Reforming EU audit services to restore investors' confidence

21-Jan-2014 @ 11:0

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Anthea McIntyre Anthea McIntyre

Anthea McIntyre Anthea McIntyre

A draft agreement between the European Parliament and EU Council on legislation to open up the EU audit services market beyond the dominant "Big Four" firms and remedy auditing weaknesses revealed by the financial crisis was endorsed by the Legal Affairs Committee today (Tuesday). The draft also aims to improve audit quality and transparency and prevent conflicts of interest.

The role of auditors has been called into question since the financial crisis.

Conservative MEP Sajjad Karim, who is responsible for the audit reform package, said: "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.”

The approved agreement achieves:

* Better quality –

The law would require auditors in the EU to publish audit reports according to international auditing standards. For auditors of public-interest entities (PIEs), such as banks, insurance companies and listed companies, audit firms would have 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.

*Opening up the EU audit market to competition and improving transparency -

As part of a series of measures to open up the market and improve transparency, the agreed text introduces a prohibition of "Big 4-only" contractual clauses requiring that the audit be done by one of these firms.

PIEs would be obliged 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 cosy, MEPs agreed on a mandatory rotation rule whereby an auditor can inspect a company's books for a maximum 10 years, which may be increased to 10 additional years if new tenders are carried out, and by up to 14 additional years in case of joint audits, when a firm is being audited by more than one audit firm. The Commission had proposed 6 years, but a majority in committee judged that this would be a costly and unwelcome intervention in the audit market.

*Independence of non-auditing services -

To preclude conflicts of interest and threats to independence, EU audit firms would be required to abide by rules mirroring those in effect internationally. Moreover EU audit firms will be generally prohibited from providing non-audit services to their clients, including tax advisory services which directly affect the company's financial statements.

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