The reform aims to improve audit quality and restore investor confidence in financial information. The new legal framework is based on two legislative instruments: a Directive amending the existing Statutory Audit Directive and a new Regulation on specific requirements regarding statutory audit of public-interest entities. The two texts were adopted by the European Parliament on 3 April 2014. Key features of the reforms are:

Better quality auditing

The legislation requires auditors in the EU to publish audit reports according to international auditing standards. Auditors of public-interest entities (PIEs), such as banks, insurance companies and listed companies, will have to provide shareholders and investors with a detailed description of what the auditor did, and an overall assurance of the accuracy of the audited company's accounts.

Opening up the EU audit market to competition and improving transparency

As one of a series of measures intended to open up the audit market and improve transparency, contractual clauses requiring that audits must be carried out by one of the "big four" accountancy firms will be prohibited.

PIEs will be required to issue a call for tenders when selecting a new auditor. To ensure that relations between the auditor and the audited company do not become too familiar, MEPs have agreed a “mandatory rotation” rule whereby an auditor may inspect a company's books for up to 10 years (this may be increased by a further 10 additional years if new tenders are issued, and by up to 14 additional years in the case of joint audits). Importantly, the rotation period has been increased from the 6 years originally proposed by the Commission. Whilst the revised 10 year period dovetails with the current provision in the UK Corporate Governance Code (introduced in October 2013), companies governed by that code will see the obligation move from a comply or explain basis to a mandatory footing.

Independence of non-auditing services

To preclude conflicts of interest and threats to independence, EU audit firms will be required to abide by rules mirroring those in effect internationally. Moreover, EU audit firms will be prohibited from providing several non-audit services to their clients, including tax advisory services that directly affect the company's financial statements and services linked to the client’s investment strategy.

Next steps

Publication in the Official Journal of the EU is expected in the second quarter of 2014. Most provisions will have to take effect within 2 years of this (although the restriction on providing certain non-auditing services is to take effect within 3 years).

For more information, see the frequently asked questionsdocument published by the European Commission.