In context

Restrictions for audit firms at listed companies

October 10, 2013
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In context

The European Parliament is currently looking at the Commission’s proposals for audit market reforms. This may change the Dutch situation for audit firms and listed companies.

The European Parliament is currently looking at the Commission’s proposals for audit market reforms, and a plenary session on the proposals is planned for November 2013. During the summer, the Dutch Minister of Finance responded to the status of the European proposals and the radical rules for audit firms and public interest entities – including listed companies, banks and insurers – that have already been introduced in the Netherlands.

 

European rules
It looks like European rules for mandatory rotation and a separation of audit and non-audit services are going to become reality for accountants firms, but the exact details are as yet unknown. The most recent proposals refer to mandatory rotation after ten years, and to the use of a “blacklist” of services that may not be performed in combination with statutory audit work at the same client.

 

Situation in the Netherlands
In the Netherlands, the maximum period of engagement is eight years, with a “cooling-off” period of two years. Mandatory rotation takes effect on 1 January 2016, but could play a role at general meetings held before that date. The Minister has promised to evaluate the new mandatory rotation rule in mid-2015 and assess it against the European rules as they then stand. An Alert issued by the NBA (in Dutch only), the professional accountants organisation, presumes that mandatory rotation applies to financial years ending on or after 1 January 2016. In practice, this means that if the eight-year tenure of an audit firm ends at the end of 2015, the listed company must appoint a new auditor in 2015. Depending on the outcome of the Minister’s evaluation, the Minister may decide to abandon mandatory rotation a few months later.

 

Audit firms must separate their audit and non-audit activities as of 1 January 2013. They cannot simultaneously provide both types of services to listed companies. In practice, this will lead to questions about the nature of services that firms may not combine with audit work. The Alert issued by the NBA addresses these questions. Proposals for further legislation include specification of permitted services.

 

Notification requirement for listed companies
Another aspect of the new rules is that the AFM has greater supervisory powers. To meet the necessary transparency, listed companies must notify the AFM of a proposed appointment of an auditor or audit firm. The AFM website contains further information on this (in Dutch only).

 

The new accountancy rules may have far-reaching consequences, not only for accountants but also for listed companies, banks and insurers, and it is not always clear how the rules should be applied. The European developments have not yet prompted the Minister to make adjustments or move the evaluation forward. All one can do for now is to wait and see what final form European regulation in this field will take.

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