Last week, the European Parliament adopted final legislation that will impose mandatory audit firm rotation and significant restrictions on the auditor’s provision of non-audit services for Public Interest Entities across the European Union. These provisions also apply to European Union Public Interest Entities’ subsidiaries of companies headquartered outside the European Union. Public Interest Entities include companies with securities traded on a European Union “regulated market” and certain other organizations viewed as acting in the public interest, such as banks, insurance companies and other financial entities. European Union Member States can supplement the Public Interest Entities definition.
The expectation is the European Union audit legislation will be finalized in July and, generally, take effect two years later on or around July 1, 2016. Special transition arrangements will apply to the mandatory rotation provisions. Under the plan, companies will be required to change auditors every decade, but extensions could be available for those that seek bids on their audit work or hire a second auditor to perform a joint audit. However, Member States can choose to adopt shorter rotation periods. The plan will also cap fees audit firms can earn from providing non-audit services.
Carl Kampel, a certified public accountant, is the director in charge of professional standards at Ellin & Tucker, an accounting and business consulting firm with offices in Baltimore, Frederick and Belcamp, Maryland and Washington, D.C. He is a member of the FASB Emerging Issues Task Force and past vice chair of the AICPA Financial Reporting Executive Committee. He is also a member of the Board of Directors of the Baltimore Chapter of Financial Executives International and the Maryland Association of CPAs.