EU ministers and MEPs in logjam over auditor rotation

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This article is part of our special report European Corporate Reporting.

SPECIAL REPORT / Plans to force companies to change accountants regularly are causing a logjam in negotiations between the European Parliament and Council, threatening to delay reforms that the Commission has insisted it wants agreed by the end of its mandate.

Following its Green Paper on audit policy – called 'Lessons from the Crisis' – the EU executive pushed through proposals to force listed companies to employ at least one auditing firm, imposing mandatory rotation of auditors.

The move to reform book-keeping practices came after auditors were widely criticised for giving banks a clean bill of health just before they needed to be rescued with taxpayers' money in the financial crisis.

MEPs have backed the plan to allow companies to keep the same accountant for up to 25 years, significantly diluting original proposals from the Commission 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.

Member states represented by the Lithuanian presidency are now calling for a much more complicated system of rotation, in which differently sized companies would be subject to different rotation requirements, and companies which use joint auditors would also be subject to a different rotation regime.

The Council proposal would see rotation periods ranging from 15 to 20 years.

Lithuanian proposal on behalf of member states is complicated

In a second round of trilogue negotiations which took place this week (19 November) in Strasbourg, MEPs resisted the Council’s suggested changes on the grounds that they were too complicated, EURACTIV understands from sources close to the negotiations.

Another impasse in negotiations concerns attempts to boost auditors' independence by banning them from giving tax and other advice to the same client.

The European Commission originally planned for a list of "white" or permitted advisory services but this has since been scrapped in favour of a "black list" of banned services.

What should appear on the blacklist remains contentious. Some member states, notably Germany, are opposed to banning auditors from offering tax advice to their clients, because this is a service traditionally offered in their territories.

Meanwhile many MEPs want to preserve a black list – including banning the provision of tax advice to audit clients – but they also want to apply an ethics test to the prohibition, enabling auditors to apply practical ethics standards to the decision about what advice they provide clients.

Regulation coming to resemble a directive

The trilogue ended with little agreement on the most contentious issues, although “there is now a consensus that the reforms should be ushered in using a regulation and a directive,” the source told EURACTIV.

Originally some member states – including the UK – had been calling for the use of a directive alone, which would have left scope for flexible implementation of the reforms in each member state.

Although reforms affecting rotation will almost definitely now appear in a regulation, a source close to the negotiations told EURACTIV that so many exceptions and exemptions are beginning to appear in the draft wording of the regulation that it could appear as weak as a directive when it is finally agreed.

The next trilogue discussions will take place on December 4th, leaving little time to agree the final package before the end of this year.

Ugo Bassi, the director of capital and companies within the EU executive's directorate-general responsible for the internal market, told EURACTIV in an interview that he remained optimistic that the reforms could be achieved on time.

Auditor concerns over global competition

“Negotiations are progressing well, in a constructive spirit. Difficult discussions cannot be excluded as talks develop, but we are hopeful that a positive political agreement can be reached before the end of the current mandate [of the Commission],” Bassi said.

Auditors and their representatives remain concerned that the reforms might place European business at a competitive disadvantage, however.

“We believe that it is important to recognise that businesses – especially public interest businesses – and their auditors typically work on a global basis and so the final outcome needs to be practical within the global economy,” said Sue Almond, the technical director at the Association of Chartered Certified Accountants (ACCA).

“We do hope that the outcome of the EU reform process is not to differentiate the audit environment in Europe so much from the rest of the world that it puts European companies at a competitive disadvantage or makes global audits even more complex to manage,” said BDO global head of regulatory & public policy affairs, Noel Clehane.

“It is a good thing that Europe is seeking to lead but there is a delicate balance between leading and removing yourself from the rest of the pack entirely,” Clehane added.

The European Union adopted a directive in 2006 which aimed to restore confidence in capital markets by strengthening the quality and independence of auditing of company accounts.

The directive came in the aftermath of international accounting scandals involving US firm Enron and which brought to collapse one of the top global auditing firms, Arthur Andersen.

In 2008, Brussels reviewed for the first time the auditing directive. But immediately after the entry into force of the new rules, and on the wake of the US subprime crisis, the Commission started a new review of the sector which ended up in December 2010 with the collection of responses to a wide public consultation aimed at changing the key piece of EU legislation on auditing again.

The European Commission tabled a draft regulation in November 2011, requiring that audit firms rotate their work regularly and spin off consultancy work, measures that would favour smaller audit outfits.

  • Dec. 4th 2013: Audit reforms discussed in third trilogue hearing

European Commission

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