Banks and listed companies would be required to rotate their auditors under European Union proposals aimed at improving audit quality and boosting competition in the industry.
The plans published by the European Commission today include curbs on large audit companies’ right to offer consultancy services, the Brussels-based regulator said in a statement on its website.
“Investor confidence in audit has been shaken by the crisis,” Michel Barnier, the EU’s financial services commissioner, said in a statement. “We need to restore confidence in the financial statements of companies.”
The EU is reviewing audit rules following the collapse of Lehman Brothers Holdings Inc., which the commission said raised questions about the quality of company audits. The top four auditing firms have a market share that exceeds 85 percent in the majority of EU member states, the commission said.
“Today’s proposals address the current weaknesses in the EU audit market by eliminating conflicts of interest, ensuring independence and robust supervision and by facilitating more diversity in what is an overly concentrated market,” Barnier said.
Banks, insurers and listed companies would be required to rotate the audit firm they use every six years, with a four-year gap before the firm could be rehired, the commission said.
The rotation period could be extended to nine years if a company uses more than one auditor, the commission said.
Audit companies would be banned from providing consulting services to their clients in order to avoid conflict of interest, the commission said.
Large audit firms would also be obliged to “separate audit activities from non-audit activities,” the commission said. This separation would amount to “a complete ban on the provision of non-audit services,” it said.