Securities Regulation Daily Wrap Up, ACCOUNTING AND AUDITING—EU Parliament Panel Clears Mandatory Audit Firm Rotation Legislation, (May 1, 2013)

By Jim Hamilton, J.D., LL.M.

The Legal Affairs Committee of the European Parliament has cleared legislation requiring mandatory audit firm rotation after a period of 14 years, which was a change from the European Commission proposal of six years, which a majority of the Committee judged to be too short a time period and a costly and unwelcome intervention in the audit market. The Committee would allow a 25-year mandatory rotation if certain safeguards are put in place.

Audit firm rotation. The European Commission proposed a significant and broad overhaul of the regulation of outside auditors of company financial statements, including mandatory audit firm rotation and strengthening the independence of auditors, as well as greater diversity into the current highly concentrated audit market.

Non-audit services. Under the Commission proposal, audit firms would be generally prohibited from providing non-audit services to their audit clients. Most Legal Committee members saw the proposed general prohibition on non-audit services as counterproductive to audit quality. However, the Committee agreed that non-audit services that could jeopardize auditor independence should be prohibited. For example, the Committee believes that supplying tax advisory services that directly affect the company’s financial statements and may be subject to question by tax authorities should be prohibited.

Big-Four-Only clauses. The Committee backed the Commission’s proposal prohibiting Big-Four-only contractual clauses requiring that the audit be undertaken only by one of the Big Four audit firms. These clauses would be null and void.

The role of auditors has been called into question by the financial crisis. The confidence of investors in the outside audit of financial statements must be won back, said MEP Sajjad Karim, who is responsible for the audit reform package, adding that high quality and independent auditing will give investors the assurance they need.

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