New Zealand subsidiaries and branch operations of EU companies are likely to feel the impact of new laws passed by the European Parliament to address investor concerns over the excessive volume of non-audit services, long tenure of audit relationships and the quality of audit communication.
Grant Thornton New Zealand’s National Technical Director, Mark Hucklesby said it was not a case of if the law in New Zealand would change, but simply when.
“Investors are the ultimate customer of the audit product. They want to be sure that the provision of significant levels of non-audit services by the auditor does not compromise audit quality via compromised independence or reduced professional skepticism,” he said.
In 2013 the estimated global advisory market was assessed at $208 billion, with the aggregate Big-4 advisory income component being $39 billion.
“The 70% capping limit for non-audit services, averaged over three years, that has been passed, will come fully into effect in 2016. It is difficult to see how this decision made by the European Parliament will not change the thinking of company directors when they come to deciding who should be providing future consulting services” said Hucklesby.
“It should also be noted that audit reform discussions are not restricted to the EU. They are also taking place in the UK, the Netherlands, India and elsewhere in response to investor concerns. It's clear that some companies have noted these concerns and are reacting accordingly, but addressing these concerns in the law ensures that there will be change across the European market and that change will be permanent.”
Key aspects of the new European auditing law include:
- capping, at 70% of the audit fee, the level on non-audit services that a PIE can obtain from its auditor
- restricting some of the tax and advisory services that a company may obtain from its auditor
- making null and void any restrictions on a company’s choice of auditor (commonly known as “Big-4 clauses”) and requiring audit rotation at 10 years unless EU Member States provide the option to extend it up to 24 years, and
- requiring more informative audit reports, and reports by the auditor to the audit committee.