Audit reforms passed in European parliament

EUROPEAN politicians today voted in favour of sweeping reforms that will force large-listed companies to tender their audit contracts once every ten years.

Under the rules, listed companies are required to change their auditors every ten years. However, a company can extend this period by a further ten years if tenders are carried out, and by 14 years if the company appoints more than one firm to carry out the audit.

There reforms also impose a 70% cap on the fees generated by firms for non-audit work, while certain non-audit services, such as tax advice and services linked to financial and investment strategy have been banned altogether.

The black-list of prohibited services, which proved one of the most contentious issues among member states, is designed to limit conflicts of interest in instances where auditors are involved in decisions impacting the way companies are managed.

The reforms fall short of the ambitious measures originally proposed by the European Commission in November 2011. Nevertheless, Michel Barnier, internal market and services commissioner and a key architect of the reforms, said he was “very satisfied” with the outcome.

“With this vote, we have taken another important step towards re-establishing investor confidence in financial information, an essential ingredient for investment and economic growth in Europe,” Barnier said.

The EU rules follow similar moves taken by UK regulators, which imposed mandatory audit tendering among FTSE 350 companies last year. In October 2013, the Competition Commissioned introduced mandatory requirements for companies to tender every ten years, with those that tender less frequently than five years required to report in which financial year they plan to put the audit engagement out to tender.

The competition watchdog rules, build on ten-year ‘comply or explain’ measures implemented by the FRC in 2012. Stephen Haddrill, chief executive of the FRC, welcomed the European leigislation as “following the UK’s example”.

“For the FRC, these developments are most important because they contribute towards the enhancement of quality in financial reports and audits that can engender trust within the investor community, not only in the UK, but across Europe,” he said. 

Other members of the profession supported the changes in general, though David Barnes, Deloitte’s managing partner of public policy, said the firm has “lingering concerns…around the patchwork of differing requirements that may develop across Europe for multinationals”.

Following today’s vote in plenary, the audit package must be formally adopted by the Council. The publication of the new rules in the Official Journal of the European Union is expected in the second quarter of 2014.