Weekly Audit & Accounting e-alert for April 4, 2022
April 4, 2022

EU Parliament Adopts Audit Reforms

The European Parliament has adopted an audit reform package, the draft Directive on Statutory Audit and the Regulation, with new requirements applicable to the statutory audit of public-interest entities. The new rules are intended to improve audit quality across the European Union (EU), improve competition in the audit market, prevent conflicts of interest, and ensure that auditors are key contributors to economic and financial stability.

The new rules require auditors in the EU to publish audit reports according to international auditing standards. For auditors of public-interest entities, such as banks, insurance companies and listed companies, the provisions require audit firms to provide shareholders and investors with a detailed understanding of what the auditor did and an overall assurance of the accuracy of the company’s accounts.

Significant requirements in the audit reform provisions include:

  • Big-four only clause prohibition. Prohibition of “big-four only” clauses in contracts.
  • Mandatory audit tenders. Public-interest entities will be required to issue a call for tenders when selecting a new auditor.
  • Mandatory auditor rotation. Companies will be required to change auditors after 10 years, with an additional 10 years if new tenders are issued, or an additional 14 years in the case of joint audits, (i.e., when a firm is being audited by more than one audit firm).
  • Prohibition on provision of non-audit services. EU audit firms will be prohibited from providing several non-audit services to their clients, including tax advisory services that directly affect the company’s financial statements or services linked to the client’s investment strategy.
  • Limits on fees for non-audit services. Fees for allowed non-audit services will be capped.

The audit package must be formally adopted by the Member States in the Council. The publication of the new rules in the Official Journal of the European Union is expected to occur in the second quarter of 2014.

A press release on the EU audit reform package is available here.

An explanatory memorandum and frequently asked questions file on the audit reforms are available here.

A Statement by the European Commission on the audit reforms is available here.

House Committee Set to Hold Hearing on Enhancing Capital Formation for Small and Emerging Growth Companies

A subcommittee of the House Financial Services Committee has scheduled a hearing, “Legislative Proposals to Enhance Capital Formation for Small and Emerging Growth Companies.” The hearing is expected to take place on Wednesday, April 9, 2014, beginning at 10:00 AM in the Rayburn House Office Building in Washington, D.C.

Emerging Growth Companies are a new category of issuers created by the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act was signed into law by President Barack Obama on April 5, 2012, and is intended to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.

Information on the hearing is available here.

SEC Chair Discusses SEC Enforcement Program

On March 31, 2014, SEC Chair Mary Jo White gave the keynote address at the SIFMA Compliance and Legal Society Annual Seminar. Ms. White discussed the importance of all-encompassing enforcement of the securities laws. Ms. White provided that such an all-encompassing approach should include “appropriate, but vigorous, use of criminal, civil, and regulatory tools to enforce the securities laws.” While acknowledging the importance of the examination function to regulatory compliance, Ms. White’s remarks focused on the enforcement function, including investigating and bring cases against wrongdoers. Among her remarks were:

  • Essentially any violation of the federal securities laws and regulations can be a criminal violation if done willfully, that is, with intent to violate the law. While not all investigations give rise to a criminal case, in the last 20 years, there has been a significant rise in criminal prosecutions of securities cases. In many of these cases, it is the lawyers, accountants, and other professionals from the SEC’s enforcement and exam programs who initially detect the misconduct and put the preliminary case together.
  • One of the SEC’s most effective tools is the SEC’s ability to bar wrongdoers from their particular roles in the securities profession, and, thanks to the Dodd-Frank Act, from the entire securities industry.
  • Although standalone criminal prosecutions and parallel actions send important messages of deterrence, the SEC’s ability, in civil standalone actions, to broadly punish wrongdoing also sends an important and additive message to the market on appropriate standards of conduct.
  • Good financial reporting and vigilant auditing obviously go to the heart of the integrity of our markets and strong investor protection, which is why the SEC has again intensified our focus on this area.
  • An important tool to the SEC in financial fraud cases is the Financial Reporting and Audit Task Force, whose objective is to focus on trends or patterns of conduct that are risk indicators for financial fraud. This task force has focused on areas like revenue recognition, asset valuations, and management estimates. Through their work, this task force has identified potential cases for investigation.

SEC Office of Municipal Securities Names Personnel

The SEC named Jessica Kane as Deputy Director and Rebecca Olsen as Chief Counsel in its Office of Municipal Securities. According to the SEC, Ms. Kane has served as senior special counsel to the Director in the Office of Municipal Securities, where she has played a leading role on the municipal advisor registration rulemaking project and other municipal securities initiatives.  She joined the SEC in 2007, where she worked on corporate securities disclosure matters in the Division of Corporation Finance from 2007 to 2012, and then worked in the SEC’s Office of Legislative and Intergovernmental Affairs from 2012 to 2013.

Ms. Olsen joined the Office of Municipal Securities in 2013, where she made notable contributions to the municipal advisor registration rulemaking project, reviewed Municipal Securities Rulemaking Board (MSRB) rulemaking, and consulted with the Division of Enforcement on municipal securities enforcement matters.  Previously, Ms. Olsen spent more than 10 years at Ballard Spahr LLP, where she practiced primarily in the municipal securities area.

The SEC established a standalone Office of Municipal Securities pursuant to the Dodd-Frank Act to administer SEC rules on practices of broker-dealers, municipal advisors, investors, and issuers in the municipal securities area and to coordinate with the MSRB on rulemaking and enforcement actions.  The Office of Municipal Securities advises the SEC and its various offices on policy matters, enforcement, and other issues affecting the municipal securities market and oversees MSRB rulemaking and the SEC’s municipal advisor registration program.

A news release on Ms. Kane is available from the SEC here.

A news release on Ms. Olsen is available from the SEC here.

Corp Fin Director Discusses JOBS Act

Keith Higgins, Director of the SEC’s Division of Corporation Finance, gave the keynote address at the Angel Capital Association Summit held on March 28, 2014, in Washington, D.C. Mr. Higgins discussed the changing landscape for angel investing as a result of the SEC’s rulemaking under the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act was signed into law by President Barack Obama on April 5, 2012, and is intended to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.

Specific topics discussed by Mr. Higgins included:

  • Elimination of the general solicitation prohibition in Rule 506 offerings;
  • Review of the “Accredited Investor” definition; and
  • Proposed changes to Regulation A.

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