Auditor Rotation Gets a Fresh Start in Europe

A similar requirement was excluded from Sarbanes-Oxley after vehement opposition.
Stephen TaubFebruary 4, 2004

The European Union is considering new rules for auditors and their corporate clients in an attempt to avoid future frauds like the one that has rocked Italy’s Parmalat.

One possible rule would require companies to rotate their audit firm or switch the audit partner in charge of their accounts, according to the Financial Times. If this proposal is adopted, all listed companies in the European Union would either have to rotate their audit firm every seven years or change the senior partner in charge of the audit every five years.

The thinking is that it might prevent the relationship between the auditor and the audited from becoming too cozy. The argument against rotation, explained the FT, is that it would harm audit quality, as auditors could struggle with a client’s accounts in the two years after rotation and might lose interest as the work concludes. A similar rule was considered in the United States, but after vehement opposition from the Big Four accounting firms, it was excluded from the Sarbanes-Oxley Act. (The act only requires the rotation of lead audit partners every five years, followed by a five-year “time-out” period. Other audit partners must rotate after seven years, followed by a two-year time-out.)

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The European Union has also considered requiring non-E.U. auditors to register with national authorities if they work for companies listed in the 15-nation bloc, said the FT. This proposal is similar to a rule established by Sarbanes-Oxley that has irked many European companies, regulators, and politicians. And next month European Union internal market commissioner Frits Bolkestein is expected to trot out new accounting rules, which his office has been putting together since the Enron scandal came to light in 2001.

Any European Union proposal must receive approval by E.U. member states and the European parliament, noted the paper, which added that the U.K. and Sweden already require the regular rotation of the lead partner on an audit.

Even the European Union admits that an audit firm is more likely to commit errors with a new client than an established one, notes the FT, which adds that the only European country to require rotation of audit firms is, in fact, Italy.

4 Powerful Communication Strategies for Your Next Board Meeting