29 July 2013

EuropeanIssuers' position paper on the reform of statutory audit in the EU

EuropeanIssuers published their position paper on the Parliament position and on the current Council position on the reform of statutory audit. They considered the current Council negotiations and preparation for trialogue negotiations.

EuropeanIssuers' key concerns are:

Mandatory rotation of audit firms

• Mandatory rotation of audit firms would excessively constrain the selection of statutory auditors especially for large companies, deteriorate audit quality and result in lack of a regulatory level playing field;

Linkage and role of the audit committee

• Excluding that the audit committee may be a subcommittee of the administrative body would contradict well-established corporate law and corporate governance practices in Member States; EuropeanIssuers believe there is no legitimate reason to impose a specific model to all Member States;
• In a number of Members States, the audit committee has no decision-making power by itself and as such does not have the capacity to approve non-audit services (NAS) other than prohibited NAS or to validate a selection procedure. However, EuropeanIssuers acknowledge the custom of a pre-approval by the supervisory board which is in place in other Member-States. Such pre-approval processes, which are embedded in national company-law or corporate governance-structures, provide sufficient flexibility for practical usage.
• Transfer of responsibility for ensuring integrity of financial statements and for submitting recommendations regarding the financial reporting process would be counterproductive and in contradiction to the allocation of competences between the board and the management;
• Extending the current role of the audit committee to a comprehensive assessment of the audit engagement, to monitoring of the work of statutory auditor(s) or audit firm(s) and of the completeness and integrity of the draft audit reports, would interfere with the principle of independence of the statutory auditor/audit firm. In addition, the audit committee does not have the capacity of becoming an "additional auditor".

Non-audit services

• A mandatory cap on non-audit services other than prohibited services deprives companies of flexibility to act according to circumstances; moreover a ceiling, if any, should not be determined by reference to the statutory audit of the parent company only, but also to the statutory audit of the consolidated financial statements, if any;
• Prohibition of certain non-audit services that do not compromise the statutory auditor’s or audit firm’s independence should be refrained from.

Some content elements of the audit reports

• Improvement of the quality of the audit reports without extending the scope of statutory audit and making it more complex and costly. In particular EuropeanIssuers are strongly opposed to audit work that would go beyond the current international auditing standards requirements as regards internal financial control system and consideration of laws and regulation.

Effects of the proposals on small and mid-cap companies

• Lack of amendment to the Regulation ensuring that the legislation follows "Think Small First" principle, whereby EU small and mid-cap quoted companies (which EuropeanIssuers define as those under €1 billion market capitalisation) should not be subject to the legislation in the first 2 years, until a review has been carried out of the effects of the proposals on the largest companies.

Position paper

© EuropeanIssuers