The European Parliament has voted in favour of long-awaited new regulations to reform statutory auditing and open up the EU audit services market, including mandatory rotation of auditors after ten years and a ban on Big Four-only clauses and the provision of some non-audit services to audit clients
The draft Directive on Statutory Audit and the Regulation aims to improve audit quality and transparency and to strengthen auditor independence and prevent conflicts of interest. It will also require audit reports to be more detailed and informative, and is intended to address criticism of the role of auditors during the financial crisis.
The proposed legislation requires auditors in the EU to publish audit reports according to global standards, including International Standards on Auditing (ISAs). For auditors of public-interest entities (PIEs) , the new rules require audit firms to provide shareholders and investors with a detailed understanding of what the auditor did and an overall assurance of the accuracy of the company's accounts.
‘Big Four only’ contractual clauses are prohibited and PIEs will be required to issue a call for tenders when selecting a new auditor. Under a new ‘mandatory rotation’ rule, auditors can work for a company for up to 10 years, which may be increased by 10 additional years if new tenders are issued, and by up to 14 additional years in the case of joint audits. Proposals to legislate for six-yearly audit rotation were turned down on grounds of the costs and disruption involved.
Stephen Haddrill, CEO of the Financial Reporting Council (FRC) said: ‘The FRC is especially pleased that EU legislation will now be following the UK’s example of retendering an audit every 10 years. For the FRC, these developments are most important because they contribute towards the enhancement of quality in financial reports and audits that can engender trust within the investor community, not only in the UK, but across Europe.’
EU audit firms will be prohibited from providing several non-audit services to their clients, including tax advisory services that directly affect the company's financial statements or services linked to the client’s investment strategy. The new rules will establish a cap on the fees generated for non-audit services to PIEs.
Michel Barnier, internal market and services commissioner said: ‘Even though some of the measures adopted are not as ambitious as in the Commission’s proposals, I am very satisfied with the outcome. The spirit of the reform is intact, and it will have a major impact for the broad community of stakeholders that rely on the quality of statutory audits.’
Additional measures included in the directive strengthen audit committees, with the possibility for 5% of the shareholders of a company to initiate actions to dismiss the auditors. Cooperation between national audit oversight bodies will be strengthened at EU level through the establishment of the Committee of European Auditing Oversight Bodies (CEAOB).
Our lingering concerns centre around the patchwork of differing requirements that may develop across Europe for multinationals
Sue Almond, external affairs director at ACCA, said: ‘The long-running EU audit debate has resulted in a highly complex legislative package that will have far-reaching consequences in improving transparency and accountability. The challenge of this legislation now is a consistent application in member states. It is important for this to be done in a way that there is no gold-plating and it does not impose unnecessary burdens on business.’
David Barnes, Deloitte’s managing partner of public policy, agreed that ‘a number of the new provisions in the legislation will strengthen corporate governance and enhance the transparency of audits to investors and audit committees. It is helpful that we now have a direction of travel’.
However, he warned that: ‘Our lingering concerns centre around the patchwork of differing requirements that may develop across Europe for multinationals.’
This view was echoed by the US-based Center for Audit Quality (CAQ) which envisages conflicts over rules for multinationals operating across multiple jurisdictions.
CAQ executive director Cindy Fornelli said: ‘We are concerned that the implementation of these reforms will generate inconsistencies across jurisdictions, which could affect companies and their auditors in the United States, where the idea of mandatory firm rotation was recently considered and set aside for sound public policy reasons.
‘We hope that these new rules can be implemented with the greatest consistency possible across Europe with minimal extra-territorial impacts.’
In a statement, EY said the firm continues to have questions ‘as to the legislation's economic costs and its impact on audit quality and shareholder choice, especially in light of already existing national requirements. We hope to continue our dialogue with policymakers as each Member State moves to implement the legislation so as to assist in the development of rules that will enhance investor confidence.’
The audit package has now to be formally adopted by the Council, and legislation is likely to be published in the second quarter of 2014. Most of the provisions will take effect within two years, apart from the ban on fee income from non-auditing services which will take effect within three years.
