View all newsletters
Receive our newsletter – data, insights and analysis delivered to you
  1. News
October 7, 2013

Mandatory audit firm rotation likely to hit EU companies

The European Council has confirmed to International Accounting Bulletin that its Committee of Permanent Representatives (COREPER I) has decided to put forward a proposal for 10 year mandatory audit firm rotation for European companies and 15 year mandatory rotation for statutory audit of credit institutions and insurance undertakings in case of public tendering.

The Council’s point of view appears to be in line with the one of the EU Parliament, which put forward a proposal for 14 year mandatory rotation earlier this year.

The EU Council, Parliament and Commission, which initiated this reform with a raft of market changing proposals, are to now start trialogue discussions and agree on a final regulation or directive document.

The Council also put forward a fee cap for advisory services being offered to an audit client.

"When the statutory auditor or audit firm provides to the audited entity for a period of three or more consecutive financial years, services other than included in the "black list", the fees for such services shall 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," the Council spokesperson told International Accounting Bulletin.

The Council says that services on the "black list" are services which could affect the opening and closing balances of the audited financial statements, the management or decision-making process and the processes of financial information generation.

The Council also decided against the European Securities and Market Authority (ESMA) being the oversight body for the profession and said cooperation through the Committee of European Auditing Oversight Bodies (CEAOB) should be applied.

Industry response
Grant Thornton International director Nick Jeffrey told IAB It is good that the process is now moving forward – "it is five years since the financial crisis, and it will be another three years before the law becomes effective – investors deserve a robust and speedy resolution".

"Given the time that has already elapsed the new law should have an impact when it comes into effect – but Council position would mean that the first companies would not have to change auditor for at least seven years after the law comes into effect. Investors will be hoping that the outcome from trialogue is that the law takes effect quicker than that."

Jeffrey also said it is "unfortunate that the intended improvements in reporting by the audit committee and auditor to shareholders, and by the auditor to regulators have not received due credit".

The Association of Chartered Certified Accountants (ACCA) technical director Sue Almond told International Accounting Bulletin that this is a clear sign that mandatory audit firm rotation is likely to be implemented in the EU. "The only question is over the maximum length of the audit engagement."

Commenting on the Council’s decision Institute of Chartered Accountants in England and Wales (ICAEW) chief executive Michael Izza said: "The agreement by member states to give the Lithuanian presidency mandate to start trilogue negotiations with the European Parliament and Commission is another key step towards a final conclusion in the audit debate that has now been rolling since the European Commission published its green paper on audit policy in 2010.

"We are eager to get certainty around the future audit regulation and directive. There are still some differing views but we are hopeful that a conclusion can be reached by the end of the Lithuanian presidency."

The Federation of European Accountants chief executive Olivier Boutellis-Taft said:

"At this point, the Council’s Common Position is not yet public and known in detail but it is understood to be quite removed from the EP’s position that resulted from an extensive and reasonably well informed democratic debate.

"All parties should now work together to find solutions that promote the supply of high quality audit services, are practicable in the real world, compatible with international standards and limiting administrative burdens on companies and firms that would have to cope with multiple standards.

"There is a clear public interest to facilitate the development of a vibrant audit market and support an independent and sustainable audit profession."

Related articles
European audit reform trialogue gets go ahead

NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. A roundup of the latest news and analysis, sent every Wednesday.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU

Thank you for subscribing to International Accounting Bulletin