Much to the chagrin of the audit profession globally, the European Parliament has finalized audit reform measures that limit the number of years a public interest entity can employ the same audit firm and restrict what non-audit services may be performed by auditors.
The new rules require public interest entities -- which include public companies and a number of other entities that are deemed important to public interests, like banks or insurers -- to put their audit out for bid at least every 10 years. If that tendering leads to the retention of the existing audit firm, the company won't be permitted to rehiring that same firm after 20 years.
The law also expands the list of non-audit services that audit firms would be prohibited from providing to their audit clients in an effort to create greater independence for auditors. In addition to prohibiting specific services, the law also sets a cap on the total volume of non-audit services that an auditor can provide to a single audit client as a further measure to assure the auditor's fortune with the company is tied more closely to the audit work rather than other consulting work.
“The legislation adopted today will result in big changes both for auditors and the companies they audit,” said Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, in a statement. “The new rules will apply to public interest entities, which also includes a number of unlisted companies. Some may not be aware of this and it could be a particular challenge for the smaller companies, which in the past will have relied on their auditors to do a lot of work.” He notes audit firms are not enthusiastic about the changes, but he already sees long-standing audit engagements out for tender and audit committees getting more prescriptive about what non-audit work auditors can provide.
Fayez Choudhury, chief executive officer of the International Federation of Accountants, is concerned the law will not be implemented consistently across all European jurisdictions. IFAC worries that aspects of the legislation, perhaps introduced to assure its passage, might promote regulatory divergence and fragmentation. “Not only will Europe be out of step with other major jurisdictions, such as the U.S. and Canada, but member states will potentially be out of step with each other,” he said in a statement. The stakes are high and the rest of the world will certainly be focused on what happens in Europe. Failure to decide a consistent approach to audit regulation within Europe does not auger well for the chances of agreement among the global community.”
In the United States, the Center for Audit Quality also chimed in with its words of caution. “We are concerned that the implementation of these reforms will generate inconsistencies across jurisdictions, which could affect companies and their auditors in the United States, where the idea of mandatory firm rotation was recently considered and set aside for sound public policy reasons,” said CAQ Executive Director Cindy Fornelli in a statement. “We hope that these new rules can be implemented with the greatest consistency possible across Europe with minimal extra-territorial impacts.”
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