EU Considers Audit Firm, Lead Partner Rotation Rule

The European Union is considering rules that would require publicly listed companies to rotate auditors every seven years or to change the senior partner in charge of the audit every five years, Financial Times reported.

The proposed rules changes come from the European Commission in the wake of the Parmalat scandal in Italy, which was Europe’s version of Enron. Member states and the European Parliament must approve commission rules.

An EU official said: "We are of course giving this issue of rotation and independence serious consideration because they are pertinent issues, particularly in light of Parmalat." However, the EU concedes that a new audit firm is more likely to make mistakes than an established auditor is, the Times reported.

The EU's eighth company law directive, due out next month with formal proposals would contain the new rotation rules, which aim to keep close ties from forming between company officials and their auditors.

The EU is also considering requiring all non-EU auditors to register with them if they work for publicly listed companies within the 15-nation bloc, similar to the U.S. rules put forth in the Sarbanes-Oxley Act.

Lead auditor rotation is already required in the UK and Sweden, but the Big Four accounting firms oppose the rule, which they successfully lobbied to keep out of the Sarbanes-Oxley Act. Financial Times reported that the EU rule could threaten the firms’ multinational auditing dominance by opening the door to smaller accounting firms who would win some of the work.

Italy is the only EU country that requires firm rotation, but that didn’t prevent the multi-billion euro fraud that led to the dairy giant’s spiral into bankruptcy protection in December.

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