Big step forward to boost audit confidence

MEPs have approved new proposals to reform the audit profession – aimed at strengthening audit quality and promoting renewed confidence in financial reporting.

MEPs have approved new proposals to reform the audit profession – aimed at strengthening audit quality and promoting renewed confidence in financial reporting.

The reforms, drafted by British Conservative MEP Sajjad Karim, introduce a series of measures designed to improve the audit process. They should make audits clearer, more independent and generally more helpful to investors.

Mr Karim’s priority has been to improve the quality of reports and to encourage innovation by audit firms, in response to investors’ desires for more useful insights into the way Europe’s largest companies work.

A major element of Mr Karim’s reform has been to promote the role of the audit committee, which will act as an effective gatekeeper ensuring that management’s judgments are appropriately investigated and the auditor’s work remains up to scratch.

The report also deals with the question of independence, which has been a key debate within Parliament. The report adopted will introduce mandatory rotation, obliging companies are to change their auditor every 14 years (although this may be extended to 25 years by member states).

This measure is reinforced by others directed at improving transparency over the appointment of auditors. Together they should encourage an open and objective culture when audit committees review output and make appointments.

Speaking after the vote in the European Parliament Legal Affairs committee, Mr Karim, ECR spokesman, said:

“Reforming the audit sector is crucial to boost confidence in the financial markets, and to support growth and investment in European companies.

“We are keen to create an environment which encourages a better quality of reporting, clear transparency and more competition.

“We have consistently advocated an international approach, adopting global standards which promote audit quality. It is no surprise that regulators in the US and around the world are watching us closely and the vote this morning signals loud and clear that we are taking the right steps.”

Much of the discussion has focused on the thorny issue of mandatory firm rotation. Mr Karim’s original proposal proposed a long back-stop period, of 25 years, in contrast to the Commission’s plan to intervene in the market on a six year basis.

Mr Karim, Conservative legal-affairs spokesman in the Parliament, said: “I’m very happy that my colleagues have supported my original concept, which is designed to promote serious consideration by audit committees of their auditor and the quality of the service provided.

“It continues to be a disappointment that rather than engage on the wider issue of audit quality, the Socialist and Green groups in the Parliament have focused solely on the narrowest debates around competition.

“Such issues are best dealt with by national competition authorities, who are best placed to decide what solutions are needed for very different domestic markets across Europe.”

The text sets out clear rules in the area of non-audit services, aimed at protecting independence and prohibiting services which risk conflict of interest.

The report was voted through the European Parliament Legal Affairs Committee with the support of MEPs from the European People’s Party and Alliance of Liberals and Democrats for Europe.

The reforms will go before the full European Parliament later this year.