EU Approves Audit Reform Rules

The European Union has taken a step further than the United States in its audit reform legislation by approving rules that ban public companies from using the same accounting firm for more than 20 years, Reuters reported.

The European Parliament on April 3 approved stringent new accounting rules designed to prevent a repeat of what happened during the financial crisis of 2007-2009: accounting firms approved banks’ books just before they needed a taxpayer bailout.

One of the rules will stop the Big 4 firms from having decades-long relationships with the same companies. Lawmakers have criticized the connections as being too close. Former British Finance Minister Nigel Lawson, who helped develop the EU law, said of the bailout, “None of the Big Four raised the alarm at all,” Reuters reported.

Mandatory rotation had been proposed after six years, but a majority judged that this would be an expensive and unwelcome intervention in the audit market.

Overall, the law is aimed at improving audit quality and transparency and preventing conflicts of interest. Banks can no longer require that a company receiving a loan must hire one of the Big 4 to handle its accounts. It also puts limits on the kinds of non-accounting services that can be provided to a company if the firm is already checking its financial statements. The new EU law is due to be approved by the EU’s member states without changes.

The Big Four lobbied against the changes, but Grant Thornton is upbeat about the new rules.

“While many people will be upset with the changes, the new law provides ground-breaking support for protecting investors’ interests and creates some of the toughest rules for the auditing profession in the world,” Ed Nusbaum, global chief executive of Grant Thornton, told Reuters.

The rules should take effect within two years.