EU agrees rules to overhaul auditing firms

The European Union has agreed wide-ranging new rules on the auditing profession, which will prohibit accountancy firms from providing certain categories of services to clients whose accounts they audit.

A shake-up of the auditing industry was proposed by legislators in Brussels in the wake of the financial crisis, amid concerns that some auditing firms had failed to spot financial irregularities in banks.

The case of Anglo Irish Bank was specifically cited in the European Commission's original 2011 proposal on reform of the audit industry, which noted the "apparent audit failures" at the Irish bank.

The new regulations, which will be finalised in the coming days, set out a "blacklist" of services which an auditor will not be permitted to provide to an audited entity. The list includes limits on tax advice and investment strategy services. According to the European Commission, this is to limit the risk of conflicts of interests for auditors.

Companies and public-interest entities will be forced to change their auditors after 10 years, according to the rules. The period can be extended by another decade, provided a tender is carried out, while this period can be extended to 14 years in the case of a joint audit. The mandatory rotation period of 10 years is longer than that originally proposed by the European Commission, which had envisaged a term of six years.

Rotation period
However, the European Parliament favoured a minimum rotation period of 14 years. While conceding that the proposals were less ambitious than originally proposed, EU internal markets commissioner Michel Barnier said the new rules will strengthen the independence of auditors, particularly in the auditing of financial institutions and listed companies.

The new rules will have a “major impact in reducing excessive familiarity between the auditors and their clients and in enhancing professional scepticism”, he said.

The attempt to overhaul EU regulation of the audit sector, which was first proposed by the European Commission in November 2011, has taken place against a background of intense lobbying by auditing firms, including from the “big four” firms. Representatives of the accountancy profession argue that the new rules are impractical and may lead to extra costs for businesses.

Auditors sued
Last year IBRC, the bank formerly known as Anglo Irish Bank, initiated legal proceedings against Ernst and Young, the first case of an Irish bank suing its former auditors over their pre-crisis role.

Some European countries already oblige public-interest companies to change their auditors after a certain period of time. In Italy, companies must switch their auditors every nine years, while the maximum period in the Netherlands is eight years.

Among the contentious issues in the new legislation was the role of the European Securities and Markets Authority as an overseer, with the agreed document only granting the ESMA an initial mandate to co-ordinate co-operation between different audit supervisory authorities.

With European Parliament elections scheduled for May, lawmakers in Brussels have been under pressure to agree the new rules before the current tenure of the European Commission and European Parliament expires next year.

It is envisaged that MEPs will vote on the package early next year, with the rules likely to come into effect in 2016. However, companies will be given a “roll-in” period in which to introduce the mandatory rotation law.