The European Parliament and the Council of the European Union
have adopted an "audit reform package" that intends to
improve audit quality and transparency and to prevent conflicts of
interest. The most important feature of the new legislation is that
it prohibits Big Four-only contractual clauses requiring that the
audit be done by one of the Big Four firms. This calls for a more
flexible approach from both auditors and companies.
With this audit reform package, European legislators aim to open
up the market beyond the dominant Big Four firms and to remedy
auditing weaknesses revealed by the financial crisis. The package
consists of a directive and a regulation.
Companies and audit firms have two years to prepare for the
changes ahead.
Public interest entities (PIEs), such as banks, insurance
companies and listed companies, will be required to issue a call
for tenders when selecting a new auditor. To ensure that relations
between the auditor and the audited company do not become too
close, the European Parliament agreed on a mandatory rotation rule
where an auditor may inspect a company's books for up to 10
years. This 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, i.e. when a firm is being audited by more than one audit
firm. The Commission had proposed mandatory rotation after six
years, but the European Parliament judged that this would be a
costly and unwelcome intervention in the audit market.
The audit reform package will require audit firms auditing PIEs 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. Furthermore, the package introduces a
cap on the fees that audit firms can earn from the provision of
permitted non-audit services to PIEs, including tax advisory
services that directly affect the company's financial
statements or services linked to the client's investment
strategy.
Both the directive and the regulation will enter into force 20
days after their publication in the Official Journal of the
European Union. The directive must be adopted by EU member states
within 2 years from that date and the regulation will be effective
2 years from that date. The restriction on fee income from
non-auditing services is to take effect within 3 years. The
Federation of European Accountants has made a set of FAQs available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
