Insurance Europe has published its response to a consultation by the European Commission on its proposals regarding corporate reporting and its enforcement.
EU requirements for audit, supervision and corporate governance are already effective and achieve the desired objectives: There is, therefore, no urgent need to modify and extend them. Moreover, exceptional corporate failure cases cannot be a driver for new EU legislation.
Should any new requirements be proposed in reaction to such cases, they must be proportionate and distinguish between genuine public interest entities (PIEs) and other companies. It does not seem reasonable, for example, to equate a small regionally operating fire insurance company with an internationally operating and listed group of companies. The current definition of PIE in the Commission’s proposals is therefore too broad and would potentially burden many small insurers with additional requirements without added value.
As raised during the last EC review of the Audit Directive, Insurance Europe has serious concerns about the impact of the requirements for mandatory audit firm rotation and the provision of non-audit services.
Mandatory audit firm rotation causes complexity by forcing subsidiaries to rotate their audit firms even if the parent company (listed in EU or outside EU) is not required to do so. This significantly harms the unified audit process within a group, as it clearly neglects the complexities of multinational entities which have a multitude of domestic and foreign subsidiaries within and outside of EU territory. Insurers therefore support the harmonisation of the approach regarding statutory audit market regulation so that mandatory rotation would apply from a group perspective.
The restrictions on non-audit services in the Audit Directive create divergences amongst EU member states, as national regulators and member states apply the legislation differently. It also means that some tax and valuation services cannot be provided by the same firm within a group which results in additional costs and inefficiency. The nature of prohibited non-audit services should, therefore, be based on the law of the ultimate EU parent entity, and domestic law should apply across the entire group irrespective of where any PIE subsidiaries might be located within the EU.
Moreover, there is a conflict of objectives between increasing requirements for audit firms regarding their independence and the free choice of an auditor. This is especially the case for listed insurance companies, where the market for suitable audit firms consists of only four to six firms. If one of these is, for example, responsible for the audit, one for tax advice and one for valuations and transaction advice, there is little choice in the rotation of the auditor in any case.