State Board Report

December 2011

The European Commission on November 30 adopted proposals that would: mandate the rotation of audit firms after a maximum of six years, prohibit audit firms from providing non-audit services to their audit clients, and create a single market for statutory audit services by introducing a European passport for the audit profession. These measures still have to be approved by the European Union’s member states and the European Parliament, and that could take up to 18 months. Other key elements of the proposals include: public entities will be required to have an open and transparent tender procedure when selecting a new auditor; coordination of auditor supervision activities within the framework of the European Markets and Securities Authority; and proportionate application of standards in the case of small and medium-sized companies.

These proposals are based on responses to the EC’s Green Paper that was launched in October 2010 and elicited 700 responses from a wide group of stakeholders. In September 2011 the European Parliament supported the Commission’s main proposals. The executive summary assessing the impact of the changes states: “The United States is also considering important changes particularly in the domain of the independence of auditors. Serious consideration is being given to the mandatory rotation of audit firms to address what are perceived as serious shortcomings.”

Responding to the EC’s proposal, Grant Thornton released a statement that it was “encouraged by the banning of restrictive covenants that artificially limit the choice of auditor, and that proposals for shared audits have been retained in the proposed legislation. We welcome the encouragement for companies to use more than one auditor, but we would like to see the incentives made stronger.”

The ACCA commented, “While welcoming the removal of the mandatory joint audit from the EC’s proposals, ACCA is concerned that the mandatory rotation of audit firms, along with a ban on firms providing non-audit services, could present major implementation challenges to the audit profession and could prove counter-productive.”

The formal titles of the documents are “Proposal for a Directive of the European Parliament and of the Council amending Directive 2006/45/EC on statutory audits of annual accounts and consolidated accounts” and “Proposal for a Regulation of the European Parliament and of the Council on specific requirements regarding statutory audit of public-interest entities.”

The European Commission is the driving force in proposing legislation to the European Union’s Parliament. The European Union is an economic and political partnership of 27 European countries which every five years directly elect 736 members to the European Parliament to represent their citizens.

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