It’s been three years in the making, but the way businesses choose and work with their auditors in the European Union (EU) is changing for good.

Companies deemed public interest entities (PIEs) in the EU, as well as multi-nationals headquartered elsewhere with EU based PIE subsidiaries, face new rules on how long they can work with their auditors and restrictions on other work their audit firms are permitted to provide. Audit committee members also face increased responsibilities.

The new legislation presents an additional challenge, as the final audit environment is unlikely to be uniform across the EU. Member states already enforcing auditor rotation are allowed to keep their existing rules, while all EU member states are permitted to go beyond the EU rules to introduce in some cases tougher measures if they wish. These derogations have the potential to produce a complex patchwork of audit legislation which all companies doing business in the EU will need to navigate.

One of the biggest changes in the reforms is the introduction of mandatory audit firm rotation, which will force companies to switch auditors on a regular basis. This follows a prolonged debate in Brussels and acts on fears among law makers that extended relationships run the risk of over familiarity between auditors and their clients. 

The legislation restricts a number of services from being provided by a PIE’s statutory auditor. These restrictions are viewed as a way of strengthening auditor independence and member states may vary them within certain constraints.

Audit committees are also affected by the reforms. Despite most of the responsibilities being considered “best practice” and already widely in use, the legislation includes details which represent big changes for any non-executives overseeing their company’s audits.

• What are the proposed rules for mandatory firm rotation and the timeline for their introduction?
• Which non-audit services are prohibited from being provided by an auditor?
• What are the new responsibilities for audit committees?

This briefing document applies to the EU baseline rules. The final regulatory environment will be impacted by how each EU Member State interprets the legislation and any derogations they choose to implement.