The Committee of Permanent Representatives (COREPER) has approved the agreement reached yesterday between the Lithuanian presidency of the Council of the European Union (EU) and the European Parliament (EP) on the framework of the EU audit reform.
A meeting of the COREPER voted in favour of the compromise text that would change the audit directive 2006/43/EC and proposes a regulation for the statutory audit of public-interest entities (PIEs), first presented by the EU Commission in November 2011.
In a statement the COREPER said that following the trialogue negotiations between EU co-legislators, it agreed on the mandatory rotation of statutory auditors and audit firms of PIEs.
"The agreement includes the 10 years basic period after which member states may allow the auditor or audit firm to continue audit of the same PIEs up to the maximum duration of 20 years where a public tendering is conducted and up to 24 years in case of a joint audit," the COREPER stated.
The COREPER has also voted in favour of prohibiting non-audit services for audited PIEs, including stringent limits on tax advice and services linked to the financial and investment strategy of the audit client.
"But member states will have the right to allow some tax and valuation services to be provided if they are immaterial and have no direct effect on the audited financial statements," the COREPER said.
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This measure aims at limiting risk derived from conflicts of interest, when auditors are involved in decisions impacting the management of a company. It would also substantially limit the ‘self-review’ risks for auditors.
Also, in order to reduce the risks of conflicts of interest, the rules propose the introduction of a cap of 70% on the fees generated for non-audit services, other than those prohibited based on a three-year average at the group level.
Ahead of the COREPER meeting, Barnier regretted yesterday that the European Securities and Markets Authority (ESMA) has not been endorsed as the audit oversight coordinator.
The COREPER said the Committee of European Auditing Oversight Bodies (CEAOB) will lead the supervision of auditors in the EU, although "it will use also the experience of the ESMA in the sphere of international cooperation between member states and third countries in this area of audit oversight."
The COREPER said that what has been approved today "allows reaching a first reading agreement, after the formal voting in the European Parliament and later in the Council."
According the COREPER, the agreement on the audit reform would be listed as an "A item" of the Council’s agenda. In the EU jargon "A items", as opposed to "B items", can be approved without the debate of member states ministers in the EU Council.
A meeting of the Competitiveness Council is scheduled for 20 February 2014 and the agreement could be voted at the plenary session of the EP scheduled for 13 January 2014, according to a source with knowledge of the situation.
Both the formal approval in the Council and a plenary vote in the EP will put an end to the EU legislative process.
Grant Thornton International director Nick Jeffrey said the COREPER’s agreement was the next single most difficult step, after which "I would believe that there won’t be any obstacle for reform".
"This package of measures will have meaningful impact. It will ensure that change happens across the market and remains permanent," he added.
PwC UK chairman and senior partner Ian Powell urged the EP and the member state governments to look again at the proposed rules and make "significant changes" or face passing a law that would place European business at a competitive disadvantage.
"An imposed regime of mandatory firm rotation over the proposed short transition period, adds cost and complexity for business with global companies, especially those in financial services, being particularly impacted," he said.
Powell added that the proposed package undermines the importance of good governance and the role of audit committees, which for him it’s at the heart of the EU corporate governance system.
"Audit Committees also have an important role to play in the control, selection and independence of any services to be provided by the auditor. We are strong supporters of independent Audit Committees and the position taken by the UK Government in this regard," Powell said.
In a statement EY said the EU’s proposed regulation could not only impose additional burdens on business but also create a patchwork of regulation that would be costly and difficult to implement for investors.
According to EY, the estimated cost to the EU economy of rotating the auditors of more than 30,000 public interest entities could be more than €16bn ($22bn).
"This is a bad deal for investors, a bad deal for business and for jobs, and a bad deal for the European and Global economy. We encourage the EU to undertake an economic analysis and consider the consequences before it moves forward," EY said.