A rule stipulating that banks and other large institutions must use joint audits – strongly opposed by the larger audit firms – was scrapped in the draft regulation published yesterday (30 November).
It nevertheless contains measures which, if implemented, would radically affect the sector, including:
Mandatory rotation of audit firms after a maximum engagement period of six years, with limited exceptions;
Mandatory tendering for auditing contracts;
Stricter rules for oversight and appointment of auditors by auditing committees;
A prohibition on audit firms providing non-audit services to their audit clients;
A requirement that larger audit firms split off their non-audit services; and
Compliance with the International Standards on Auditing by all statutory auditors and audit firms.
The Commission is also proposing to create a single market for statutory audit services allowing auditors to exercise their profession freely and easily across Europe, once licensed in one member state, by amending the 2006 auditing directive.
Internal Market and Services Commissioner Michel Barnier said the measures were necessary to counter shaky investor confidence in audits highlighted by the financial crisis.
Rule would require change in five years
“[These] proposals address the current weaknesses in the EU audit market, by eliminating conflicts of interest, ensuring independence and robust supervision and by facilitating more diversity in what is an overly concentrated market, especially at the top-end,” Barnier said.
EU officials stressed that the regulation, if adopted according to schedule, would require the audit companies' compliance within a maximum of five years, accounting for a phase-in period of two years included within the regulation.
“We are under no illusion that there are plenty of significant issues on the table at the moment, but we want to achieve a result as quickly as possible,” one official said.
The regulation falls under Barnier's raft of single market instruments, which he wants to present as a fait accompli before the end of next year, the 20th anniversary of the first Single Market Act.
Heated exchanges likely over next six months
A tightly contested fight with Europe's largest auditing companies - Deloitte, KPMG, Ernst & Young and PwC - is envisaged. The four largest audit firms share the work of more than 85% of listed companies in the vast majority of member states.
These firms stand to lose from proposals that they rotate their work regularly and spin off consultancy work, measures that would favour smaller audit outfits.
“The larger firms have put up a big fight against joint audits, and now we assume that they will turn their primary attention to attacking the provisions for rotating auditors and for 'pure' audit companies,” an EU official told EurActiv.
The larger firms have already won a strategic battle in the European Parliament, however, where the proposal will now be debated.
The draft regulation will be subject to a main report by the legal affairs committee, and another report by the economic affairs committee. Both rapporteurs selected for the task are British Conservatives, who traditionally oppose measures to rein-in larger audit firms.