is a Professor of Finance and Accounting at the University of Bremen. Daniel Worret has been a Post-Doc Researcher at Goethe University Frankfurt and is now with PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft.