European Parliament Backs Commission Proposals on Newrules to Improve the Quality of Statutory

European Commission

Statement

Brussels, 3 April 2014

European Parliament backs Commission proposals on newrules to improve the quality of statutory audit

The European Parliament has today adopted in plenary session the amended Directive on Statutory Audit and the Regulation on specific requirements regarding the statutory audit of public-interest entities.

The new rules will considerably improve audit quality across the European Union and will ensure that auditors are key contributors to economic and financial stability.

Internal Market and Services Commissioner Michel Barnier said: “The financial crisis and more recent inspection reports by national supervisors highlighted major shortcomings in the European audit sector. To address these deficiencies, we made ambitious proposals in November 2011 to clarify the role of statutory auditors, to strengthen their independence, and to enhance supervision.

Even though some of the measures adopted are not as ambitious as in the Commission’s proposals, I am very satisfied with the outcome. The spirit of the reform is intact, and it will have a major impact for the broad community of stakeholders that rely on the quality of statutory audits. Landmark measures include the strengthening of the independence of statutory auditors, making the audit report more informative, and improving audit supervision throughout the Union.

In addition, stricter requirements will apply to the statutory audit of public-interest entities, 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.

I would like to pay tribute to the rapporteurs, Sajjad Karim and Kay Swinburne, and the shadow rapporteurs, for their commitment to this major achievement. I am sure the Council will formally adopt the legislation in the coming weeks.

With this vote, we have taken another important step towards re-establishing investor confidence in financial information, an essential ingredient for investment and economic growth in Europe.”

Next steps:

Following today's vote in plenary, the audit package must be formally adopted by the Council. The publication of the new rules in the Official Journal of the European Union is foreseen for the second quarter of 2014.

New legal framework for statutory audit – key measures include:

I. A clarified societal role for statutory auditors

1. Increased audit quality: In order to reduce the 'expectation gap' between what is expected from statutory auditors and what they are bound to deliver, the new rules will require that audit reports be more detailed and informative, and include meaningful data for investors.

2. Enhanced transparency: Strict transparency requirements will be introduced for statutory auditors with stronger reporting obligations vis-à-vis supervisors.

3. Better accountability: The work of auditors will be closely supervised by strengthened audit committees within audited entities. In addition, the new rules will introduce the possibility for 5% of the shareholders of a company to initiate actions to dismiss the auditors. An improved set of administrative sanctions that can be applied by the competent authorities is also foreseen.

II. A strong independence regime

1. Mandatory rotation of audit firms of public-interest entities (PIEs): Public-interest entities will be required to change their statutory auditors after a maximum engagement period of 10 years. Member States can choose to extend the 10-year period up to 10 additional years if tenders are carried out, and by up to 14 additional years in case of joint audit, i.e. if the audited company appoints more than one audit firm to carry out its audit. Calibrated transitional periods taking into account the duration of the audit engagement are also foreseen to avoid a cliff effect once the new rules apply.

2. Prohibition of certain non-audit services to audited PIEs: Audit firms will 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. The aim is to limit risk of conflicts of interest, when statutory auditors are involved in the making of decisions impacting the management of the PIEs they audit. This will also substantially limit the likelihood that statutory auditors «self-review» their recommendations to the PIEs they audit.

3. Cap on the provision of non-audit services to PIEs: To enhance the independence of statutory auditors, the new rules will establish a cap on the fees generated for non-audit services to PIEs.

III. A more dynamic and better supervised EU audit market

1. A Single Market for statutory audit: The new rules will provide a level-playing field for statutory auditors at EU level through enhanced cross-border mobility and the Commission’s empowerment to adopt International Standards on Auditing (ISAs) at EU level.

2. More choice: In order to promote market diversity, the new rules prohibit restrictive 'Big Four only' clauses. Incentives for joint audit and tendering, as well as the prohibition of certain non-audit services to audited PIEs are among some of the measures that will contribute to providing new market opportunities. Tools to monitor the concentration of the audit market are also reinforced.

3. Enhanced supervision of the audit sector: Cooperation between national audit oversight bodies will be strengthened at EU level through the establishment of the Committee of European Auditing Oversight Bodies (CEAOB). A specific role will also be conferred on the European Securities and Markets Authority (ESMA) with regard to the cooperation between Member States and third countries on audit oversight.

Background

Statutory auditors and audit firms play an important societal role by providing investors and shareholders with an opinion on the accuracy of company accounts.

The financial crisis highlighted that a number of banks had been given clean bills of health despite huge losses from 2007 onwards. In addition, in relation to the real economy, inspection reports from the Member States revealed instances of a lack of professional scepticism by statutory auditors, misstatements, and a lack of fresh thinking in the statutory audits of major companies. This is why the Commission launched an extensive consultation process on how to improve the audit market in October 2010 (see IP/10/1325), and, following the European Parliament's own-initiative report by AntonioMasip Hidalgo MEP on Audit Policy: Lessons from the Crisis, adopted two legislative proposals in November 2011 (see IP/11/1480):

a Directive amending the existing Statutory Audit Directive, covering all statutory auditors and audit firms regardless of whether the audited entity is a public-interest entity or not, and
a new Regulation on specific requirements regarding statutory audit of public-interest entities.

The two texts were negotiated under the ordinary legislative procedure. The European Parliament and the Member States reached a preliminary agreement on compromise texts on 17 December 2013 (see MEMO/13/1171).