EU deal to regulate auditors

MEPs and member states back new rules.

It should be harder for large companies to lean on their auditors to sign off their annual accounts, under new European Union rules for auditing that were agreed by MEPs and the presidency of the Council of Ministers on Tuesday (17 December).

Client relations in the audit sector, which is dominated by the ‘big four’ of Deloitte, PwC, Ernst & Young and KPMG, came under fire for being excessively cosy when it became clear, in the aftermath of the financial crisis, that auditors had approved the accounts of financial institutions that subsequently went bust.

Under the new rules, which still have to be voted on by MEPs and member states, banks, insurance companies and listed companies will have to invite tenders every ten years to meet their audit needs, and will be obliged to change auditors at least every 20 years. But the compromise is a retreat from the European Commission’s 2011 proposal, which would have required auditors to rotate every six years.

The Commission had urged shorter mandatory rotation periods to give smaller auditors the chance to break up the dominance of the ‘big four’.

Improvements

Sajjad Karim, a British MEP of the European Conservatives and Reformists Group, who led the Parliament’s response to the proposal, described the deal as “a workable compromise and a considerable improvement on the Commission’s original proposal.”

Michel Barnier, the European commissioner for internal market and services, said: “This is a first step towards increasing audit quality and re-establishing investor confidence in financial information, an essential ingredient for investment and economic growth in Europe.”

To the dismay of the audit sector, the deal retains strict limits on the additional services – such as tax, strategy or investment advice – that audit firms can provide to auditing clients. “It will take time for everybody involved – the profession, businesses, regulators – to work through the details and get to grips with all the changes,” said Michael Izza, the chief executive of the Institute of Chartered Accountants in England and Wales.

The audit industry had warned of the danger of forcing companies to switch auditors all at once. Questions are also being asked as to whether the new rules will offer genuine opportunities for smaller auditing firms to win additional shares of the audit market.

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