The case concerned a complaint by an EU citizen about the practice of the Council of the European Union to confine approval of the appointment of auditors to Euro Member States' central banks to the 'Big Four' auditing companies only. The complainant argued that these auditors were not sufficiently independent since they had too many links to too many other players in the banking sector. He also pointed to a Green Paper in which the Commission had raised concerns about concentration in the audit sector. He was not satisfied with the Council's reply.

The Ombudsman inquired into the issue and found that there had been no maladministration. The Council approves the appointment of auditors following a tender procedure by the national central banks concerned and a recommendation by the Governing Council of the ECB. These institutions are obliged to respect Good Practice Guidelines issued by the ECB which are stricter than the recently adopted legislative rules for the audit sector that came about as a result of the Commission Green Paper and proposals the complainant referred to. Moreover, the complainant did not provide any evidence to call into question the independence of the auditors appointed by the Council.

The background to the complaint

1. Article 27.1 of the Protocol on the Statute of the European system of central banks and of the European Central Bank[1] (the 'Protocol') is worded as follows:

"The accounts of the ECB and national central banks shall be audited by independent external auditors recommended by the Governing Council and approved by the Council. The auditors shall have full power to examine all books and accounts of the ECB and national central banks and obtain full information about their transactions."

2. On 8 July 2011, the complainant, who owns an auditing and tax advisory firm, wrote to the Council of the EU (the 'Council') criticising its practice of consistently appointing the audit firms known as the 'Big Four' (KPMG, PriceWaterhouseCoopers, Deloitte & Touche and Ernst & Young - hereafter, the 'Big Four') to audit the national central banks of the Eurosystem ('the Eurosystem central banks'). By reference to a Green Paper published by the Commission in 2010, which proposed measures to reform the audit market, including measures to reduce the market power of the Big Four[2], the complainant argued that the Council's approval practice contradicted the Commission's view that the dominance of the Big Four represented a serious risk of distortion in the audit market and entailed a systemic risk.

3. The complainant therefore asked the Council not to give further audit mandates to the Big Four in the future, and to examine whether on-going mandates could be terminated. He also asked the Council to inform him of the overall fees paid by the Eurosystem central banks to the Big Four, divided, if possible, into fees paid for auditing and consulting mandates. He also wished to know which firm had audited the Greek central bank since 2002 and the conclusions of the relevant audit reports.

4. The Council replied on 2 August 2011. In relation to its role in the appointment of auditors for the Eurosystem central banks, it referred to Article 27(1) of the Protocol and the guidelines of the ECB on Good practices for the selection and mandate of external auditors[3] (the 'Good Practice guidelines'). It underlined that, since its first decision on the appointment of external auditors in 1999, it had always followed the recommendations of the ECB's Governing Council. It added that it did not have any information on the fees paid by national central banks for auditing or consulting mandates. As regards the information requested about the annual accounts of the Greek central bank, the Council pointed out that they were freely available on the bank's website. The accounts contained the annual financial statements and the audit reports.

5. The complainant was not satisfied with this reply and thus turned to the European Ombudsman.

The inquiry

6. The Ombudsman opened an inquiry into the complaint and identified the following allegations and claims.

Allegations

(1) The Council acted wrongly by approving the appointment of the 'Big Four' audit firms to audit the national central banks of Member States whose currency is the Euro.

(2) The Council failed properly to deal with the issues raised in the complainant's letter of 8 July 2011.

Claims

(1) The Council should refrain from appointing the Big Four firms in the future, and assess whether it can terminate on-going mandates of the Big Four firms for auditing central banks.

(2) The Council should reply to the substance of the issues raised in the complainant's letter of 8 July 2011.

7. In the course of the inquiry, the Ombudsman received the opinion of the Council on the complaint and, subsequently, the comments of the complainant in response to the Council's opinion. Upon the request of the Ombudsman, the Council submitted a supplementary opinion, on which the complainant provided further observations. In conducting the inquiry, the Ombudsman has taken into account the arguments and opinions put forward by the parties.

