In December 2013, the European Union (E.U.) Parliament and its member states reached a preliminary agreement on a suite of audit reforms. Two reforms dealing with mandatory audit firm rotation and the provision of non-audit services could affect Canadian companies and their auditors.\nAudit firms will be required to rotate after 10 years. This period can be extended by up to 10 years where the audit is put out for tender, and by up to 14 years for a joint audit. A transition period is being considered, to avoid a cliff effect following the introduction of the new rules. For example, where audit tenure exceeds 20 years, rotation might be required within 5 years.\nThere is a 70 per cent cap on non-audit services, so the auditor of a company cannot tender for other services worth more than 70 per cent of the audit fee. Some non-audit services are banned including most tax advisory services, corporate finance services, and some other advisory services.\nThe reforms will apply for audits of Public Interest Entities (PIEs). PIEs cover entities listed on a regulated stock exchange in the E.U., and unlisted credit and insurance businesses in the E.U. Member states have the option to add other types of entity, for example if they are of significant public relevance because of the nature of their business, their size or the number of their employees.\nSo how might Canadian companies and their auditors be affected by these reforms? Examples include:\n\n E.U.-based subsidiaries of a Canadian parent where the subsidiary meets the definition of a PIE;\n Canadian subsidiaries of PIEs, depending on the decisions made on rotation and non-audit services at the parent company level; and\n Other Canadian companies, if E.U. member states choose to go beyond the proposals and sweep in a broader range of entities.\n\nMany are concerned that the reforms will not enhance audit quality and, in fact, may have negative consequences. Further, they may undermine the important role that audit committees play in recommending to the board the appropriate external auditor for the entity, overseeing the auditor’s work, and approving non-audit services. An outcome of the reforms could be that Canadian companies are limited in their choice of auditor.\nIt is evident that the E.U. reforms will have global implications. According to the proposed timetable, the agreement process will be completed by March 2014 and the requirements of the legislation will be in force from the second quarter of 2016. Affected Canadian companies and their auditors will then have to assess how the final reforms affect them.\nKeep the conversation going….can you see other unintended consequences of the E.U. reforms? How should Canada deal with the implications in a Canadian context?\nPost a comment below; or email me directly.\nEric\nConversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.