Why the EU Audit Reform matters to companies

Much has been made of the effects of mounting regulation occasioned by the EU directive and regulation on the role and resilience of auditors. Less has been said about companies and their audit committees. However the burden on them is substantial.

The requirements to tender and rotate auditors in Europe for companies that are “public interest entities” have been well publicised. Less well known are the requirements to make those processes open to the audit market, with clear criteria for appointments and for audit committees to propose two final candidates to the board. Effectively the audit committee is now to be involved in what at least looks like a semi-public process. The audit committee chair is now very much the lynchpin of company governance of audit, and can consequently expect more public scrutiny.

The new law also has detailed restrictions on non-audit services provided by auditors as well as a cap on total fees which those can attract. Companies may therefore need to engage with providers they don’t yet have relationships with to provide services relating to taxation or due diligence by way of example.

The regulation also requires annual reports to be produced by the Commission on the impact of all this legislation, but it particularly refers to the performance of audit committees.

There are a number of country by country variations, making this particularly complex for some multinational companies.

Much of this is only mandatory for listed companies and financial services businesses. Increasingly, though, it will be looked on as best practice and expected of others who raise equity outside their business and its immediate community.

The larger listed company, the board and its committees can expect to be well supported by the finance and secretarial teams, and will typically have a reasonable spread of non-executive directors.  In smaller listed companies, there are likely to be fewer and a more stretched infrastructure that isn’t geared to serving up complex material to board committees.  

Our experience can help identify where you have exposures to the new rules, what relevant timelines might be and how best to navigate the issues. Visit our dedicated EU Audit Reform site, or contact us below.

Author: Noel Clehane , Global Head of Regulatory & Public Policy Affairs