Allegation that the Council wrongfully approved the appointment of the Big Four firms to audit the Eurosystem central banks and related claim

Arguments presented to the Ombudsman

8. In his complaint, the complainant identified two main instances of alleged maladministration: (a) that the Council's actions were inconsistent with the conclusions of the Commission on the highly concentrated audit market, and (b) that the Council paid too little attention to the question of the independence of audit firms and provided insufficient information to him in this regard.

9. With regard to argument (a), the complainant noted that although the Council had the power to reject the recommendations of the ECB's Governing Council, and thus to ensure that no further audit mandates were given to the Big Four, it had always chosen not to use that power. It thus contradicted the Commission's aim, laid down in its Green Paper of 2010, to reduce the overall high level of concentration prevailing in the audit market.

10. As regards argument (b), the Council, by its own admission, had never actually examined whether the proposed auditors were in fact independent. The complainant added that if the Council did not have information about the fees paid by the national central banks for the auditing or consulting mandates, it could not assess whether the audit firms recommended by the ECB's Governing Council were indeed independent. According to the complainant, where an audit firm had already carried out an audit of a central bank and had made recommendations, it could no longer audit that same bank in an independent manner the following year.

11. In its opinion, the Council stated that the Governing Council of the ECB holds the exclusive power of initiative in relation to the designation of the independent external auditors to audit the accounts of the Eurosystem central banks, and that the Council acts on the recommendation of the Governing Council, which has wide discretion in making such an assessment.

12. The Council also stressed that it too has wide discretion in judging whether the proposed auditors are indeed independent. In doing so, it relies on relevant information such as the recommendations of the Governing Council and the ECB's Good Practice guidelines. Given its wide discretion, the Council would refuse the appointment of an auditor only where the requirement of independence was clearly and manifestly not met. According to the Council, no lack of independence, in the sense claimed by the complainant, has ever manifested itself in respect of any of the auditors approved thus far.

13. The Ombudsman asked the Council to clarify whether it is the Governing Council of the ECB or the Council itself that, "by virtue of its wide power of discretion", would refuse the appointment of an auditor where the requirement of independence was clearly and manifestly not met. The Ombudsman also asked the Council to explain how it had come to the conclusion that all the auditors it has appointed so far fulfilled the requirement of independence.

14. In its reply, the Council argued that it fulfilled its duties by appointing independent auditors, recognised as such by the Governing Council of the ECB, in line with the Good Practice guidelines. These stipulated that the Eurosystem central banks had to ensure that the audits were carried out in accordance with the 'International Standards on Auditing' (ISA), and the 'International Federation of Accountants (IFA) Code of Ethics'. In addition, the Eurosystem central banks have to verify annually that the chosen auditor does not provide any non-auditing services to the bank and is not in any way involved in management decisions of the audited bank. According to the Council, the fact that the ECB carries out a rigorous assessment based on the Good Practice guidelines prior to making any recommendation to the Council on the appointment of external auditors should satisfy the requirement of independence of the recommended auditors.

15. The Council also noted that during the decision-making procedure leading to the adoption of the Council's decision approving the appointment of the auditors in question, no Member State had ever raised any concerns about compliance with the Good Practice guidelines. Thus, there was nothing to undermine the Council's confidence that, as it had done in the past, the ECB would continue examining rigorously compliance with the Good Practice guidelines before issuing its own recommendation.

16. In that regard, the Council added that to exclude a specific group of auditors from auditing the Eurosystem central banks would be arbitrary, unfair and counterproductive. Moreover, it could not, at this stage, take any position on the Commission's Green Paper, which merely launched a consultation on the changes that may be needed to reform the audit market, and represented the views of the Commission only.

17. In his observations, the complainant accepted that the Council had a margin of discretion both in relation to the proposal put forward by the ECB's Governing Council and as regards the decision whether to actually nominate a proposed auditor. However, he considered that the Council was wrong to rely on this discretion when there was even the slightest doubt as to the independence of the auditors concerned.

