Mandatory auditor rotation agreed

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The UK has been outvoted at European Union level over the imposition of mandatory rotation of auditors

In a qualified majority decision on Friday, the ambassadors of the EU member states agreed to give their backing to a package of proposals including a limit on keeping the same auditor for banks and “systemically important” companies of 15 years and 20 years for other public interest entities (PIEs).

They also agreed to cap non-audit services at 70%.

The decision means that negotiations on reform of the audit market can now go ahead between the Council of Ministers, the European Commission and the European Parliament.

The UK had argued against mandatory rotation of auditors, opting instead for the approach adopted by the profession’s regulator, the Financial Reporting Council, which is mandatory audit tendering every 10 years on a “comply or explain basis”.

Under the deal, according to a report from Reuters, banks and other financial institutions would be able to keep their auditor for up to 15 years unless they have a joint audit, in which case the cap is 20 years. All other PIEs will be able to hold on to the same auditor for 20 years.

There will be transitional arrangements which would mean that companies would not have to change their auditor until nine years after the legislation is passed.

The member states’ time limit is not far removed from the 25 years the parliament has indicated it would support. This will make the forthcoming trilogue negotiations easier.

However, in the original package of proposals for audit reform announced by internal market commissioner Michel Barnier, the Commission backed rotation every six years unless there was a joint audit in place in which case the limit would be nine years.

Commentators think the Commission is unlikely to argue strongly for such a short limit if to do so would put the whole package at risk. In any case, it will pleased that one of the major elements of its reform package had been adopted.

As it made clear in its response to the UK Competition Commission’s (CC) provisional decision on remedies, it believes rotation is “an essential step for ensuring the independence and professional scepticism of auditors”.

“Audit firm rotation is necessary to ensure a ‘fresh pair of eyes’ and to avoid the relationship between management and auditors becoming too close,” wrote internal market and services director general Jonathan Faull.

As far as the UK is concerned, it is currently waiting to see what final conclusions the CC comes to on its investigation into the state of the audit market. These are due out later this month.

In the face of widespread antagonism to any suggestion of mandatory auditor rotation, it watered down its package of remedies, suggesting instead that companies should be required to tender their audit every five years. That proposal turned out to be similarly unpopular.

However, mandatory rotation could still be resurrected in the light of the ambassadors’ decision, since the UK government will be required to adopt the EU proposal if, as seems likely, it survives the trilogues and enabling legislation is passed by the European Parliament.

Michael Izza, ICAEW chief executive, said, “The agreement by Member States to give the Lithuanian presidency mandate to start trilogue negotiations with the European Parliament and Commission is another key step towards a final conclusion in the audit debate that has now been rolling since the European Commission published its green paper on audit policy in 2010.

“We are eager to get certainty around the future audit regulation and directive. There are still some differing views but we are hopeful that a conclusion can be reached by the end of the Lithuanian presidency.

“The end of the legal debate does of course not mean that discussions about audit will end. Fora such as the AuditFutures initiative will develop new ideas to ensure that audit continues to best serve society.”

Julia Irvine

 

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