EU audit firm rotation clears another hurdle

Mandatory audit firm rotation cleared another hurdle in the European Union on Thursday 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—is 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 their 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.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.