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October 10, 2013

Europe pushes ahead with mandatory rotation as UK in anticipation of CC final report

This week saw the European Council under the Lithuanian presidency propose 10 year mandatory audit firm rotation (with some option to extend to 20 years) for EU companies in their version of the audit reform document.

The move signals all three bodies – the European Commission, European Parliament and the Council – are now in agreement that mandatory rotation is the right solution for the European statutory audit market.

It also means the debate can now, after three years, move to its final stage, the trialogue.

The trialogue meetings are to start at the end of the month with internal market and services commissioner Michel Barnier representing the European Commission, Legal Affairs Committee (Juri) rapporteur Sajjad Karim representing the EU Parliament and the Lithuanian Presidency representing the Council.

Grant Thornton International director Nick Jeffrey said the trialogue process is likely to be formed of several official and unofficial meetings and a final legal text is possible by the end of the year.

However, if no agreement is reached by the end of February 2014 the reform could come to a standstill due to the European parliamentary election in May.

Rotation vs. retendering
The Association of Chartered Certified Accountants (ACCA) technical director Sue Almond said the Council’s stand is a clear sign that mandatory audit firm rotation is likely to be implemented in the EU.

The time frame for the duration of rotation still needs to be agreed (see table).

In the case of the UK where the Competition Commission (CC) is to release its final report on the UK audit market concentration levels on Tuesday 15 October likely to suggest mandatory retendering, but no rotation, there are fears the two might be in contradiction.

While the CC’s investigation was competition based its comprehensive set of evidence was often referred to in the European debate.

The combination of CC’s remedies and EU regulation could also mean that the UK is to see both remedies implemented. For example retendering every five years as currently suggested by the CC with the maximum tendering limit under EU law at 10 years.

As often stated by industry experts remedies such as retendering and rotation would address some stakeholder concerns about long tenure and possibly signal a breath of new opportunities for the mid-tier while the Big Four argue it would harm audit quality and raise cost.

Restriction on non-audit services
While the EU Parliament suggested in their document no additional restrictions are made on firms offering non-audit services to audit clients, the European Council and European Commission disagree, which is likely to make this provision one of the main political issues during trialogue discussions.

This week the Council suggested fees from advisory services apart from the ones on a "black list" are to be limited to no more than 70% of the average of the fees paid in the last three consecutive financial years by the audited entity for the statutory audit.

Almond highlights there has been little information on what the Council perceives as the "black list" and she expects that to be a key topic of discussion during trialogue meetings.

According to Jeffrey the 70% limit could mean that about 20% of audit committees might have to think more carefully about the company’s suppliers of non-audit services.

IAB contacted all of the Big Four firms in the UK and asked what this would provision mean for their business, however they declined to comment or did not respond by the time this article was published.

 

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