The latest European Parliamentary Committee to vote on audit changes has rejected proposals for mandatory rotation, a cap on non-audit services and audit-only firms

The influential Economic and Monetary Affairs Committee decided instead that it would go for mandatory tendering every seven years.

It adopted a compromise agreement that the company’s audit committee would need to assess the audit quality of firms tendering and make recommendations, providing a choice of at least two firms and setting out a justified preference for one of them.

There will not be any minimum or maximum duration for the audit engagement although renewal will be subject to approval of an audit committee recommendation at the company’s agm.

The committee also refused to countenance the reintroduction of joint audits for large public interest entities (PIEs).

"This is a proportionate response to calls for improvements in the audit of European companies which encourages increased shareholder engagement in how companies are governed, without unnecessary increases in costs for businesses," Kay Swinburne MEP, the committee’s lead member on the reforms, said.

The committee also rejected the proposed cap on non-audit services (NAS) and removed references to related financial audit services. However, it did go for a list of banned NAS in line with the International Ethics Standards Board for Accountants’ code of ethics.

This basically states that new developments in business, the evolution of financial markets and changes in IT make it impossible to draw up an all-inclusive list NAS. Instead it requires firms before accepting an NAS engagement to determine whether providing such a service would create a threat to independence. "If a threat is created that cannot be reduced to an acceptable level by the application of safeguards," it adds, "the non-assurance service shall not be provided."

Audit committees will be responsible for deciding on the provision of NAS but the process will need to be open and transparent.

If the committee has its way, the audit changes will be included in a directive rather than a regulation as previously proposed. Swinburne particularly welcomed this decision because it will allow member states to use more discretion in how they apply the new rules, "allowing for differences in cultures of regulation and supervision as well as more evolution of the specific requirements over time.

"The financial crisis has shown that governance structures within financial companies needed to be improved," she added. "This report further empowers the audit committee to really question decisions that boards make with regards to their financial statements, as well as how audit firms are appointed for both the statutory audit and in areas of non-audit services via formal tendering procedures."

The parliamentary legal affairs committee (JURI) will vote on its proposals for audit change at the end of this month.

Julia Irvine

This article first appeared in Economia