Current EU audit firm rotation proposals watered down

Canadian audit firms have been watching with great interest as the European Commission (EC) goes through the process of legislating audit reform proposals.

Canadian audit firms have been watching with great interest as the European Commission (EC) goes through the process of legislating audit reform proposals. The proposal of greatest concern – mandatory audit firm rotation – has been diluted in a recent decision by the European Parliament’s Legal Affairs Committee (JURI).

The JURI proposes that amendments be made to the original EC proposals such that companies change auditors every 14 years (up from 6 years under the original proposal), which could be increased to 25 years if there is:

  • a public tendering process after 14 years
  • a comprehensive assessment of the auditor by the audit committee
  • a joint audit
It is noteworthy that a comprehensive assessment of the auditor by the audit committee every five years is one of the key recommendations of the Chartered Professional Accountants of Canada (CPA Canada) and Canadian Public Accountability Board (CPAB) Enhancing Audit Quality (EAQ) initiative. The JURI evidently recognizes that the performance of such an assessment by the audit committee can address audit quality concerns potentially arising from long association between an audit firm and the entity. So its proposals are now more aligned with the EAQ initiative recommendations, which I believe is a move in the right direction for audit quality.

The JURI audit firm rotation proposals have received mixed reviews from those looking for enhancements to audit quality or for increased market competition. Proponents of remedies that enhance audit quality believe that any form of audit firm rotation fails to enhance audit quality because it may prevent audit committees from choosing the auditor they feel would be best for the job. Supporters of increased market competition argue that the JURI proposals do not go far enough in mandating frequent audit firm changes that might provide broader access to the public company audit market for firms outside the largest audit firms.

In my view, it is not clear what the benefits of mandatory rotation after 25 years will be. Surely, if the audit committee has performed comprehensive assessments of the auditor on a regular basis throughout this period, together with required frequent rotation of senior engagement personnel (and senior management will likely change during a 25 year period as well) what are the familiarity threats to auditor independence that remain? Nevertheless, I am pleased that the JURI recognizes that addressing audit quality issues is very different from addressing market concentration issues and is trying to find a suitable balance between the two.

The EC continues to discuss the proposals and hopes to have the legislation in the form of a regulation and a directive by the end of the year. It remains to be seen what effect, if any, the final legislation will have here in Canada.

Keep the conversation going….what are your views on the JURI proposals? Does mandatory audit firm rotation after 25 years seem reasonable – or necessary – to you?

Post a comment below; or email me directly.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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