European Union Requires Auditor Rotation

After several years of “flirting” with a proposal to require audit firm rotation, the EU Parliament has reached a decision – companies must put the audit up for “tender” after 10 years.

In a cfo.com article summarizing the new rules, Mr. David Katz points out that, in certain circumstances, the company can extend the incumbent audit firm’s tenure for an additional period. He says, “EU member countries can decide to extend the 10-year auditor rotation period for up to 10 more years if companies tender the audit contract out but choose the incumbent firm. Countries can extend the term by up to 14 added years if the audited company appoints more than one audit firm to carry out its audit” (http://ww2.cfo.com/auditing/2014/04/eu-enacts-10-year-auditor-rotation/).

An EU press release introducing the EU decision (http://europa.eu/rapid/press-release_STATEMENT-14-104_en.htm?locale=en), states that the new requirements on audit firm rotation is part of a package of rules intended to improve audit quality and auditor independence for audits of “public interest” entities, which includes listed companies, credit institutions, and insurance undertakings.

In his cfo.com article, Mr. Katz notes that in the U.S., the Public Company Accounting Oversight Board (“PCAOB”: http://pcaobus.org/Pages/default.aspx) proposed a rule requiring auditor rotation in 2011. The PCAOB tabled the proposal a few years later after failing to reach an approach acceptable by its various constituencies.

Mr. Katz suggests that auditor rotation might not be a “dead” issue in the U.S. For example, he notes that, despite suspending the audit firm rotation project, James Doty, chairman of the PCAOB, continues to refer to “auditor tenure” in public meetings on various PCAOB agenda projects, such as at a recent public meeting on the PCAOB’s proposals to improve the auditor’s reporting model.

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About docjonz

I am an Associate Professor of accounting at Hofstra University in Hempstead, NY. Additionally, I have more than 30 years of professional accounting experience in various capacities including auditing, accounting standard setting and corporate accounting policy.
This entry was posted in Accountant, Auditing and Auditor Reporting, Corporate Governance and tagged , , , , , . Bookmark the permalink.

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