Investors make last ditch attempt to sway audit reforms

THE LARGEST INVESTORS in Europe have ganged together in a last-minute bid to urge the European Commission to push ahead with tougher audit reform proposals, ahead of a European Parliament debate this week.

Signatories of a joint letter sent to the EC included Euroshareholders, a group of about 30 European national shareholder associations, the investment arm of Legal & General and the Universities Superannuation Scheme.

The group of investors represent about €732bn (£590.5bn) and have set out their thoughts and proposals in a letter to European Commissioner Michel Barnier (pictured).

They believe the current system is failing on several fronts, including the failure of auditors to provide adequate warnings, too few large audit firms, the lack of rotation, the high levels of non-audit work, and the heavy dependence on large audit firms from the regulators and standard setters.

“We believe there are a number of worrying features in the audit market. At a fundamental level, we are concerned about auditor independence and professional scepticism,” the letter said.

High on the agenda is that the EU proposed that auditors need to rotate every six years, although this could be extended to nine years if there are joint audits, with a cooling-off period of four years. Recently, there have been reports that European Parliament may ease requirements to every 25 years.

However, the investors argue that audit committees themselves should set a time limit on auditor rotation dependent on company size and complexity. But there should be an upper limit of 15 years to safeguard shareholders’ long-term interest, with a cooling-down period of five years before reappointment.

The investors also argue that some EU proposals go too far – particularly that related financial audit services be capped at 10% and that large firms should separate audit activities from other activities to avoid conflict of interest. Instead, the investors suggest that auditors be permitted to undertake a maximum of non-audit work worth 50% of audit fees.

The signatories shot down the EU proposal to change audit reports. The proposal outlines that two pages of disclosures are proposed for the audit report within four pages or 10,000 characters, however, the investors argued this is too prescriptive. They suggest a fuller report that draws attention to key areas of judgement, estimates, any weaknesses in the financial system, and any disagreements with management.

Audit reform is due to be discussed on 18 September by the European Parliament’s legal affairs committee. A report by Sajjad Karim, an MEP from England, is being discussed – it proposes softening an initial audit reform put forward by the European Commission. 

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