18 January 2016

FEE: The impact of the audit reform on audit committees in Europe

FEE briefing paper highlights the developing role of the audit committees in Europe and provides an overview of the related changes to corporate governance best practice. The paper also provides for a number of FEE recommendations.

In April 2014 the European Parliament and the Council of Ministers reached an agreement on the EC’s proposals for a reform of the EU statutory audit (the so called audit reform). Provisions regarding the audit committee are set out both in the Directive 2014/56/EU2 (the Directive) and the Regulation 537/20143 (the Regulation).

The latest EU audit reform has expanded the audit committee’s role substantially. The new role for the audit committee is instrumental in strengthening confidence in auditors and in financial information overall. While still being a subcommittee of the board, the audit committee is more accountable with provisions reinforcing its role in the evaluation of internal controls, internal audit and risk management functions. It is important to work towards consistent functioning of audit committee practices across Europe. The legislative text allows for divergent approaches to Member States’ implementation. Although it is necessary to provide Member States with flexibility and allow them to come up with tailor-made solutions, businesses should not encounter additional administrative burdens because of different national legal frameworks. A high level of coordination amongst all stakeholders will facilitate achieving the desired outcomes for auditing across Europe.

FEE agrees that the audit committee is best placed to be responsible for the auditor selection process. The audit committee should ensure that the selection criteria are fit for purpose.

FEE recommends that the procedure for selecting the auditor remain principles-based. This will accommodate flexibility for businesses and avoid possible divergences in interpretation of the Regulation at cross border level. FEE welcomes the Regulation’s requirements for further transparency and reporting on the selection procedure towards and from the audit committee. Increased transparency in the auditor selection is a means to safeguard quality in the process.

Stringent provisions are now part of the legislation which limits the non-audit services provided by the statutory auditor. The audit committee is tasked with approving the services to be provided in light of this legislation. The legislation states that the provision of non-audit services requires the approval of the audit committee after it has properly assessed any threat to the auditor’s independence. This seems to suggest that prior approval by the audit committee of each instance is called for. FEE considers a sense of proportion should be applied. It would be reasonable for management to approve minimal instances of non-audit services, in accordance with prior principles and procedures adopted by the audit committee. 

Full briefing paper

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