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September 6, 2012

Juri scraps mandatory rotation and audit-only firm proposals

Measures such as pure audit-only firms and mandatory rotation have been scraped in the revised draft regulation by the European Parliaments Committee on Legal Affairs (Juri).

Juri committee rapporteur Sajjad Karim has published revised draft audit regulation on the back of the European Commission’s November 2011 proposals but has removed the most drastic audit market reforms such as banning certain non-audit services to audit clients, which could have led to audit-only firms.

The EC’s original recommendation which stated “It is important to introduce a transitional regime regarding the entry into force of the obligation to rotate audit firms, the obligation to organise a selection procedure for the choice of audit firm and the conversion of audit firms into firms that only provide audit services” has been completely scraped in Karim’s amendments.

Re-tendering Karim has suggested a Public Interest Entity (PIE) should be allowed to keep its auditor for a maximum of 25 years before mandatory re-tendering is required, which is a measure that has been widely called for by the mid-tier to tackle the issue of lengthy audit engagements, particularly among the Big Four, that can last up to century.

“The maximum unbroken duration of an audit engagement to a public-interest entity shall not exceed 25 years,” the Juri draft stated.

The draft also recommends that every seven years a PIE must report to regulators that it has conducted independence threat assessments concerning both the statutory auditor and audit firm and it is “satisfied that the statutory auditor or audit firm is likely to be able to mitigate any threats to its independence”.

This watered down version of the draft regulation is not a big surprise as speculations have been growing that the Juri committee was expected to take a more soft approach towards reforming the EU audit market. There have also been widespread allegations of increasing Big Four lobbying in order to scrap measures that would significantly alter the Big Four business model.

Karim is to present the report on 17 or 18 September and the Economic and Monetary Affairs Committee (ECON) is then expected to give its opinion in November.

A formal agreement of a final text that will then go to EU Parliament for debate could emerge by the end of 2012.

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