Out-Law News 2 min. read

EU member states agree "compromise" on audit market reform


EU member states have agreed to the introduction of more stringent rules governing the audit market, intended to increase competition in the sector and strengthen auditors' independence.

The "compromise" text tones down the European Commission's original proposals, first put forward in 2011, which would have required companies to appoint new auditors after a maximum engagement period of six years. Under the agreed text, banks and listed companies would instead be able to retain an audit firm for up to 20 years, or 24 if joint auditors are appointed.

"Under the compromise text, the member states agreed to introduce more stringent rules for the auditors and audit firms that are aimed in particular at strengthening the independence of auditors of public interest entities (PIEs) as well as at assuring greater diversity into the current highly-concentrated audit market," said Rimantas Šadžius, Finance Minister of Lithuania, which currently holds the EU Presidency.

"I believe that the agreed audit reform package should enhance the quality of statutory audits in the EU and will help to strengthen confidence in audited financial statements, in particular those of banks, insurers and listed companies," he said.

The final text must now be formally approved by the European Parliament and member states.

Under the proposals, listed companies would be required to change their auditors every ten years, although they would be able to retain the same firm for a further ten years if they put their audit requirements out to tender. Joint auditors could be retained for a maximum of 24 years.

A 70% cap would also be introduced on the fees an auditor can earn for non-audit services provided to an audit client, although certain non-audit services including tax advice and services linked to financial and investment strategy would be banned altogether unless "immaterial". Supervision of the audit market would also be enhanced at EU level, with enhanced cooperation between national regulators and a specific role given to the European Markets and Securities Authority (ESMA).

The proposed new rules have been significantly watered down from those originally proposed by the European Commission in November 2011, which would have set a maximum engagement period of six years with a four-year break before a firm could appoint the same auditor again. The Commission had also proposed a full prohibition on auditors providing non-audit services to their audit clients, and the 'ring-fencing' of audit from non-audit activities in the case of larger firms.

"Although less ambitious than initially proposed by the Commission, landmark measures to strengthen the independence of auditors have been endorsed, particularly in the auditing of financial institutions and listed companies," said Michel Barnier, Internal Market Commissioner, who originally put forward the reform proposal. "This will ensure that auditors will be key contributors to economic and financial stability."

The UK's Competition Commission decided not to go ahead with mandatory auditor rotation following its own investigation of statutory audit services earlier this year. Instead, it has proposed the introduction of a requirement that companies listed on the FTSE 350 put their statutory audit engagement out to tender at least every 10 years.

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