Europe: the Commission's audit market reform proposals

The European Commission today published wide-ranging proposals for the reform of the audit market. If these become law they will make dramatic changes to the legal framework governing the audit and the organisational structure of the largest firms.

With regard to public-interest entities, the Commission is proposing, amongst other things, mandatory audit firm rotation after six years (9 years if two audit firms are used) and a ban on the auditor providing certain non-audit services. Mandatory tendering of the audit is also proposed and contract clauses requiring a company to be audited by one of the 'Big Four' will be prohibited. The Commission also wants structural changes within the largest firms so that there is a complete separation between auditing and non-auditing activities.

Elsewhere in the proposals, a greater role is proposed for the audit committee, which the Commission says should consist of non-executive directors, with at least one NED having experience and knowledge of auditing and another experience and knowledge in accounting and/or auditing. A greater role for the European Securities and Markets Authority is proposed with regard to coordination between regulators in Member States but also with regard to the publication of guidance on various matters identified in the Regulation including, for example, the content of the handover file to be provided by outgoing auditor to the incoming auditor.

Requiring firms to have joint auditors is not proposed at this stage although it is clear that the Commission believes that there is merit in the largest firms having two auditors (note what is said in the below video).

For further information see: Press release | FAQs | Draft Regulation (pdf) | Draft Directive (pdf) | Impact assessment: full version (pdf) or summary (pdf) | Video summary (and below) |