Proxinvest and Ethos have joined the investors coalition on the auditors rotation

Will the European Parliament install auditors in a 25 years long comfortable journey ?

Supporting most of the EC Commission proposals on auditors responsibility and rotation Proxinvest and Ethos have joined an important investors coalition on this thema of audit tasks.

USS, the second UK pension fund, has succeeded in gathering major names to support a practical proposal for the reform of the audit. Several UK, Swedish, Swiss (Ethos) pension funds and Proxinvest , but also AXA IM and Groupama, have now joined the coalition around the following proposals:

1st proposal: Audit Committees are required to set a maximum tenure period for auditors to suit their company’s complexity and size, and outline their reasoning to shareholders. An upper bound of 15 years should be set to safeguard shareholders long term interests.

It is expected that Audit Committees will undertake at least one competitive tender including the incumbent, and then again at the end of the full term, excluding the incumbent6. There should be a ‘clear water’ period of at least 5 years before an auditor can be re-appointed. We would like to see a system of mandatory tendering every 5-7 years, combined with mandatory rotation after no more than 15 years (see above). The tender should involve at least two candidates (other than the incumbent) to ensure genuine competition and to open the market to new entrants. We do not feel the EC should go as far as requiring that a smaller auditor is involved in the process. The selection and appointment process needs to be transparent for shareholders.

2nd proposal: Auditors should be permitted to undertake audit related work, but we favour restrictions on non-audit work for audit clients. We would like to see a requirement that where the value of non-audit work rises above 50% of the audit work, the Audit Committee must bring down the ratio below 50% within the next 12 months, or select a new audit firm at the next tender. Whichever action is taken must be disclosed in the next annual report.

3rd proposal:We would like to see a fuller audit report that draws attention to key areas of judgment, estimates, any weaknesses in the financial system, assumptions underlying fair value estimates, any disagreements with management, etc. We would support more formal adoption of the “Audit Committee Reports – Global Disclosure Guidelines” published by the Enhanced Disclosure project.

4th. proposal:Audit Committees at large cap firmsshould have two members with some auditing/accounting expertise.

5th. proposal:Rather than extending the coverage of ISAs, the EC should investigate as a matter of some urgency whether IFRS is delivering accounts that provide a “true and fair” view as required under 4th and 7th Accounting Directives, and therefore can ensure prudent long term stewardship by management and shareholders.


Universities Superannuation Scheme RPMI Railpen BBC Pension Fund Legal & General Investment Management London Pensions Fund Authority Local Authority Pension Fund Forum Environment Agency Active Pension Fund, UK The Cooperative Asset Management Governance for Owners First Swedish National Pension Fund (AP1) Second Swedish National Pension Fund (AP2) Third Swedish National Pension Fund (AP3) Fourth Swedish National Pension Fund (AP3) Ethos service Proxinvest


12 September 2012