EC committees push back on mandatory firm rotation

19 Aug 2013

The European Commission’s (EC) proposed audit reforms continue to work their way through the lengthy political process. Two influential parliamentary committees have recently weighed in. The outcomes of the votes are significant in that they represent the current position of the European Parliament as it enters into detailed negotiations with the Council of Ministers (the Council) and the EC to reach agreement on a ‘compromise text’ which will form the basis of any new legislation.

In their vote in March, European Parliament’s Economic and Monetary Committee (ECON) rejected mandatory firm rotation (MFR) – albeit by a narrow majority – but did support mandatory tendering on a seven-year basis and mandatory re-assessment of audit quality by the audit committee. In April, the Legal Affairs Committee (JURI, the lead committee) voted to set the maximum duration of the combined audit engagement at 14 years, but to allow member states to extend this to a maximum of 25 years when certain conditions are met (including the possibility of joint audit). JURI rejected the recommendation for a seven-year mandatory tendering requirement and would require it only when a change of auditor is proposed to shareholders.

Competitiveness Council meeting

In the Council, the Presidency requested views from the member states on three key areas at the Competitiveness Council meeting on 29 May. Member states’ responses indicated:

  • Overall support for the principle of MFR, but with a number of conditions(eg, on overall term).
  • Support for the principle of a black list of prohibited non-audit services, but the majority reject the 70% cap. A wide range of views on what should be included but support for a principles based approach similar to the IFAC / IESBA Code.
  • Major opposition to the ESMA proposals and support for the compromise of expanding the role and remit of the European Group of Auditors’ Oversight Bodies (EGAOB).

The responses to these questions will now be used to further develop Council negotiations with the European Parliament.

Both committees also rejected the separation of audit and non-audit services and creating ‘only-audit’ firms. As there has been major opposition to these proposals among EU countries, it is considered highly unlikely they will be resurrected. JURI also rejected most of the EC’s more prescriptive and restrictive proposals regarding the prohibition and provision of non-audit services, but recommended introducing a requirement for audit committees to have a policy governing which services need to be approved by the board and shareholders and communicated to competent authorities. ECON favoured a list of prohibited services broadly in line with the IESBA Code.

It is now unlikely that the final parliamentary report and vote will take place before the end of 2013.