What audit reforms will the EU propose next year?

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EU to Propose Stricter Company Reporting and Auditor Rules Next Year

The European Union is set to propose more stringent regulations concerning company financial reporting and the oversight provided by auditors, with a specific focus on reforms aimed at enhancing the quality and reliability of public disclosures. These proposed changes, planned for introduction next year, are a direct consequence of the significant financial scandal involving Wirecard. The reforms will scrutinise the clarity of responsibilities assigned to company board members regarding the provision of accurate financial statements and will also consider improvements to the function of company audit committees, including their potential mandatory implementation.
Addressing Weaknesses Highlighted by Wirecard Scandal

The impetus for these forthcoming EU reforms stems directly from the collapse of Wirecard in 2020, which represented Germany's largest post-war fraud case. The scandal revealed critical failures when auditor EY could not verify €1.9 billion in cash balances. Mairead McGuinness, the EU's financial services chief, described Wirecard as a "wake-up call," indicating that the company presented a misleadingly positive financial narrative.
Enhancing Audit Committee Roles and Board Accountability

Following the summer, McGuinness plans to initiate a public consultation process. This consultation will delve into the operations of company audit committees, the external auditors responsible for approving financial figures, and the regulatory bodies that oversee them. A key area of examination will be whether the duties of company board members in ensuring the accuracy of financial reports are sufficiently well-defined. Furthermore, the consultation will explore ways to enhance the effectiveness of audit committees and assess whether their establishment should become a compulsory requirement for all companies.
Improving Audit Market Competition and Quality Control

Supervisory bodies for auditors across the EU have identified deficiencies in internal quality control systems, including inadequate monitoring of entities deemed high-risk and insufficient audit evidence and documentation. Consequently, the EU aims to have a proposal ready by the end of 2022 to address these issues and bolster the quality of public reporting and its enforcement. There is also an acknowledgement that further, more robust actions might be necessary to foster competition within the audit market, which is currently dominated by the Big Four firms—EY, KPMG, Deloitte, and PwC—who collectively hold a 92 per cent market share. The focus on lucrative non-audit services may also be a contributing factor to the perceived decline in audit quality.

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What audit reforms will the EU propose next year?

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