21st January 2014
Europe has moved another step closer to a radical shake up of the audit market, after the lead parliamentary committee on the reform, the Committee on Legal Affairs (Juri), gave the greenlight.
It is the last step before the directive and the regulation are passed on to the European Parliament for a vote in February.
The aim of the legislation is to open up the EU audit services market beyond the dominant Big Four firms and remedy auditing weaknesses revealed by the financial crisis.
“Reform of the audit market has been long overdue and the proposals that were voted through today are unprecedented. This draft piece of legislation will have positive ramifications, not just for the audit market, but for the financial sector as a whole. We are rebuilding confidence one step at a time," Juri member Sajjad Karim, a British Conservative MEP, said.
The reforms introduce mandatory auditor rotation every decade, with companies offered the option of extending the period by a further ten years if tenders are carried out, and by 14 years if the company being audited appoints more than one firm to carry out the audit.
Another feature is a range of innovative tools to limit the risk of conflict of interest. To reduce possible threats to audit independence, several non-audit services are prohibited under a strict ‘black list’, including stringent limits on tax advice and on services linked to the financial and investment strategy of the audit client.
The new rules will also introduce a cap of 70 per cent on the fees generated for non-audit services others than those prohibited based on a three-year average at the group level.
“Taken together, the agreed measures will considerably strengthen audit quality across the European Union,” commented commissioner Michel Barnier, who first proposed the reforms three years ago.
Sue Almond, technical director for the Association of Chartered Certified Accountants, said the reforms strike a balance between reinstating stakeholders' confidence and a competitive environment for businesses.
“We now hope for a smooth, final endorsement from the two co-legislators before the European elections in May. The next challenges are now in the hands of the member states, especially regarding a timely, consistent and proportionate implementation of the directive, ensuring that legislation is workable and is not subject to unnecessary gold-plating,” she added.