18. The complainant underlined that the Big Four had played an important role in bringing about the sovereign debt crisis. They had audited and advised the banks which put "toxic" financial products into circulation. They also audited or advised the national central banks which bought such products, and thus could not cast doubt on their value because doing so would have undermined their relationships with the issuing banks. According to the complainant, the Council's view that the only relevant question for turning down the ECB's recommendations was whether an auditor had sold other services to the audited bank and/or whether it was involved in its management decisions, constituted an overly permissive interpretation of the applicable rules. The Big Four simply had too many links to too many players in the financial markets to be independent.

19. In conclusion, the complainant pointed out that the crisis had clearly shown that audits of central banks were more important than ever and that stricter rules were necessary.

The Ombudsman's assessment

20. The Ombudsman is aware that the issue raised in this complaint reflects two concerns that are shared by many EU citizens. First, there is a perception that the share of the audit market held by the Big Four firms might act as barrier to effective competition. Second, serious questions have been asked regarding the role of auditors in the lead up to the banking and financial collapse a few years ago. Both in relation to individual national central banks, and in relation to some of the major commercial banks, there are many who believe that their auditors should have detected and warned of problems before the collapse. While the Ombudsman understands these concerns, the present inquiry does not allow her to engage on the important issues which they raise. Critically, and this point is developed later in this decision, the Council was not itself selecting auditors for the national central banks but approving selections already made at national and ECB levels.

21. The main issue is therefore whether the Council, in giving approval acted in accordance with the relevant EU legislation and guidance. In his first allegation, the complainant identified two main alleged instances of maladministration (see paragraph 8, above). These are examined below.

(a) The argument that the Council's actions were inconsistent with the conclusions of the Commission on the highly concentrated audit market

22. The Ombudsman notes that the ideas the Commission set out in the Green Paper published in October 2010, subsequently led to Commission proposals for a Regulation on the quality of audits of public-interest entities and for a Directive to enhance the single market for statutory audits, which were submitted in November 2011[4]. These proposals, which were drafted in reaction to the financial crisis, aimed to clarify the role of statutory auditors, strengthen their independence, and enhance supervision. On 3 April 2014, the European Parliament adopted in plenary session the amended Directive on Statutory Audit, and the Regulation on specific requirements regarding the statutory audit of public-interest entities, with a view to considerably improving audit quality across the EU[5]. Amongst other matters, the reform now envisages a rotation of audit firms every 10 years, though the same audit firm may audit the same company for an additional 10 years if a tender procedure is carried out, and also imposes a limit on the non-auditing services which auditors can provide to an audited client.

23. More particularly, as suggested in 2010 by the Commission's Green Paper mentioned above, the recently agreed legislative proposals reform the auditing services in the EU with a view to restoring investors' confidence and require auditors in the EU to publish audit reports according to international auditing standards. That requirement was, however, already provided for, back in 2008, by the ECB's Good Practice guidelines, and in particular, by 'Good Practice (4)'. The latter expressly requires that "the Eurosystem central banks should ensure that the selected auditors and audit firms carry out external audits in accordance with International Standards on Auditing (ISAs) and the IFAC Code of ethics". Likewise, as regards the opening up of the EU audit market to competition and improving transparency, listed companies will now be required to issue a call for tenders when selecting a new auditor. As stated above, in order to ensure that relations between the auditor and the audited company do not become too close, the reform also envisages rotating audit firms every 10 years, renewable once where a tender procedure is carried out, and also imposes a limit on the non-auditing services which auditors can provide to an audited client. These rules also correspond to what was already laid down in the Good Practice guidelines of 2008. In fact, 'Good Practice (3)' is even stricter than the proposed reform since it requires a change of auditors at a Eurosystem central bank every seven years and specifies that both the audit firm and the key audit partner should not continue to audit the same central bank for a longer period. This rotation period coincides with the maximum interval for carrying out the procurement procedure mentioned in 'Good Practice (2)'.

24. In the light of the above, there is nothing to suggest that the Council's practice of approving the recommended appointment of the Big Four to audit the accounts of the Eurosystem central banks either was in conflict with the overall spirit of the Commission's initial Green Paper on the need to reform the audit market or is now in conflict with the above-mentioned agreed legislative proposals that resulted from the Green Paper. In any event, even if one were to assume that such a conflict existed in the past, there would be no grounds for any further inquiries into this argument in light of the above-mentioned recent legislative developments which, according to the Commission's own statements, "will considerably improve audit quality across the European Union and will ensure that auditors are key contributors to economic and financial stability".

