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The objective of such changes should be to preserve audit quality without unnecessarily increasing costs for business through a framework that is based on globally accepted practices and standards. This will help companies in their efforts to generate jobs and growth.
The following proposals are of particular concern: mandatory audit firm rotation (Article 33(2)), composition of the Audit Committee (Article 31(1)), 10 % cap on “related financial audit services” (Article 9(2)), definition of “non-audit services” (Article 10(3)), and Audit Report (Article 22).
Mandatory audit firm rotation (Article 33(2))
Article 33(2) of the proposed Regulation forces a public interest entity to rotate its audit firm after a pre-defined period. Audit firm rotation will create challenges for audit quality and will increase costs. Mandatory rotation will also cause practical problems for multinational groups by reducing choice in the number of potential new audit firms and increasing complexity where auditor appointment in other countries is subject to different terms. These problems will be particularly acute in countries that have chosen to have a system of joint audit. Mandatory rotation is a significant intervention in the freedom of contract and the decision-making authority of the Audit Committee and/or those charged with governance. The introduction of mandatory firm rotation thus contradicts the intent of the Commission’s proposal to strengthen the competencies of the Audit Committee.
It should be for the Audit Committee and those charged with governance in a company to regularly monitor the independence of the auditor and to ensure that relevant information on their findings is provided to the shareholders.
10 per cent cap on “related financial audit services” (Article 9(2))
Article 9(2) of the draft Regulation imposes a cap, equal to 10 per cent of the statutory audit fee, on the provision of “related financial audit services” by a statutory auditor to a public interest entity.
Related financial audit services are services that are customarily provided by a statutory auditor and the type of services are not considered to endanger independence. In some cases these services are even required by law to be performed by the statutory auditor, and most of the services themselves have a specific independence requirement.
Setting a 10 per cent cap or, indeed, any cap will not only add complexity and cost to businesses but also endanger their competitiveness by potentially restricting them from commissioning services that are best provided by the auditor, for instance, reviews of interim financial statements or certain due diligence services.
It should be the responsibility of the Audit Committee, or those charged with governance, to set appropriate policies within the group regarding the purchase of audit related and other services from the statutory auditor.
Audit Report (Article 22)
Although the current audit report has shortcomings, the detailed proposals set out in Article 22 of the Regulation regarding the audit report are overly prescriptive. They represent a significant departure from the requirements of International Standards on Auditing as promulgated by the IAASB and will create unnecessary confusion and divergence at the international level.
Most of the businesses subject to the draft Regulation have operations across the globe and need to be able to attract investment on a global level. As such, a globally accepted Auditor’s Report is an important aspect to support transparency and thereby facilitate their access to loan finance or equity capital. If the EU would follow a different approach, this will undermine international convergence and promote confusion in the international marketplace.
The proposed regulation of the Audit Report should therefore be principles based, allowing for the alignment of the report with the relevant International Standards on Auditing as adopted at EU level. This will also facilitate possible future changes in the audit report without having to reopen the Regulation.