Companies may have to prepare themselves to retender their external audits every seven years if proposals - voted on by politicians at the European Parliament's Economics and Monetary Affairs Committee (ECON) - make it into the rule books.
In Strasbourg last night, ECON committee members voted on the reforms - part of the wider effort to improve the audit market in the EU - just a week after the UK's own Competition Commission (CC) made provisional findings suggesting mandatory auditor rotation.
The controversial proposals also take matters further than the guidance in the Financial Reporting Council's Corporate Governance Code, which expects FTSE 350 companies to put their external audit contract out to tender once every 10 years.
The Competition Commission's (CC's) provisional report into the FTSE 350 audit market found that restrictions on competition made it difficult for companies to switch auditors. It also says auditors are failing to serve shareholders because of a focus on management needs.
The CC stated that because companies find it difficult to compare alternatives with their existing auditor, prefer continuity and face significant costs in switching, they are reluctant to change auditor and so lack bargaining power.
The CC provisionally recommended improving this through mandatory tendering and rotation; increasing information and transparency with more frequent reviews and extended reporting requirements; and strengthening accountability and independence by giving audit committees and shareholders greater control of external audit.
Speaking after the ECON vote, the committee's lead member on the reforms, European Conservatives and Reformists group economics spokesman Kay Swinburne MEP said the vote is a 'proportionate response to calls for improvements in the audit of European companies which encourages increased shareholder engagement in how companies are governed, without unnecessary increases in costs for businesses'.
'The committee's decision to propose that the regulation is transformed into a directive so more discretion can be shown by member states in how they apply these new rules, allowing for differences in cultures of regulation and supervision as well as more evolution of the specific requirements over time is particularly welcome.
'The financial crisis has shown that governance structures within financial companies needed to be improved. This report further empowers the audit committee to really question decisions that boards make with regards to their financial statements, as well as how audit firms are appointed for both the statutory audit and in areas of non-audit services via formal tendering procedures,' said Swinburne.
