The draft also aims to improve audit quality and transparency and prevent conflicts of interest.
The role of auditors has been called into question due to the financial crisis. "Reform of the audit market is long overdue and the proposals that were voted through today are unprecedented. This draft legislation will have positive ramifications, not just for the audit market, but for the financial sector as a whole. We are rebuilding confidence, one step at a time", said Sajjad Karim (ECR, UK), who is responsible for the audit reform package. The committee approved the deal by 13 votes to 8, with one abstention.
Better quality auditing
The law would require auditors in the EU to publish audit reports according to international auditing standards. For auditors of public-interest entities (PIEs), such as banks, insurance companies and listed companies, the agreed text would require audit firms to provide shareholders and investors with a detailed understanding of what the auditor did and an overall assurance of the accuracy of the company's accounts.
Opening up the EU audit market to competition and improving transparency
As one in a series of measures to open up the market and improve transparency, the agreed text would prohibit "Big 4-only" contractual clauses requiring that the audit be done by one of these firms.
PIEs would be obliged to issue a call for tenders when selecting a new auditor. To ensure that relations between the auditor and the audited company do not become too cosy, MEPs agreed on a “mandatory rotation” rule whereby an auditor can inspect a company's books for a maximum 10 years, which may be increased to 10 additional years if new tenders are carried out, and by up to 14 additional years in the case of joint audits, i.e. when a firm is being audited by more than one audit firm. The Commission had proposed mandatory rotation after six years, but a majority in committee judged that this would be a costly and unwelcome intervention in the audit market.
Independence of non-auditing services
To preclude conflicts of interest and threats to independence, EU audit firms would be required to abide by rules mirroring those in effect internationally. Moreover EU audit firms would generally be prohibited from providing non-audit services to their clients, including tax advisory services which directly affect the company's financial statements.
The deal will be put to a vote by Parliament as a whole, probably in April.
S&D response: Right-wing sabotages European audit reform – no lessons learnt from Enron and Parmalat
The European liberals and conservatives were strongly criticised today in Brussels for pushing forward a harmful draft reform of the audit sector which may open the door to potential new abuses like the Enron or Parmalat scandals.
As these scandals have demonstrated, auditing firms who work for a company for many years tend to get too close to their clients. Despite the evidence, the European conservative and liberal groups have backed a proposal to allow companies to engage the same auditor for up to twenty consecutive years (24 in the case of a joint-audit), in opposition to the seven-year maximum proposed by the S&D Group.
Moreover, audit firms will be also allowed to provide a wide range of non-audit services – such as providing financial information, business optimisation and cash management – which could lead to serious conflicts of interest.
The fees generated for non-audit services could amount up to 70 per cent of total revenues, potentially making auditing a marginal activity rather than their core business.
Antonio Masip MEP, S&D spokesperson on audit reform, said: "The agreement goes against the spirit of the EU Commission's original proposals for introducing more transparent rules and a better separation of auditing and advisory services. It ignores necessary reforms to promote joint audits and relies on companies' audit committees to define the blacklist of non-audit services."
German Green MEP Sven Giegold, who sits on the economics committee, where his group tried to push for more scrutiny and for shorter contracting periods, did not hide his disappointment at the deal, which is likely to be adopted by the European Parliament in April. "The audit file is a strong wind for the financial lobby here in Brussels. Honestly I don't expect any resistance before the plenary", he told EUobserver.
He said the proposal was weak to begin with, and has gradually become even weaker. "The Big Four will continue to dominate the market. After this failure to regulate it, it is up to the Commission's directorate general for competition to act on this oligopoly. So the battlefield moves to [EU competition commissioner] Almunia", he said.
Further reporting © EUobserver
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