EU Parliament approves audit reform proposals

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03 Apr, 2014

Members of the European Parliament have today approved the framework for EU audit reform in a plenary vote in Brussels.

The new rules will be in the form of a Directive amending the Statutory Audit Directive (Directive 2006/43/EC) (link to Europa website) and a Regulation on specific requirements regarding the statutory audit of public-interest entities (PIEs).  

In December 2013 a preliminary agreement between the Lithuanian EU Council Presidency and the European Parliament on the framework for EU audit reform was reached.  This framework was subsequently endorsed by the Legal Affairs Committee (JURI) of the European Parliament in January 2014

Under the new rules, the societal role of auditors will be clarified, with the aim of increasing audit quality, transparency and audit supervision.  The new rules will require that “audit reports be more detailed and informative” and their work will be more closely monitored with “strengthened audit committees”.

Mandatory rotation of auditors for PIEs will be introduced, requiring such companies to retender at 10 years and change the auditor at least every 20 years. The reforms include a prohibition on the provision of certain non-audit services to PIE audit clients (including tax advice and services linked to the financial and investment strategy of the audit client) and also introduce a cap on the fees that can be earned from the provision of permitted non-audit services to PIEs.

Additionally the rules prohibit the use of restrictive clauses in contracts which limit a company’s choice of auditor “in order to promote market diversity”.

The vote has been welcomed within the profession including the Financial Reporting Council (FRC) and the Association of Chartered Certified Accountants (ACCA).  The FRC comment:

The Financial Reporting Council welcomes the positive vote today by the European Parliament in favour of the EU audit reform. We commend the work of the EU institutions in working together, compromising where necessary; to ensure that the EU retains a high quality and competitive audit market.  The FRC is especially pleased that EU legislation will now be following the UK’s example of retendering an audit every 10 years. 

The package of measures must still be formally adopted by the Council of Ministers.  Subject to this formal approval, it is expected that the new rules will be published in the Official Journal of the European Union in the second quarter of 2014.  Both the Directive and the Regulation will enter into force 20 days after their publication into the Official Journal.  The Directive must be adopted by EU member states within 2 years of that date and the Regulation is effective 2 years from that date.  The restriction on fee income from non-auditing services is to take effect within 3 years.

The Competition Commission (now taken over by the Competition and Markets Authority (CMA)), which has been delaying the release of their package of remedies to increase competition within the provision of statutory audit services to FTSE 350 companies in the UK is now likely to review their package in light of the EU announcement in order to consider the implications of the EU rules on their Orders which bring their measures into law.

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