17 December 2013

Bloomberg: Banks face 24-year auditor limit as EU seals rotation deal

EU negotiators brokered a draft agreement that requires companies to change accounting every 10 years, with a one-off right to an extension as long as 14 years if they carry out a tender process. Industry groups are concerned that the rule could affect non-EU banks with operations in Europe.

One of the main goals for the new rules is to limit conflicts of interest, Barnier said. Auditors will face restrictions in offering ancillary services to companies whose accounts they oversee, including “stringent limits on tax advice and on services linked to the financial and investment strategy of the audit client", he said.

The draft deal also includes a cap on additional services - preventing auditors from making extra money from a client that goes beyond 70 per cent of their audit fee. For the purposes of the calculation, the amount would be averaged out over three years.

“We are pleased that the decision-makers have managed to come to an agreement, as there is now hope for all the required follow-up work to be completed before, rather than be stalled by, the EU elections next year”, Michael Izza, chief executive officer of the Institute of Chartered Accountants in England and Wales, said in an e-mailed statement.

Banks have warned that the rotation rules may also capture lenders based outside the EU, depending on how the final accord is drafted. “A rotation requirement considered applicable to branches could mean that it is extended to the non-EU parent banks themselves since they and their branches constitute a single legal entity”, the Association for Financial Markets in Europe said in a letter to Rapporteur Sajjad Karim dated December 13.

Large “multinational financial groups often rely on a single worldwide auditor and this restricts the choice of firms that are able to deliver quality services at global level”, said the group, which represents lenders including Goldman Sachs Group Inc, Deutsche Bank AG, and JPMorgan Chase & Co.

These concerns “still remain", Pablo Portugal, a director at AFME, said in an e-mail. “We urge policymakers to give careful consideration to this extra-territorial reach.”

The rotation periods are far longer than those in Barnier’s original proposal, which called for firms to rotate the accounting firm they use every six years. The rotation period could have been extended to nine years if a company uses more than one auditor. The accord is “a considerable improvement on the Commission’s original proposal”, said Karim in an e-mail. “The European Parliament is optimistic that the proposal can be approved by a majority of Member States and MEPs, considering it a balanced compromise”, he added.

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