Financial reporting is one of the main sources upon which investors base their decisions. Auditors play a key role in financial reporting, by ensuring that audited financial statements deliver a true and fair view of a company's financial situation. On 17 June 2016, new EU rules on statutory audit took effect. These rules aim to boost investors' confidence in financial reporting, which will in turn promote cross-border investment and contribute towards the EU's goal of building a Capital Markets Union. Here, policy expert at the European Commission Loren Lesko explains the new rules, which the Commission hopes will help enhance competition in this highly concentrated sector. 

Transparency, independence and competition

The new EU rules on statutory audit aim to strengthen the quality of audits of financial information throughout the EU. Specific rules will apply to the statutory audits of companies with a significant public interest – in particular listed companies, banks and insurance companies (public-interest entities, or PIEs).

The new rules will enhance transparency by providing more informative audit reports to investors, together with an additional report to the audit committee of PIEs. Furthermore, a set of measures will strengthen auditors' independence vis-à-vis the audited company's management. For instance, in the case of PIEs, auditors will rotate on a regular basis and will no longer be able to provide certain non-audit services to their audit clients This new rotation system, combined with the restrictions on the joint provision of audit and non-audit services, will limit the risk of conflicts of interest and help promote competition and innovation in the market for providing audit and non-audit services. The Commission has just started work on a report monitoring the developments in the PIE audit market, based on input from national audit supervisors.

A smooth transition

The new EU rules represent a major overhaul of the existing framework on statutory audit. Since their adoption in 2014, the Commission has worked closely with Member States, national audit supervisors, the audit profession and the industry to facilitate the implementation of the new rules. The Commission has also sought to reduce any possible cross-border inconsistencies in the application of the audit reform, in light of the 'national' options Member States can choose to adopt.

The Commission will continue to provide assistance when practical questions arise, while taking stock of the implementation process and assessing the compliance of Member States. The Committee of European Auditing Oversight Bodies (CEAOB), created under the new audit reform, will include national audit supervisors and the European Securities and Markets Authority (ESMA). It will also support supervisory convergence in the EU and provide further guidance on the cross-border application of the new rules.

Read more on the new EU audit rules