Introduction In 2014 the Audit Reform package was introduced by the European Union. This was a result of the global financial crisis which revealed a dissatisfaction in the quality of audits that were carried out. Therefore in order to strengthen the beliefs and confidence of the auditors in the investor’s eyes, changes to the Public Interest Entitles were made. The three changes that have been agreed upon are; a mandatory rotation of audit firms, a prohibition on an entities statutory auditor from providing some non-audit services, and finally a cap on the fees that audit firms can be paid from permissible non audit services. The audit legalisation came into effect in early July 2014. “Most of its measures will take effect from around…show more content… These areas include market competition, audit quality and standards application, audit reporting but most importantly auditor independence. Overall the main threat the changes aim to address are familiarity, self-interest and intimidation.
Mandatory Firm Rotation
The mandatory audit firm rotation is a system in which Public Interest Entities (PIEs) have to appoint a new audit firm every 10 years (ICAEW, 2014). Entities have the option of shortening the maximum period, similarly they may be allowed an extension for up to another 10 years, or by 14 years if there is a joint audit appointment (PWC, 2014). Member states of the EU may adopt slightly different regimes, however it is expected that the UK will allow up to a 10 year extension (PWC, 2014). The mandatory rotation is due to come in to effect from mid-2016 onwards.
PWC US (2012) believe that the mandatory audit firm rotation should not be adopted. They imagine that this system will harm and not improve audit and financial reporting quality. Barber (2014) agrees and says that “Enforcing mandatory rotation may lead to a reduced quality.” Furthermore it will lead to an inevitable rise in audit fees. Furthermore PWC US suppose it can lead to undermining reforms that have benefited audit quality such as “the role of the audit committee in governing the audit firm-public company relationship.” (PWC US, 2012). According to PWC US (2012) giving the responsibility for overlooking a company’s auditor to an