MEPs dilute audit reform rules

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European Union plans forcing companies to change accountants regularly were watered down on Thursday (25 April), providing some relief for the "Big Four" auditors that check most large company books.

The European Parliament’s legal affairs committee backed allowing companies to keep the same accountant for up to 25 years, significantly diluting 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 provison would cost companies in time and manpower involved in the re-tendering process.

The lawmakers also ditched a controversial part of the European Commission's draft reform, caps on audit market share, that could have seen the four firms that dominate the industry – KPMG, PwC, Ernst & Young and Deloitte – being split up.

Rules proposed after failures of the financial crisis

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 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.

PwC said it remained opposed to any mandatory rotation of accountants for firms, arguing it could damage audit quality.

"It prevents company audit committees from making the decision about who they should appoint as auditor," said Pauline Wallace, head of regulatory affairs at PwC.

But smaller rivals like Grant Thornton welcomed the changes.

"Rotation will bring greater liquidity to the market," said Ed Nusbaum, CEO of Grant Thornton International.

Smaller firms like Mazars and BDO as well as Grant Thornton have been reluctant to make big investments without regulatory intervention that might help them pick up blue-chip clients.

The committee voted by 15 to 10 with the Socialists and Greens opposed, seeing 25 years as too long a tenure. Some companies have kept the same accountant for decades.

List of permitted services scrapped

The reform seeks to boost auditors' independence by banning them from giving tax and other advice to the same client.

But the European Commission's plan for a list of "white" or permitted advisory services was scrapped in favour of a "black list" of banned services.

The reform also bans clauses in bank loans to companies that stipulate their accounts must be audited by one of the Big Four. Auditors would also have to give an overall assurance over the accuracy of company accounts.

Thursday's vote opens the way to talks with EU states on a final text with a full parliament vote by year end.

Britain's Competition Commission said earlier this year the UK audit market was "sticky" and will announce in July whether mandatory switching should be introduced. Rotation now looks set to become part of an EU law that Britain will have to apply.

"This is a victory for greater transparency and impartiality in the audit sector which remains the preserve of a few big firms. Parliament's negotiating position now is very clear,” said Cecilia Wikström MEP (Sweden; Alliance of Liberals and Democrats for Europe).

“We want mandatory rotation and for certain non-audit services to be prohibited so that there can be no more question marks over the close links between auditors and their clients. Large financial institutions, like all public interest entities, have a statutory obligation to be audited on an annual basis, but this function is also important from the point of view of public trust and market confidence, something in very short supply in this post-crisis era," added Wikström the ALDE coordinator on the legal affairs committee.

“A number of the changes voted through by the MEPs seem to align the EU audit reform proposals more closely with international standards, which is positive,” said Michael Izza, chief executive of the Institute of Chartered Accountants of England and Wales.

“Much of the focus of this debate has been on rotation and the largest audit firms. However, it is important to remember that the audit reform will impact on all businesses having an audit, their shareholders and audit firms of all sizes across the European Union. There is a lot in the proposals beyond those issues that have received the most attention,” Izza concluded.

"I'm very happy that my colleagues have supported my original concept, which is designed to promote serious consideration by audit committees of their auditor and the quality of the service provided,” Sajjad Karim MEP (UK; European Conservatives & Reformists), the rapporteur on the legal affairs committee.

"It continues to be a disappointment that rather than engage on the wider issue of audit quality, the Socialist and Green groups in the Parliament have focused solely on the narrowest debates around competition. Such issues are best dealt with by national competition authorities, who are best placed to decide what solutions are needed for very different domestic markets across Europe," Karim added.

“It is crucial that audit meets the demands of the business world, including those of management, investors and shareholders. Future legislation needs to be workable for businesses while enhancing investors’ confidence. The JURI report prepared by MEP Sajjad Karim reaches a laudable balance, which was not an easy task given the diverging opinions, especially on the controversial issues linked to market structure,” according to Sue Almond, technical director at the Association of Chartered Certified Accountants (ACCA).

“For ACCA, the touchstone of the audit reform has always been about ensuring well-structured audit services, which can be trusted and which can also bring the most value to businesses and the end-users of these services. Audit is only one part of this jigsaw: further progress could for instance be made through enhancing both corporate governance and reporting, namely through non-financial and also integrated reporting. Their development would help reflecting the interconnected nature of economic and financial performance with environmental, social and governance factors,” Almond concluded.

A statement from BDO said the firm was "disappointed but not surprised that the Commission’s proposals regarding the audit market structure were further diluted in the Legal Affairs Committee vote on 25 April and that they are now far from delivering the body blow to concentration that the European Commission originally intended them to be."

"Despite the fact that the measures adopted by the committee were weaker than they might have been, the surrounding debate has highlighted the desire to have greater competition and choice in the audit market, as well as the need for greater liquidity and switching. As a result, companies are likely to be more aware now of the need to actively consider auditor appointment and the range of services they procure from them," the statement from BDO said.

"We welcome the amendments that would see international independence and auditing standards become the basis of the European standards in these areas, as we believe that high quality, globally applied standards are preferable to standards developed for EU purposes only," concluded BDO's remarks.

 

 

 

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.

>> Read: Commission braced for battle with big audit firms

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 again the key piece of EU legislation on auditing.

  • By end of 2013: Audit reforms will go before full Parliament for vote

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