It will be harder for large companies to lean on their auditors to sign off their annual accounts under new European Union rules for the auditing sector agreed by MEPs and the Lithuanian government on Tuesday (17 December).

The cosy relations between the audit sector, which is dominated by the ‘big four’ of Deloitte, PWC, Ernest & Young and KPMG, and their clients came under fire following the financial crisis as auditors approved the accounts of financial institutions that subsequently went bust.

Under the new rules, which still have to be voted on by MEPs and member states, banks, insurance companies and listed companies will have to put their audit needs out for tender every ten years and will have to change auditors after a maximum of 20 years. But the compromise pours water on the European Commission’s proposal from 2011, which would have required auditors to rotate every six years. Sajjad Karim, the centre-right British MEP who led the Parliament’s response to the proposal and is a member of the European Conservatives and Reformists Group, described the deal as “a workable compromise and a considerable improvement on the Commission’s original proposal.”

Michel Barnier, the European commissioner for internal market and services, said: “This is a first step towards increasing audit quality and re-establishing investor confidence in financial information, an essential ingredient for investment and economic growth in Europe.”

In a controversial move, the deal would place strict limits on the  additional services – such as tax, strategy or investment advice – that audit firms can provide to auditing clients. “It will take time for everybody involved – the profession, businesses, regulators – to work through the details and get to grips with all the changes,” said Michael Izza, the chief executive of ICAEW, an association of chartered accountants.

Industry has also warned of the danger of forcing companies to switch auditors all at the same time.

By introducing short mandatory rotation periods, the Commission’s proposal would have given smaller auditors the chance to break up the dominance of the ‘big four’. It remains to be seen whether this will happen under the new rules.

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