A legislative package to open up the EU audit services market beyond the dominant "Big Four" and to remedy weaknesses revealed by the financial crisis has been approved by the European Parliament and adopted by the Council of the European Union. The package will enter into force when published in the Official Journal (expected in Q2 of 2014).
The legislative package consists of:
- a regulation which will impose requirements on the statutory audit of public interest companies ("PIEs"), namely, listed companies, credit institutions and insurance companies. The regulation is likely to become effective in Q2 of 2017.
- a directive which amends the Statutory Audit Directive 2006/43/EC. This will require EU member states to legislate to ban any contractual provision restricting the choice of auditor to "certain categories or lists of statutory auditors or audit firms as regards the appointment of a particular statutory auditor or audit firm to carry out the statutory audit of that firm." Member states will have two years from publication in the Official Journal (that is, by Q2 of 2016) to act, although member states may choose to implement the ban earlier.
The aim is to:
- improve audit quality. Auditors will have to publish audit reports according to international auditing standards. Auditors of PIEs will have to provide shareholders and investors with details of what they have done and an overall assurance of the accuracy of the companies’ accounts. The audit committee of PIEs will have an advanced role in the selection of audit firms.
- improve competition and transparency. In order to open up the market there will be a ban on "Big Four-only" contractual clauses. Companies must tender when selecting a new auditor. The audit firms of PIEs will have to rotate after 10 years. This period may be extended where a public tendering process is conducted or where two or more audit firms are simultaneously engaged. Under transitional arrangements companies are given varying periods of time to switch to a new auditor.
- preclude conflicts of interest and threats to independence. EU audit firms will be prohibited from providing several non-auditing services, including tax advisory services, that could jeopardise independence.
The ban on "Big Four-only" clauses will apply to existing contractual terms which will be null and void. Lenders and borrowers should consider amending existing clauses. If lenders wish to include contractual terms which provide that they may require borrowers to appoint a specific auditor or that they may approve the appointment in advance, they need to ensure that they are drafted in such a way that they cannot be interpreted as operating by reference to "certain categories or lists of statutory auditors or audit firms."