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EU audit reform voted in

14 April 2014

European Parliament has voted in key auditing reforms, which will affect statutory auditing.

The reforms include the strengthening of the independence of statutory auditors, making the audit report more informative and improving audit supervision throughout the EU.

Additionally, stricter requirements will apply to the statutory audit of public-interest entities (PIE), such as listed companies, credit institutions and insurance undertakings. These new measures will reduce risks of excessive familiarity between statutory auditors and their clients, encourage fresh thinking, and limit conflicts of interest, according to the European Commission (EC).

In further detail, the new auditing reforms will include requiring more detailed and informative reports, with meaningful data for investors. There will be stricter transparency requirements and auditors will be closely monitored by strengthened auditing committees. The new rules will also introduce the possibility of 5% of a company’s shareholders initiating actions to dismiss the auditors.

Mandatory rotation of auditors will be required, however Member States can choose to extend this up to 10 additional years if tenders are carried out, and by up to 14 additional years in case of joint audit. Audit firms will also be prohibited from providing certain non-audit services to the PIEs they audit, including tax advice and services linked to the financial and investment strategy of the audit client. A cap on fees will also be generated for non-audit services to PIEs.

Lastly, a single market for statutory audit will be created – EU wide – with more choice to foster market diversity and will include a prohibition of ‘big four-only’ clauses. There will also be enhanced supervision of the auditing sector with the creation of the Committee of European Auditing Oversight Bodies (CEAOB).

Michael Izza, ICAEW chief executive said: ‘While perhaps not enthusiastic … everybody has now accepted that these are the new rules audit firms and companies will have to operate within. We are already seeing changes emerge in the market, including in the UK. The legal process is far from done, however. Big challenges remain, as it is now up to each country within the EU to implement the new regulation and transpose the directive into country law. There are still areas that require clarification. What is important is to make the new regulatory framework work in practice for companies, shareholders and markets. This requires collaboration between governments, regulators and the profession.’

Matthew Fell, CBI Director for Competitive Markets, said: ‘We have continuously highlighted that a blanket ban on auditors providing non-audit services to their clients would lead to a loss of expertise and advice, so we’re pleased the reforms only exclude a specific list of services.

‘The UK Government now needs to bring these proposals together at a national level, along with the recommendations from the Competition Authority, so UK firms know where they stand.’

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