(b) The argument that the Council paid too little attention to the question of the independence of the audit firms

25. According to the complainant, the Council never really examined whether the Big Four were actually independent, and had wrongly interpreted the relevant rules to mean that the question of independence was determined solely by whether or not an auditor provided non-audit services to the audited central bank and/or was involved in the management decisions taken by the latter.

26. In that regard, the Ombudsman notes that the complainant did not call into question the Good Practice guidelines adopted by the ECB, but only argued that the Council's interpretation of them was overly permissive. The Ombudsman however finds no reason to doubt the Council's interpretation of the applicable rules. In fact, as laid down in Article 27(1) of the Protocol, it is each Eurosystem central bank that is responsible for carrying out the necessary procurement procedure for the selection of its auditors. Those auditors are expected to be independent and approved under the professional regulations of an EU Member State ('Good Practice (1)'). In that respect, the Ombudsman notes that the Good Practice guidelines are based on relevant EU legislation and most notably on Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts[6], and on Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC[7]. The fact that under the Good Practice guidelines, the Eurosystem central banks need to provide the ECB with information on the application of those guidelines in order to get a recommendation on the appointment of the chosen auditor by the Council, constitutes a further guarantee that the selection process carried out by each Eurosystem central bank was carried out in line with the applicable rules. In such circumstances, where the ECB makes a recommendation to the Council on the appointment of an external auditor that has already been selected by the central bank concerned on the basis of EU tender rules, and the appointment appears to be in line with the applicable Good Practice guidelines, unless concerns or doubts about such conformity with the guidelines have been raised before the Council, there is in reality little scope for the Council to turn down such a recommendation. In fact, it is not for the Council to carry out a second selection process, but it must decide whether there may be reasons which require it to turn down the recommendation issued by the Governing Council of the ECB.

27. As the Council stressed, in the absence of any evidence to the contrary, there is no reason to believe that the auditor, selected by the Eurosystem central bank and recommended by the Governing Council of the ECB, lacks the required independence. In that regard, the Ombudsman notes that the complainant did not submit any concrete proof or evidence to show that the selection process carried out in the past by any of the Eurosystem central banks was tainted by allegations of conflict of interest or any other allegations that could cast doubt on the independence of the selected auditor(s). As the Council pointed out, without being contradicted by the complainant, no Member State has ever raised, during the decision-making process leading to the adoption of the Council's Decision on the appointment of an external auditor, any concerns related to the lack of independence of those selected by the Eurosystem central banks and recommended by the Governing Council of the ECB. Thus, in the absence of any concrete evidence, the mere general and abstract assertion that the Big Four have too many links to too many players in the financial markets to be independent is not, as such, sufficient to justify a finding of maladministration on the part of the Council.

28. In light of the above, the Ombudsman finds no maladministration in relation to the first allegation and related claim.

Alleged failure to fully reply to the complainant's letter and related claim

Arguments presented to the Ombudsman

29. The complainant argued that the Council failed to deal properly with his letter of 8 July 2011. According to the complainant, the Council did not reply to his questions about the volume of non-audit services provided by the Big Four to the Eurosystem central banks and the fees paid for such services. In his view, the Council should also have provided him with the information he requested about the audit reports of the Greek central bank instead of referring him to the latter's website.

30. The Council considered that the fact that it did not share or agree with the views expressed by the complainant in his letter of 8 July 2011, and did not take any action against the Big Four, did not mean that it failed to deal properly with the above-mentioned letter.

31. As regards whether it had access to information on the non-audit work carried out by the Big Four, the Council stated that, as laid down in the Good Practice guidelines, firms auditing the Eurosystem central banks are not expected to provide non-audit services to those banks. As regards the audit reports of the Greek central bank, the Council stated that since it was neither the "depository nor the addressee" of any such documents, it would rely on the good efforts of the complainant to identify the precise matters of interest to him within the extensive available documentation. According to the Council, the auditor's report is included in pages 158 and 159 of the Greek central bank's annual report for 2010 (the latest one available) which was addressed to the shareholders of the bank and not to the Council. The Council also provided the complainant with the appropriate web link to the said audit report.

