The European Parliament and EU Member States have reached an audit reform agreement that calls for 10-year term limits on audit firms and new limitations on non-audit services that auditors can perform for public interest entities.

To bring about greater independence for auditors, the agreement will require audit firms to rotate off their public interest entity clients every 10 years, with entities allowed to extend tenure once. It places limits on tax services and other non-audit services tied to financial and investment strategy of the entity that auditors will be permitted to perform for their audit clients, and it sets a cap on permitted non-audit services at 70 percent of the audit bill.

The agreement also requires auditors to produce more detailed and informative audit reports with a focus on providing information that is relevant to investors. Auditors will be required to meet strong reporting obligations with their supervisors, and audit committees will play a bigger role in supervising auditors. The measure also opens a path for 5 percent of shareholders to initiate actions to dismiss the auditor.

“This is the first step towards increasing audit quality and reestablishing investor confidence in financial information, an essential ingredient for investment and economic growth in Europe,” said EU Commissioner Michel Barnier, who is responsible for the EC's internal market and services, in a published statement. He said the rule will promote professional skepticism and limit the risk of auditors operating under a conflict of interest, reducing familiarity between auditors and the entities they audit.

In the United States, the Public Company Accounting Oversight Board has all but abandoned any effort to require term limits or mandatory rotation for auditors. At a recent national accounting conference, PCAOB member Jay Hanson said the PCAOB is involved in no activity at all to consider such a requirement. The board had floated the idea in a controversial concept release but failed to gather the evidence necessary to demonstrate that such a requirement would achieve its intended objective or affect audit quality.

The board is still active, however, on an effort to overhaul the audit report to draw more information out of auditors about what they do and what they learn about a company's financial condition during the course of an audit. The board has proposed auditors be required to include narrative disclosures explaining any critical audit matters they might have encountered during the audit that made it difficult to issue an audit opinion.

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