In October, we summarized a leaked draft that proposed significant restrictions in the European Union regarding public accounting firms. On November 30, the revised proposal was made public.
The released European Commission’s proposal includes:
- Requiring mandatory auditor rotation after six years. A four-year period would be required before a firm could audit the same client again. Companies that opt for a voluntary joint audit would be allowed a nine-year period.
- Prohibiting audit firms from providing non-audit consultancy services to their audit clients, and requiring large audit firms to separate audit activities from non-audit activities.
- Public-interest entities would be required to have an “open and transparent tender procedure” when picking a new auditor.
- Creating a single market for statutory audits by allowing audit firms to provide services across the entire European Union.
The proposed changes have to be approved by European Union states and the European Parliament. If approved, the changes could significantly alter the European market now dominated by the Big Four firms, which consist of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers,
Mandatory rotation of auditors is considered the most controversial, and will be hard fought by both the Big Four and their clients. Critics contend that mandatory audit rotation increases costs with no meaningful increase in audit quality. For multinational companies having large operations in both Europe and the U.S. a change in either jurisdiction will have significant impact throughout the world.
Restricting non-audit services would be significant change in many parts of Europe, where audit firms are still allowed to provide other consulting services to their public company audit clients. In the United States, the Sarbanes-Oxley Act of 2002 prohibited many non-audit services by one’s outside auditor.
In the United States, the PCAOB also is examining potential limits on audit firms’ tenure with public companies. The PCAOB is focused on longer audit terms than what the EU is proposing. The PCAOB is accepting written feedback through December 14, with a public forum scheduled for March 2012.