EUROPE - A group of long-term investors including several pension fund directors has criticised the "watering down" of legislation to reform auditing in the European Union.

The group is coordinated by the UK's Universities Superannuation Scheme and also includes the European Federation of Financial Service Users.

Signatories to the main declaration also include RPMI Railpen, LGIM, the London Pensions Fund Authority, the Local Authority Pension Fund Forum, the Environment Agency Active Pension Fund, Cooperative Asset Management, Governance for Owners, Sweden's AP funds, the Ethos Foundation, Proxinvest and the PanSlovenian Shareholders' Association.

The group, which represents more than €700bn on behalf of members and investors, sets out in a common declaration its own suggestions for a series of rules to control auditing standards. 

The declaration highlights a number of "worrying features" of the European audit market, particularly with respect to auditor independence and "professional scepticism". 

It points out the "failure" of auditors to "provide adequate warnings prior to the collapse of a number of banks and insurance firms prior to the financial crisis".

Signatories to the declaration also complain that shareholders have "minimal insight" into the audit process.

"Too often," it says, "we are told little about why auditors are selected or kept on."

It also argues that key discussions between the auditor, company executives and the audit committee - "who are expected to represent shareholder interests" - over critical assumptions and risks are "rarely disclosed".

This means neither auditors nor audit committees are fully accountable to shareholders, it says.

In November 2010, the European Commission proposed revising its 2006 Statutory Audit Directive with a new directive and regulation.

Elements of the Commission's original proposal had been similar to those of the declaration and included steps to encourage the development of second-tier audit firms to prevent a handful of firms from dominating the market.

In July, however, when the Commission's reform plans were passed to the European Parliament's Legal Affairs committee, the rapporteur, MEP Saj Karim, warned against a "heavy-handed" approach to reform.

At the time, critics accused him of watering down the legislation and favouring lobbies from the Big Four accounting firms.

Karim is expected to unveil his draft report today; the deadline for amendments from committee MEPs is 9 October.

Input from the Economic and Monetary Affairs Committee is expected in November, and conclusion in the Parliament is scheduled for the end of this year.