New EU audit services law to regain investors’ confidence

Not only should auditors remain independent and therefore state their fees and benefits received from their clients, they also have to disclose any payments received for non-auditing services if they work for larger companies.

In order to rebuild investors’ confidence in European companies, the EU’s Legal Affairs Committee has now voted for a new draft law forcing companies to switch auditors on a regular basis and prohibiting auditors from performing certain non-auditing services that could risk their independent view such as supplying tax advisory services to the same client.

Furthermore, auditors would have to ensure higher transparency by publishing detailed reports in compliance with international standards and provide detailed insights to shareholders.

With the perception of the auditors’ independence and integrity being a vital factor influencing the public’s and investors’ confidence in financial reporting and hence a determining investment factor, the EU aims to reinforce higher auditing standards sending out positive signals to potential investors.

However, the initial plan of the EU Commission of a regular auditor rotation of every 6 – 12 years has been rejected by the Committee pleading for a 25 years interval (or 4 times a century). According to the Commission “a basis for further discussion” – which providers of auditing services are watching closely.