The Ombudsman's assessment

32. The complainant's argument that, by not taking action against the Big Four, the Council failed properly to handle his letter of 8 July 2011, cannot succeed. The fact that the Council did not agree with the complainant's views and did not consider it necessary to take action against the Big Four, as requested by the complainant, does not imply that the Council failed to handle his letter properly.

33. As regards the complainant's request to receive information about the volume of non-audit services provided by the Big Four to the Eurosystem central banks and the fees paid for such services, the Ombudsman notes that according to "Good Practice (4)", it is the Eurosystem central bank that "should verify on an annual basis that the auditor or the audit firm carrying out an external audit is independent from the audited Eurosystem central bank, in particular that it is (i) not providing any non-audit services to the audited Eurosystem central bank". Thus, in light of the clear presumption that, in order to fulfil the independence requirement, no appointed auditor of a Eurosystem central bank is expected to provide non-audit services to the audited Eurosystem central bank, the Ombudsman finds that the Council's reply to the effect that it had no access to such information and that, in any event, external auditors cannot, by definition, provide any such services, was reasonable. Given that it is for each Eurosystem central bank to verify annually that its auditors do not provide any non-audit services to it, it would have been quite disproportionate to expect the Council to gather, maintain and provide to citizens such putative information which, if it existed, would only be in the hands of each of the Eurosystem central banks concerned.

34. As regards the complainant's further request for information about which firm has audited the Greek central bank since 2002, and the conclusions of the relevant audit reports, the Ombudsman finds the reply of the Council that it is neither the depository nor the addressee of such reports to be correct. Moreover, the Council acted reasonably when it redirected the complainant to the relevant website of the Greek central bank, and in particular to the specific web page where all the requested information regarding the audit reports and findings of the auditors is stored. In fact, and in line with the EU's goal to increase the provision of cross border e-government public services, one would also expect that national central banks, given their public service missions, would also make available online all information about their activities and all documentation that is useful and relevant to EU citizens. Such initiatives not only increase information and knowledge exchange, but also provide user-friendly services, while reducing the associated costs and administrative burden for all administrative authorities concerned, including, in this case, the Council. In that regard, the Ombudsman notes that the complainant did not state that he is not in a position to access online the information to which the Council redirected him. The complainant simply argued that it was for the Council to gather and send him the information already available on the website of the Greek central bank. However, in the absence of any special needs or duly justified circumstances, citizens are expected to make use of all e-government services which are freely and easily available and accessible to them, and thus free the administrative authorities of any unnecessary burdens and associated costs.

35. Thus, the Ombudsman finds no maladministration in relation to this allegation and related claim.

Conclusion

On the basis of the inquiry into this complaint, the Ombudsman closes it with the following conclusion:

No maladministration has been found.

The complainant and the Council will be informed of this decision.

 

Emily O'Reilly

Done in Strasbourg on 22 May 2014

---

[1] https://www.ecb.europa.eu/ecb/legal/pdf/en_statute_2.pdf

[2] Green Paper Audit policy: lessons from the crisis, COM (2010) 561 final, available at: http://ec.europa.eu/internal_market/consultations/docs/2010/audit/green_paper_audit_en.pdf

[3] Good Practices for the selection and mandate of External Auditors according to Article 27.1 of the ESCB/ECB Statute of 23 October 2008. A more recent version was approved by the Governing Council of the ECB on 14 June 2012. These 'Good Practices' are based on relevant EU legislation, most notably EU Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (OJ 2004 L 134, p. 114) and Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts (OJ 2006 L 157, p. 87).

[4] http://ec.europa.eu/internal_market/auditing/reform/index_en.htm

[5] http://www.europarl.europa.eu/news/en/news-room/content/20140331IPR41179/html/Reforming-EU-audit-services-to-restore-investors%27-confidence

[6] OJ 2004 L 134, p. 114.

[7] OJ 2006 L 157, p. 87.