Mandatory audit firm rotation cleared another hurdle in the European Union when the European Parliament endorsed proposed new audit regulations.
Under the draft agreement, public-interest entities—which include listed companies, banks, and insurance companies—will be allowed to keep the same auditor for up to 10 years. That period could be extended to 20 years if the audit is put out for bid, or to 24 years in cases of joint audits in which more than one audit firm conducts the audit.
The EU Council of Ministers, which represents the member states’ governments, must formally adopt the proposal for it to take effect. The member states voted in favor of the rules in December. Publication of the new rules in the Official Journal of the European Union—the authoritative source of EU law—was expected in the second quarter of this year, according to the European Commission.
Most provisions in the proposal would take effect within two years of passage, but a restriction on fee income from nonaudit services would take effect within three years. The draft agreement would prohibit EU audit firms from providing several nonaudit services to clients, including tax advisory services that directly affect the company’s financial statements, and services linked to the client’s investment strategy.
Contractual clauses in loan agreements that require the audit to be done by one of the Big Four firms also will be prohibited.
Three new AICPA Technical Questions and Answers (TPAs) provide nonauthoritative guidance regarding application of accounting alternatives FASB issued in January for private entities that are not classified as public business entities, as defined in Accounting Standards Update (ASU) No. 2013-12.
AICPA Technical Questions and Answers (TPAs) 9150.32-.33 and 9160.29 also provide nonauthoritative guidance on how application might affect a compilation, review, or audit engagement and related reports. The TPAs are available at tinyurl.com/6kj2uku.
The accounting alternatives are included in FASB ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill, and ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach.
ASU No. 2014-02 permits a private company to subsequently amortize goodwill on a straight-line basis over 10 years, or less if the company demonstrates that another useful life is more appropriate. The alternative also permits a private company to apply a simplified impairment model to goodwill.
ASU No. 2014-03 gives private companies except for financial institutions an option to use a simplified hedge accounting approach to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments.
While acknowledging that auditors are under unprecedented scrutiny, an international association of audit regulators asked audit firms to analyze causes of problems in audits globally in hopes of finding remedies.
Lewis Ferguson, chair of the International Forum of Independent Audit Regulators (IFIAR), said he believes audit quality has improved in recent years as auditors have been scrutinized more heavily than other professionals.
“At least in the United States, we do not look at lawyers or doctors or engineers with the level of scrutiny by experts [that auditors receive],” Ferguson, a member of the PCAOB, said during a news conference. “And the people who are doing this looking, the regulators, are themselves great experts in this area. So this profession is being subjected to a level of scrutiny that’s really kind of unprecedented.”
An IFIAR survey report showed results of that scrutiny. The report, available at tinyurl.com/oyuqrb5, identified certain areas where deficiencies were most common in inspections conducted by regulators globally:
- For audits of listed public-interest entities, inspection themes with the highest numbers of audit findings were fair value measurement, internal control testing, and adequacy of financial statements and disclosures.
- For audits of systemically important financial institutions, inspection themes with the highest number of findings were audit allowance for loan losses and loan impairments, internal control testing, and audit of the valuation of investments and securities.
- For inspections of audit firms’ own quality-control systems, the highest numbers of findings were related to engagement performance, human resources, and independence and ethics requirements.
The topics that resulted in the highest number of findings were nearly identical to those found in a 2012 survey conducted by the IFIAR. Different data collection methods and time frames across jurisdictions made it impossible to make a quantitative conclusion on whether overall audit quality has improved or declined, Ferguson said.
“I think those of us in this business do have a sense that audit quality is improving,” Ferguson said.
The PCAOB and the Supervisory Board of Public Accountants of Sweden have entered a cooperative agreement in their oversight of audit firms, the PCAOB announced.
The agreement takes effect immediately and provides for joint inspections while allowing for the exchange of confidential information. An agreement on data protection also was reached.
Within the European Union, the PCAOB has similar agreements with Finland, France, Germany, the Netherlands, Spain, and the United Kingdom. The PCAOB also has agreements with Switzerland and Norway, as well as regulators in North America, the Middle East, Asia, and Australia.
More than 900 of the approximately 2,300 audit firms that are
registered with the PCAOB are outside the United States; eight
PCAOB-registered firms are in Sweden.