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Close season endangers swift passage of EU audit reform

THE ARRIVAL of watered down legislation to boost investor confidence in company audits and rein in the dominance of the Big Four comes at the start of Brussels’s “close season”, when commissioners, MEPs and other EU high-ups focus on career moves to come in 2014.

With European parliamentary elections due in May, and the European Commission (EC) changeover set to be at the end of October, the legislation, which strays significantly from its original intentions, will be continuing its passage through the Brussels machinery as this difficult political season gets fully under way.

Hence, current commentary on the parliament’s legal affairs committee’s (Juri) recent clearance of its version of rules to revise company audits tends to be let’s try to make the best of things.

The hope being implied is that further clean-up may be possible as the legislation passes into the domain of member state finance ministries meeting as the European Council, together with the parliament, and the EC, all working together.

Ambitions are for the legislation to be completed as a finished regulation and directive by the end of this year. The hope is for a final rubber stamping to follow a vote in the parliament’s plenary session, which could take place in October or November. But the schedule is a matter of guessing. Optimists hope that this will come sooner. However, an over-run is entirely possible.

Dilution of the present set of rules, which cleared with 15 versus ten votes on April 25 via the Juri, includes that the basic rotation limit of audit tenure is now 14 years, extendible in certain circumstances to a back-stop of 25 years. The original EC proposal was for six as standard with the possibility of 12 years maximum.

The reforms, intended to reduce “concentration” of the audit services being provided by the very few large firms, has also taken a hammering from those it should benefit. The rules are now “far from delivering the body blow to concentration” originally proposed, according to one mid-tier group, while BDO was “disappointed, but not surprised” on this matter.

However, it concedes that the amendments passed by the parliament’s Juri committee “do go some way to addressing investor concerns about long auditor tenure and will undoubtedly lead to more frequent and transparent consideration of auditor appointments over time”.

The reforms first got into gear in 2010, when the Commission’s Jonathan Faull, EC director general for internal market services, talked of needs to combat “professional scepticism” from investors and an “expectation gap” between auditors and stakeholders.

Referring to the banking crisis as causing “misery” all over Europe, one of the more stringent ideas that he put forward was that the appointments of auditors should be placed with an independent organisation. This would have removed the right of a company to choose its own auditor. This idea is now not even discussed.

Sajjad Karim, the British MEP who coordinated the present version of legislation through parliament, has repeatedly described the EC’s original proposal as “heavy handed” and describes the rules now on the table as “a big step forward to boost audit confidence”.

However, the EC’s own reaction to the committee’s position is generally tactful. It states that: “the negotiation mandate constitutes a good basis for future discussion with the Council”. As for the 25 year rotation back-stop, the commission considers the recommendation “as a basis for further discussion”.

The 14-year rotation period can be extended to 25 years if certain criteria are met, which include tendering after 14 years, a comprehensive assessment by the audit committee or having a joint auditor.

Turning to the rosy side, the changes particularly welcome the fact that the rules on the table define more precisely the content of the audit report, and, “especially, what is meant by ‘going concern'”. As for non-audit services, the EC says it regrets that Juri did not support its proposals, “which limited, by a cap the number of authorised services, allowed to be provided”.

ALD, European parliament’s political central party, which supported the centre-rightists in clearing the package’s acceptance in Juri, points out that while there is no cap on non-audit services, “they will be subject to mandatory tendering”. It also approves that the European Securities and Markets Authority remain as the oversight of national audit authorities. However, for investor interests,“more work needs to be done to assuage well-founded investor concerns as regards auditor independence”, said Vincent Papa, director of financial reporting policy at the CFA Institute. 

On the same lines, EuroFinuse (the European Federation of Financial Services Users) reflects a common view that: “The approved text will only partially resolve the problems that this audit reform was aiming to tackle.” It describes the current 25 year maximum, as “too high … to address the current lack of investors’ confidence”.

Like others looking to the bright side, but with notable reserves, are the institutions representing interests that include the audit profession itself. Sue Almond, technical director at the ACCA, stresses the need to enhance investor’s confidence, while Michael Izza, chief executive of the ICAEW, states that the committee vote: “takes us one step closer to the end”. He echoes hopes that final approval from Brussels “can be found soon”.

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