Reforming the Audit Market European Commission November 30 th 2011

2 Main objectives Clarify and define more precisely the role of the auditor Reinforce the independence and professional scepticism of the auditor Make the top end of the audit market more dynamic

Main objectives cont’d Improve the supervision of auditors Facilitate the cross-border provision of statutory audit services Reduce unnecessary burdens for SMEs

Proposed update of Statutory Audit Directive Free ownership of audit firms Mutual recognition of professional qualifications – EU passport for auditors and audit firms ISA should be applied in all Member States ISAs should be adapted to the dimension and scale of SMEs Extended definition of PIEs – listed companies and financial institutions

5 Proposed regulation for PIEs PIE auditors Mandatory rotation of the audit firm after 6 years (9 years if joint audit) Mandatory tendering Cooling off period: 4 years. Prohibition of non-audit services to audit clients Related financial audit services limited to 10 % of audit fee

6 Proposed regulation for PIEs Large PIEs 10 largest issuers/market cap All issuers with market cap > 1 bn EUR, All issuers with total assets or assets under management > 1 bn EUR

7 Proposed regulation for PIEs Appointment of auditor The audit committee shall submit a recommendation for the appointment of auditor/audit firm The recommendation shall contain at least two choices At least one auditor or audit firm invited to submit a proposal should not have more than 15 % of total annual audit fees from large PIEs

Proposed regulation for PIEs If > 1/3 of annual audit revenues from large PIEs and annual audit revenues of EU network of > 1,5 bn EUR: No non-audit services to PIEs May not belong to network which provides non- audit services within EU Consultancy entity/entities cannot own more than 5 %/10 % of audit firm Audit firm cannot own more than 5 % of consulting entity 8

Proposed regulation for PIEs Audit report Information on appointment of auditor Members of audit team and their independence Audit methodology and materiality Key areas of risk of material misstatement, including critical accounting estimates and uncertainties 9

10 Proposed regulation for PIEs Audit report cont’d Assessment of entity’s internal control system Entity’s violation of laws and regulation Matters of emphasis Going concern assessment Indicate non-audit services and confirm independence Max 4 pages/ characters (without spaces)!!

Proposed regulation for PIEs Report to the audit committee Declaration of independence Indicate and explain judgments about going concern-doubts Determine in detail whether bookkeeping, accounting, documentation etc. show appropriateness 11

Proposed regulation for PIEs Report to the audit committee cont’d Indicate and explain all instances of non- compliance Assess valuation methods Confirm attendance at stock takes Indicate and explain principles of consolidation 12

Proposed regulation for PIEs Market oversight Financial Information Analysis of turnover by: Fees from statutory audits of PIE Fees from statutory audits of other entities Fees charged for related financial services Turnover generated by the network 13

Proposed regulation for PIEs Market oversight cont’d Transparency Report Legal structure and ownership Network structure Governance structure Internal quality control system Independence procedures List of PIE clients 14

Proposed regulation for PIEs Market oversight Corporate governance statement if > 1/3 of annual audit revenues from large PIEs Regular monitoring of market concentration Contingency plans Oversight shall be organized within the framework of ESMA Fee of up to 10 % of revenue if violation of regulations 15