The European Parliament and EU Member States reached a provisional agreement on the reform of the audit sector

The key elements of the new rules include:

1. A clarified societal role for auditors
Increased audit quality: In order to reduce the ‘expectation gap’ between what is expected from auditors and what they are bound to deliver, the new rules will require auditors to produce more detailed and informative audit reports, with a required focus on relevant information to investors.
Enhanced transparency: Strict transparency requirements will be introduced for auditors with stronger reporting obligations vis-à-vis supervisors. Increased communication between auditors and the audit committee of an audited entity is requested.
Better accountability: The work of auditors will be closely supervised by audit committees, whose competences are strengthened. In addition, the package introduces the possibility for 5% of the shareholders of the company to initiate actions to dismiss the auditors. A set of administrative sanctions that can be applied by the competent authorities is also foreseen for breaches of the new rules.

2. A strong independence regime
Mandatory rotation of audit firms: Audit firms will be required to rotate after an engagement period of 10 years. After maximum 10 years, the period can be extended by up to 10 additional years if tenders are carried out, and by up to 14 additional years in case of joint audit, i.e. if the company being audited appoints more than one audit firm to carry out its audit. A calibrated transitional period taking into account the duration of the audit engagement is foreseen to avoid a cliff effect following the entry into force of the new rules.
Prohibition of certain non-audit services: Audit firms will be strictly prohibited from providing non-audit services to their audit clients, including stringent limits on tax advice and services linked to the financial and investment strategy of the audit client. This aims to limit risk of conflicts of interest, when auditors are involved in decisions impacting the management of a company. This will also substantially limit the ‘self-review’ risks for auditors.
Cap on the provision of non-audit services: To reduce the risks of conflicts of interest, the new rules will introduce a cap of 70% on the fees generated for non-audit services others than those prohibited based on a three-year average at the group level.

3. A more dynamic and competitive EU audit market
A Single Market for statutory audit: The new rules will provide a level playing field for auditors at EU level through enhanced cross-border mobility and the harmonisation of International Standards on Auditing (ISAs).
More choice: In order to promote competition, the new rules prohibit restrictive ‘Big Four only’ third party clauses imposed on companies. Incentives for joint audit and tendering will be introduced, and a proportionate application of the rules will be applied to avoid extra burden for small and mid-tier audit firms. Tools to monitor the concentration of the audit market will be reinforced.
Enhanced supervision of the audit sector: Cooperation between national supervisors will be enhanced at EU level, with a specific role devoted to the European Markets and Securities Authority (ESMA) with regard to international cooperation on audit oversight.

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