The EU Audit Reform: An Encouraging Step in Creating a Single European Audit Market

What Encouraged Such a Reform?

When Michel Barnier became European Commissioner for DG Internal Market in February 2010, he made it an objective to pursue three major reforms, one of which being a European Audit Market Reform. After the Financial Crisis of 2008, it became essential to restore investors’ confidence in audits by eliminating conflicts of interest, ensuring independence, providing sound supervision and facilitating greater competition in what is an overly concentrated market.

The publication of a Green Paper in 2010 entitled "Audit Policy: Lessons from the Crisis” helped materialize this objective and constituted a stepping stone, setting off a three year legislative process that has led to a final agreement and proposal which has been formally voted in by the European Parliament on April 3rd, 2014. 

What does this Reform Entail?

This reform strives to lay down the framework in creating a Single European Audit Market through the adoption of a new Regulation and amended Directive:

The Directive 2014/56/EU amends the Directive 2006/43/EC and applies to all statutory audits. The Directive would need to be transposed into national law by each Member State.

The Regulation (EU) No 537/2014 includes new requirements governing statutory audits of Public Interest Entities (PIEs) that would apply throughout the EU without needing to be transposed into Member State law. 

What are the Primary Changes?

• A strong emphasis on a reinforced governance by increasing the role of the Audit Committee and introducing a fair and transparent tendering process for the selection of the auditor(s);
• A more elaborated audit report, with the requirement of additional reports;
• A system of mandatory rotation of audit firms which recognizes that Joint Audit is a system with merits;
• A list of prohibited non-audit services and a threshold on permitted non-audit services provided by the audit firm;
• The creation of a Committee of European Auditing Oversight Bodies (CEAOB) to oversee the cooperation between national audit oversight bodies;

Why is this Reform Important?

This Reform will distinguish Europe from other economic areas. Smooth implementation on a Member State level will be detrimental in ensuring a secure environment in which…

• Companies have the opportunity to improve the external control of their financial information,
• Investors’ can regain confidence through better and secure financial reporting,
• Greater choice, innovation and easier market access will promote the emergence of a competitive and secure European market reinforced by a European oversight system.

What are the Next Steps?

1)  The Directive and the Regulation were published in the Official Journal of the European Union on 27 May 2014, triggering Entry into Force on 17 June 2014. 

2)   Member States have two years to implement the Directive and the Regulation.

How can we Support You?

By making the reform more accessible to you!

1) Before getting ready for any type of change, it is first important to understand what will be changing. We aim to facilitate this process by providing you with an extensive Guidebook which explains the scope of the Reform by regrouping the primary changes that will take place into major processes. Guidebook coming soon.

2) We would like to help you understand both practical and salient subject matters related to the Reform through the point of view of various in house and out of house experts: Other videos coming soon.

3) The recognition that has been given to Joint Audit within the New Regulation (longer rotation period) reinforces the idea that the system is a proven and credible option. In the right column, you will find a short and concise document that outlines the benefits of Joint Audit. For a more exhaustive understanding of Joint Audit, please refer to “An Insight into Joint Audit”, also in the right column.

4) For your reference, you will find a copy of the current 2014 Regulation and amended 2006 Directive.