Strict new EU audit rules

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MEPs in the EU have agreed a proposals to reform the audit market which will see mandatory rotation at 20 years and a 70% cap on non-audit fees with non-audit services such as tax advice and services linked to the financial and investment strategy of the audit client – strictly limited report Harris & Co accountants Northampton, who are statutory auditors to many small and medium sized companies

The measures published today - after MEPs failed to reach a workable solution overnight - are subject to formal approval through a vote later this week when member states meet in the Committee of Permanent Representatives (COREPER).

The main points of dissent – which included the so-called "10 plus 10" mandatory rotation period, prohibition of non-audit services (NAS)under a strict ‘black list’ and capping of non-audit services provided by a company’s external auditor – have now been agreed by MEPs.

With mandatory rotation, audit firms will have to rotate after 10 years. However, the period can be extended by 10 years to maximum 20 years if tenders are carried out. For joint audits, this can be extended to 24 years.

Audit firms will be prohibited from providing NAS to their audit clients through a strict ‘black list’ which would include limits on tax advice and strategy advice. According to the internal markets commissioner, Michel Barnier, this aims to limit risk of conflicts of interest, when auditors are involved in decisions impacting the management of a company. This will also substantially limit the "self-review" risks for auditors.

In addition, the new rules introduce a cap of 70% on the fees generated for non-audit services based on a three-year average at the group level, to further reduce the risks of conflicts of interest.

The regime places more focus on the needs of investors, with requirements for more detailed and informative audit reports highlighting information relevant to investors.

In addition, a more empowering measure could give shareholders the right to initiate action to dismiss auditors – if at least 5% believe it is appropriate to do so.

The MEPs also announced measures to widen the offering of auditors to companies – the key measure being the prohibition of ‘Big Four’ only clauses in audit contracts – understood to often be used by multinational companies, large financial institutions and banks, but which has the adverse impact of restricting auditors outside the Big Four from contracting to such companies.

The rules are expected to level the playing field through enhanced cross-border mobility and the harmonisation of International Standards on Auditing (ISAs), as well as improving cooperation between national supervisors, with a specific role devoted to the European Markets and Securities Authority (ESMA) with regard to international cooperation on audit oversight.

Speaking after agreement was reached, lead negotiator Sajjad Karim said:

‘The key objective of the European Parliament to improve audit quality and audit reporting was secured in the proposed package and the strong involvement of the audit committee throughout the process, in particular for non-audit services was guaranteed.’

‘On the controversial issue of rotation a 20-year timespan was agreed, which is a workable compromise and a considerable improvement on the Commission"s original proposal.’

‘The European Parliament is optimistic that the proposal can be approved by a majority of Member States and MEPs, considering it is a balanced compromise that will go a long way towards restoring confidence in the audit market.’

Barnier said that while the plans were less ambitious than initially proposed by the Commission. He said: ‘It is now high time for auditors to meet the challenges of their role – a societal role. I trust that once final details are reflected in the text and formally endorsed by the College, co-legislators will also approve the text in coming weeks.’

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