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Financial Reporting and the Law

The European Parliament and the EU member states recently reached a preliminary agreement on auditor reform. The agreement includes a provision mandating auditor rotation every 10 years for listed companies, banks, and insurance companies, with extensions for 10 years, if the engagement is put out for public bid, and 14 years, if the audit is conducted by multiple firms.

The Center for Audit Quality (CAQ) is concerned that the preliminary agreement, which was reached in December 2013, could adversely affect U.S. public companies with EU subsidiaries that are listed on a European exchange or that are banks or insurance companies. The CAQ is an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets.

To become effective, the new regulations must still be approved by the European Parliament and the council of national governments. U.S. companies with EU subsidiaries should monitor these reforms and assess the impact that they may have if they are ultimately approved. Mandatory auditor rotation will require companies to anticipate an auditor change in order to avoid engaging possible new auditors for services that would adversely affect the auditors’ independence.

In the United States, the PCAOB’s consideration of mandatory audit firm rotation has not progressed since last summer, following passage in the U.S. House of Representatives of a bill to prohibit the PCAOB from adopting any such rule.