During the final trialogue discussions between the Lithuanian EU Council presidency and the European Parliament on December 17, an agreement was finally reached pushing through EU audit reform. Now subject to ratification by 28 European Union member states later this week, the last minute deal will force big companies to change auditors regularly as member states attempt to challenge cosy relationships between corporate clients and their accountants.
According to Michel Barnier, European Commissioner for Internal Market and Services, this deal, less onerous and ambitious than the European Commission first proposals, marks a “first step” towards booting confidence in audit quality. MEP Sajjad Karim also stressed that the key objective of improving audit quality had been secured in the proposed package.
After the suspension of informal negotiations between the European Parliament, the European Union Council and the European Commission earlier this month, due to disputes over non-audit services, politicians were able to agree and avoid further delays.
Listed companies and banks will now have to change their auditors every ten years, with the option of extending the period by a further 10 years if tenders are carried out and by 14 years if the company being audited appoints more than one firm to carry out the audit.
Under the new framework, a 70% cap on the fees generated for(non-restricted) non-audit work will be introduced, as well as a black-list of prohibited services, which is designed to limit conflicts of interest in instances where auditors are involved in decisions impacting the way companies are managed. Limits were established on certain non-audit services such as tax advice and services linked to financial and investment strategy.
Better accountability is also a key point of this deal since an Audit Committee skill sets will be strengthened and shareholders will gain a right to initiate actions to dismiss the auditor, as long as they have 5% shareholder support.
A calibrated transitional period” will prevent a “cliff effect” as the new rules come into force.
Please read the Financial Times article here.