August 10, 2020

U.S. Companies Should Beware of “Ambiguous” Auditor Rotation in Europe

Damn you, globalization, all this stuff was so much easier when we shopped at mom and pop stores, salted our own pork for the winter and conducted business in wampum while avoiding dysentary and snake bites. But oh well, time must go on…

As we know, the PCAOB has back-burnered auditor rotation in the U.S. after the House of Representatives took a long piss all over it but meanwhile those crazy Europeans have totally made it a thing. A thing which, due to the global nature of the capitalist machine and all that, might be a thing for companies in the U.S.

PwC lists the following as things you need to know about this (you being large U.S. multinational with businesses in Europe):

  • US multinationals should be aware of the requirements because they apply to subsidiaries that meet the definition of an EU public interest entity, including EU banks and insurers.
  • The legislation contains ambiguous wording that could be open to multiple interpretations across jurisdictions.
  • Member states may implement the requirements inconsistently, due to the various options available, resulting in additional complexities.

Complexities, we might add, that may not actually affect the business for 20 years.

Late last year, the Center for Audit Quality (which, if you didn't know, is "affiliated" with the AICPA so we know where this is going) wrote in regards to auditor rotation:

“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.”

Yeah, consider them weighed, this thing is happening whether Cindy Fornelli likes it or not.

The good news is it only affects public interest entities with significant operations in Europe. Oh, and India, India adopted their own auditor rotation. Meanwhile, here in the U.S., there's no reason to break up with your auditor unless, say, your company is going under and your audit firm just sold out to another firm.

I mean, who knows a company better than the audit firm that has been by the client's side since the 1800s?

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