Brussels pushes for shake-up of audit

The European Commission is pressing ahead with rather radical plans to transform the market for audit services in the European Union. In one possible scenario the draft regulation might see a reconfiguration of the networks of the Big Four accountancy firms and a split between audit and non-audit services. The key elements of the planned regulation are:

• Mandatory rotation of auditors: With some exceptions, organizations would need to change auditors every six years, and there would be a "cooling off" period of four years before an auditor could return to work for the client.
  
• Mandatory tendering: Audits of public-interest entities would be made by an open tendering process, in which the organisation's audit committee would play a central role.
  
• Ban on non-audit work: Audit firms would be barred from providing non-audit services to audit clients. Large firms would need to legally separate audit and non-audit activities to reduce conflicts of interest.
  
• EU supervision: Regulation of the audit industry would be overseen by the European Securities and Markets Authority.
  
• EU passport: Auditors in one member state could offer audit services in others under a "passport" system. This would make it easier for smaller audit businesses to compete with the big networks.

Internal market commissioner Michel Barnier said: "Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary: we need to restore confidence in the financial statements of companies. Today's proposals address the current weaknesses in the EU audit market, by eliminating conflicts of interest, ensuring independence and robust supervision and by facilitating more diversity in what is an overly concentrated market, especially at the top-end."

The commission's proposal is for what the special language of Brussels calls a "regulation". That means that whatever measure is finally adopted by the European Parliament and the European Council of national governments would become mandatory across all 27 member states, without scope for national variations in approach.

Source documents: The draft regulation is an 87-page pdf file. The version we saw was a late draft, due to be replaced by a final version with the correct date. The audit website has links to other documentation.