Reforming EU audit services to win back investors' confidence
Committee : Legal Affairs
Obliging companies to switch auditors regularly and prohibiting auditors from supplying certain non-auditing services are among the changes voted by the Legal Affairs Committee on Thursday to a draft law to open up the EU audit services market and improve audit quality and transparency.
The role of auditors has been called into question due to the financial crisis. "We need to win back the confidence of investors, who are looking for high-quality and independent auditing to give them the assurance that they need when investing in Europe's companies", said Sajjad Karim (ECR, UK), who is responsible for the audit reform package.
The committee decided by 15 votes to 10 to enter into negotiations with Council, with a view to agreeing on a common text. The S&D, Greens/EFA and GUE/NGL groups voted against. Informal talks will start as soon as possible.
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, the committee agreed that 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.
Competition and transparency
As part of a series of measures to open up the market and improve transparency, the committee backed the proposed 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 approved a mandatory rotation rule whereby an auditor may inspect a company's books for a maximum 14 years, which could be increased to 25 years if safeguards are put in place. 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. Most committee members saw the proposed general prohibition on offering non-auditing services as counterproductive for audit quality. They agreed that only non-auditing services that could jeopardise independence should be prohibited. They also approved a list of services that would be prohibited under the new law.
For instance, auditing firms would be able to continue providing certification of compliance with tax requirements, but prohibited from supplying tax advisory services which directly affect the company's financial statements and may be subject to question by national tax authorities.
Committee on Legal Affairs
In the chair: Klaus-Heiner Lehne (EPP, DE)
Procedure: codecision, first reading, vote on mandate for trialogue