European Commission proposals on changes to audit regulations
Process and key parties
The European Commission published its proposals on changes to audit regulations in November 2011. These become law only by agreement of both the European Parliament (EP) and the European Council of Ministers (EU Member States). Three Parliamentary committees, JURI, ECON and ITRE have been involved in developing their own views on the proposals:
- JURI is the lead committee which drafts the report comprising of amendments to the EC’s proposals. It voted in April 2013.
- ECON is an associated opinion committee which has certain exclusive competences; it drafts amendments to those areas of the EC’s proposals. It voted in March 2013.
- ITRE issues a non-binding opinion; it voted in December 2012.
Next steps
The next stage in the legislative process involves the European Council of Ministers. Council will now aim to reach a consensus position on the reforms among the 27 Member States, based on a 'trilogue' process designed to agree a final position between Council, Parliament and the Commission, to enable a plenary vote of the Parliament and approval by the Council. This could take place before the end of this calendar year.
Overview of the original proposals
The EC proposals apply to the statutory audit of all public interest entities (PIEs) namely all listed companies and the majority of financial institutions, regardless of size. The proposals included the following key provisions:
- Mandatory rotation every 6 years, unless there are joint auditors in which case the maximum duration is 9 years. A 4-year cooling off period also applies.
- Mandatory tendering every time a new auditor is appointed.
- Non-audit services (excluding financial related services) are categorised as either prohibited services or services requiring prior approval from a national regulator or audit committee.
- Financial related services are capped at 10% of the statutory audit fee.
- Firms to be audit-only where they generate more than a third of their audit fees from large PIEs and belong to a network generating more than Euros 1,500 million audit revenues in the EU.
Deloitte’s view
We are supportive of measures to enhance audit quality, strengthen the independence of the auditor, and foster competition; and believe it is critical that proposals regarding the audit regime and regulation should focus on building greater confidence in the capital markets and facilitating economic growth.
The Deloitte audit reform briefing sets out Deloitte’s support for changes that demonstrate improvement in audit quality; but also details those about which we have concerns, as they do not advance the stated objectives and will have significant negative unintended consequences.
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