Mandatory rotation of audit firms is essential to ensure their independence

Press release from the ALDE-group, 2013-04-24

Ahead of tomorrow’s key vote in Parliament’s Legal Affairs committee on rules for improving the quality and independence in the auditing of major companies (especially banks), Liberals and Democrats underline the need to establish some time limits on the contractual relationship between auditors and their clients.

In light of the financial crisis over the last five years that has exposed poor supervisory practices of Europe’s banking and financial sector, the European Commission proposed in 2011, two pieces of legislation covering statutory audits, building on earlier rules in place since 1984, but aiming to increase competition in a market dominated by the ’big four’ audit firms and avoiding potential for conflicts of interest to develop.

Guy Verhofstadt, ALDE group leader, stated his clear views on the subject:
”The financial crisis has exposed bad practices and conflicts of interest in many of our trusted financial institutions and supervisory authorities. We have tackled the credit rating agencies and banking supervisors. Now it is time to shine a light on the audit companies which have been signing off the accounts of Europe’s big banks throughout the crisis, apparently oblivious to any signs of accounting imbalances or excessive debt accumulation.”

Cecilia Wikström (Folkpartiet, Sweden), ALDE coordinator in the Legal Affairs committee added:
”Large financial institutions, like all public interest entities, have a statutory obligation to be audited on an annual basis, but this function is also important from the point of view of public trust and market confidence, something in very short supply in this post-crisis era. Audit firms need to demonstrate that they are beyond reproach. Cosy relationships with clients that last for too long only fuel suspicion of inappropriate familiarity.”

The Liberal and Democrat group believes that mandatory rotation of audit firms is necessary to guarantee independence and professional scepticism. An acceptable compromise, between the Commission’s proposal of 6 years and those who oppose the idea altogether is to settle on 14 years, with a backstop at 25 for Member States requesting a derogation when their PIEs have carried out either mandatory re-tendering of audit contracts or a comprehensive assessment to international standards or have been subject to a joint audit by two or more firms.

Alexandra Thein (FDP, Germany) as ALDE shadow on this subject, has always supported mandatory rotation for financial institutions.

For more information, please contact:

Linda Aziz, press officer of Cecilia Wikström

linda.aziz@ep.europa.eu

+32 486 94 76 82