The audit reforms will also place restrictions on which non-audit services auditors can provide.
Most controversial among the reforms have been the requirements for companies to tender their audit contract every 10 years, and rotate their auditor every 20 years. But there is also an expanded list of non-audit services that the external auditor is banned from carrying out, and a cap on how big a proportion of the audit fee can be made from offering non-audit services.
The changes run parallel to changes mooted in the UK by the Competition Commission, which proposed that FTSE 350 companies should tender every five years. It later revised its guidance to suggest 10 years, but the progress of its consultation has been delayed to wait for the decisions at EU level.
EU member states voted unanimously in favour of the package of audit reforms in December.
The changes have been broadly welcomed by the profession.
ICAEW chief executive Michael Izza said, “We are glad we have a conclusion to the three and a half year long debate about how audit needs to change across the European Union. The legislation adopted today will result in big changes both for auditors and the companies they audit.
“The new rules will apply to public interest entities, which also includes a number of unlisted companies. Some may not be aware of this and it could be a particular challenge for the smaller companies, which in the past will have relied on their auditors to do a lot of work.
“While perhaps not enthusiastic about all areas of change, I think everybody has now accepted that these are the new rules audit firms and companies will have to operate within. We are already seeing changes emerge in the market, including the UK, with long-standing audit engagements being put out to tender and audit committees being more prescriptive about the kind of non-audit services they ask the auditors to provide.”
Stephen Haddrill, CEO of the Financial Reporting Council, said the FRC was “especially pleased” that EU legislation would be following the UK’s example of retendering an audit every 10 years. “For the FRC, these developments are most important because they contribute towards the enhancement of quality in financial reports and audits that can engender trust within the investor community, not only in the UK, but across Europe.”
David Barnes, Deloitte’s managing partner of public policy, welcomed the certainty the vote brings. “A number of the new provisions in the legislation will strengthen corporate governance and enhance the transparency of audits to investors and audit committees. It is helpful that we now have a direction of travel."
However, he added, there were "lingering concerns" focused on "the patchwork of differing requirements that may develop across Europe for multinationals”.
Welcoming the vote, Bob Dohrer, RSM’s global leader for quality & risk, added that the focus of attention would now switch to consistent implementation of the measures across EU member states as well as to the resulting impact on the audit profession in jurisdictions outside the EU.
“However, this is just one goal post and we look forward to continuing dialogue and being active in the future debate as we focus on reforms to enhance audit quality and the development of the profession as a whole.”
Mazars head of global audit David Herbinet said that the reforms heralded a dramatic change in the European audit market, including the restoration of trust in audit, an enhancement in audit quality and ultimately, a more innovative market with new players.
“We also now have the chance to create over time a single audit market across the EU to replace the current fragmented one.”
He added that Mazars had been very encouraged by the recent public statement from 10 leading investors noting the benefits that the “fresh pair of eyes” of new entrants to the large listed market can bring.
“Challenger firms such as ourselves also have to demonstrate that we have the capabilities and willingness to become a much more significant part of the audit landscape in the years to come. We are fully committed to doing this.”
It is now up to each country within the EU to implement the new regulation into law.