Proposals to reform the European audit market, drafted by Conservative MEP Sajjad Karim, were today approved by MEPs of the EU legal affairs committee.
Karim's draft report adopted by the committee now reflects its position and recommendations to parliament. While this is not yet law - as this must now be further voted on by the entire European parliament - it is a big step towards legislating measures such as mandatory rotation in which the committee proposed forcing companies to change their auditor every 14 years (although this may be extended to 25 years by individual member states).
The committee decided by 15 votes to 10 to enter into negotiations with Council. Socialist group S&D, Greens/EFA and GUE/NGL voted against. Informal talks will start as soon as possible.
The next steps in the process involve the issue moving onto the agenda for parliament's plenary sessions either at the end of this year or early in 2014.
Sources close to the process say that this vote is significant and probably indicates that MEPs will probably also vote the measures through since the composition of the legal committee reflects the European parliament.
The report is in keeping with the UK's own markets watchdog, the Competition Commission, which last month recommended mandatory tendering of the audit contract and mandatory rotation of the external auditor in its provisional recommendations.
The CC's preliminary findings showed that the audit market was not sufficiently competitive, with the Big Four maintaining a tight grip. Auditors also seemed to serve the needs of management, the CC said, as opposed to the owners of companies, for whom the audit is actually conducted.
Karim's priority at an EU level was to improve the quality of reports and to encourage innovation by audit firms, in response to investors' desires for more useful insights into the way Europe's largest companies work.
A major element of the reforms seeks to promote the role of the audit committee, which will act as an effective gatekeeper ensuring that management's judgments are appropriately investigated and the auditor's work remains up to scratch. The report also deals with the question of independence.
Together with individual member states' measures - such as the UK's Financial Reporting Council's Corporate Governance Code, which encourages greater transparency around the appointment of auditors, companies can be encouraged to adopt a more open and objective culture when audit committees review output and make appointments.
Speaking after the vote, Karim said that reforming the audit sector is crucial to boost confidence in the financial markets, and to support growth and investment in European companies.
'We have consistently advocated an international approach, adopting global standards which promote audit quality. It is no surprise that regulators in the US and around the world are watching us closely and the vote signals loud and clear that we are taking the right steps,' said Karim.
Earlier, Karim watered down the EC plan to force rotation on a six-year basis, pushing instead for a long back-stop period of 25 years.
'I'm very happy that my colleagues have supported my original concept, which is designed to promote serious consideration by audit committees of their auditor and the quality of the service provided,' said Karim.
The text sets out clear rules in the area of non-audit services, aimed at protecting independence and prohibiting services which risk conflict of interest.
