Credit providers seek to monitor customers’ performance over the lifespan of a funding transaction. The starting point for this is usually analysis of the audited annual accounts. Funders often place great store by who does the audit and frequently seek to control this by using so-called ‘auditor (or Big Four) clauses’ – these typically require the customer to use either a specified audit firm (usually from a list, often of the Big Four audit firms) or one otherwise approved by the funder.
The first proposal
An extensive reform of the audit process, including auditors’ duties and public oversight, has been in train in the EU since 2006 with the introduction of the Statutory Audit Directive.
As part of this, there has been a focus on ‘auditor clauses’ by both the European Commission and the UK competition authorities. We reported towards the end of last year on a proposal by the Competition Commission (now called the Competition and Markets Authority (CMA)) to issue an order prohibiting the use of ‘auditor clauses’ in loan agreements – in addition to restricting the ban just to loan agreements, the CMA also proposed an exception where ‘objectively justified auditor selection criteria’ could be met. What these criteria would extend to was never entirely clear – the CMA thought that they would include ‘appropriate skills’, but not ‘reputation’.
However, this problem has now gone away – and the CMA proposal dropped – with the adoption this summer of new rules at an EU level.
Under the new EU rules, EU states will have to introduce national legislation by mid-2016 prohibiting a clause in any contract which restricts a company’s choice of auditor to ‘certain categories or lists’ of audit firms. The prohibition, therefore, will not just apply to loan agreements and is an absolute one – there are no exceptions.
In addition, the ban will apply to all contracts whenever entered into – existing as well as subsequent transactions will therefore be affected.
Funders and others currently with control over auditor appointments are likely to want to consider amending existing agreements (if these could still be live in 2016), as well as the impact of their approach in future transactions.
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