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29 May 2013

Competitiveness Council results on audit reform

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The reform of the audit market is intended to improve quality and independence of audits, to increase transparency and reinforce investors' confidence, as well as to reduce the current market concentration.

Following a presentation by the Irish Presidency of a progress report, ministers expressed views on outstanding issues of the ongoing reform aimed at improving audit rules in the EU. The outcome of the debate provides political guidance for taking the reform forward.
The reform is being carried out on the basis of two Commission proposals covering on the one hand a revision of the Audit Directive ("Eighth Company Law Directive") and on the other a regulation on specific requirements regarding statutory audit of public-interest entities.
The financial crisis highlighted weaknesses in the statutory audit especially with regard to public interest entities, which are of significant public interest because of their business, their size, their number of employees or their corporate status. The reform is intended to improve quality and independence of audits, to increase transparency and reinforce investors' confidence. It also seeks to reduce the current market concentration and lack of choice within the audit market.
During the public deliberation, the Presidency invited ministers to express their views on the Presidency compromises as regards three main issues:
1. Mandatory rotation of auditors and audit firms of public interest entities
The Commission in the draft regulation proposed provisions requiring the mandatory rotation of auditors and audit firms after a maximum period of six years which could, under certain exceptional circumstances, be extended to eight years. It was also proposed that where a public-interest entity has appointed two or more statutory auditors or audit firms (joint audit), the maximum duration of the engagements will be nine years and that on an exceptional basis, such duration may be extended to 12 years. Having regard to the need to ensure the high quality of audit, including independence and objectivity of auditors in particular of public interest entities, as a compromise the Presidency suggested to set a maximum period of engagement of seven years (eight years for joint audit), renewable, subject to the satisfaction of certain criteria, for a maximum of seven further years (eight years for joint audit). In addition, the Presidency compromise foresees that, on an exceptional basis, the Public Interest Entity may request the competent authority to grant another extension to re-appoint the statutory auditor or audit firm for a maximum of two further years (three years for joint audit).
The majority of Ministers could support the general principle of a mandatory rotation accompanied with a number of applicable conditions.
2. Restriction on the provision of related financial audit services and prohibition of non-audit services
In order to address the need to reinforce independence, the Commission proposed to limit the services that statutory auditors and audit firms of public interest entities are allowed to carry out emphasising that the auditor should focus on audit. To this end, it proposed to differentiate certain categories of services. It proposed to limit the provision of related financial audit services to no more than 10 per cent of the fees paid by the audited entity for the statutory audit.
In order to facilitate a compromise, the Presidency proposed to increase this threshold to no more than 70 per cent of the fees paid in any three year period. In addition, services related to audit work imposed by Union legislation would not be counted against this threshold. Under the Presidency proposal, this limitation is applicable to all services that do not feature on the list of prohibited services (“black list”) which it proposes.
The concept and content of a list of prohibited services ("black list") only, with auditors permitted to provide all other services that do not feature on this list was developed by the Presidency in response to a request from delegations for a simpler system of permitted/ prohibited services. It was also designed to meet the objectives of reinforcing the independence of auditors and the avoidance of conflict of interest, on which there were divergent views as to how this could be achieved and on the specific services that should be prohibited. A large number of Ministers could agree with the establishment of a black list. However, a number of them were not in favour of the cap of 70 per cent.
3. Cooperation of national audit oversight bodies
The Commission proposal envisages that EU-wide cooperation on auditor oversight between the national competent authorities takes place within the European Securities and Markets Authority (ESMA). The proposed committee would assume functions previously undertaken by the European Group of Auditors' Oversight Bodies (EGAOB), an expert group chaired by the Commission.
The Presidency compromise proposal attempts to address concerns expressed by several delegations as regards the Commission proposal, by providing the creation of a Committee of European Auditing Oversight Bodies (CEAOB) within ESMA, composed of the members of EGAOB and having decision-making powers.
A number of delegations proposed an alternative to ESMA, namely the strengthening of existing cooperation provided under the EGAOB, by means of the establishment of a body to be known as the “European Board of Auditors’ Oversight Bodies” (EBAOB). Many delegations were favourable for the establishment of the European Board of Auditors' Oversight Bodies, although some support was also expressed for the cooperation to take place
within ESMA.

© European Council

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