Washington, D.C. – The Center for Audit Quality (CAQ) issued the following statement by Executive Director Cindy Fornelli in reaction to the preliminary agreement reached between the Lithuanian EU Council Presidency, the European Parliament and the European Commission on a framework for EU audit reform that would require mandatory firm rotation and prohibit most non-audit services by audit firms to the companies they audit:
“The implications of this preliminary agreement raise serious concerns for audit quality. There is no evidence to show that mandatory firm rotation improves audit quality, and in fact some studies show it has an adverse effect. There is also little evidence that fees from non-audit services adversely affect the quality of financial reporting. Additionally, these provisions undermine the important role that audit committees have with respect to auditor selection and scope of services. Service providers should be chosen by those best equipped to understand business needs, not the government.
“We also have serious concerns about the impact these provisions could have for U.S. companies or EU companies with U.S. subsidiaries. For example, an EU subsidiary of a U.S. company will be subject to these provisions if, for example, the subsidiary is a bank or insurance company, or listed on a European exchange. Likewise, U.S. subsidiaries of European companies also could be affected depending on the decisions made on rotation and non-audit services at the European parent company level. In addition, we are concerned by the provisions because they allow EU member states to go beyond those proposed, for instance, by sweeping in an even broader array of entities than those currently contemplated.
“We urge U.S. officials, European Union officials, and policymakers in EU member states to carefully weigh the consequences of these measures.”
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The Center for Audit Quality (CAQ) is an autonomous, nonpartisan public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets. The CAQ fosters high quality performance by public company auditors, convenes and collaborates with other stakeholders to advance the discussion of critical issues requiring action and intervention, and advocates policies and standards that promote public company auditors’ objectivity, effectiveness and responsiveness to dynamic market conditions. Based in Washington, D.C., the CAQ is affiliated with the American Institute of Certified Public Accountants.
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