On 30 November, the European Commission adopted proposals aimed at creating a higher quality, dynamic and open audit market. The changes are intended to clarify the role of auditors and to introduce more stringent rules for the audit sector, aimed in particular at strengthening auditors’ independence as well as creating greater diversity in the current highly-concentrated audit market. Key proposals include the following:
- Audit firms will be required to rotate after six years (subject to some exceptions). There will be a four year “cooling off” period before that audit firm can be engaged again by the same client.
- The prohibition of contractual clauses entered into with third parties which limit an entity’s choice of auditor.
- Mandatory tendering by public-interest entities when selecting a new auditor.
- Auditors will be prohibited from providing non-audit services to their audit clients. In addition, large audit firms will be required to separate audit activities from non-audit activities in order to avoid all risk of a conflict of interest.
- Supervision and coordination of the audit sector at EU level within the framework of the European Markets and Securities Authority.
- The creation of a single market for statutory audits through the introduction of a European passport for the audit profession.
- The cutting of red tape to allow for a proportionate application of audit standards in the case of small and medium-sized companies.
- The European Commission believes that, taken together, the proposed measures should enhance the quality of statutory audits in the EU and restore confidence in audited financial statements, in particular those of banks, insurers and large listed companies.
For further details of the proposed changes, click here: http://ec.europa.eu/internal_market/auditing/reform/index_en.htm