The move to reform book-keeping practices came three years after auditors were widely criticised for giving banks a clean bill of health just before they needed taxpayer bailouts in the financial crisis.
The changes seek to stop auditors becoming too cosy with clients, make them challenge what they are told and inject more competition into the market.
“This is a first step towards increasing audit quality and re-establishing investor confidence in financial information, an essential ingredient for investment and economic growth in Europe,” said Internal Markets Commissioner Michel Barnier, greeting the news.
Long debate over rotation
In one of the most strongly contested provisions, listed companies will be required to rotate after an engagement period of 10 years. This term can be extended by a further 10 years following a tender, and by up to 14 years where companies are audited by more than one firm.
Auditors will be strictly prohibited from providing non-audit services to their audit clients, including limits on tax advice and advice on the financial and investment strategy of their clients, in an attempt to ensure their relationship remains at arm’s length.
The reform also bans clauses in bank loans to companies that stipulate their accounts must be audited by one of the so-called "Big Four" (Deloitte, PwC, Ernst & Young and KPMG). Auditors would also have to give an overall assurance over the accuracy of company accounts.
The European Parliament’s legal affairs committee originally wanted to allow companies to keep the same accountant for up to 25 years, significantly diluting the Commission’s original proposals calling for a switch every six years.
The six-year proposal ran into a barrage of criticism from companies and investors claiming that such a provision would cost companies in time and manpower involved in the re-tendering process.
Coordination of supervision of auditors at EU level
“Despite the extension of the rotation period, this principle will have a major impact in reducing excessive familiarity between the auditors and their clients and in enhancing professional scepticism,” said Internal Markets Commissioner Michel Barnier.
The new rules will also cap at 70% of total billing the fees firms are permitted to generate for non-audit services.
Cooperation between national supervisors will be enhanced at EU level, with a specific role devoted to the European Markets and Securities Authority (ESMA) with regard to international cooperation on audit oversight.
The political agreement still requires some technical finalisation and formal approval by the co-legislators.