Mandatory Firm Rotation and Transition Arrangements
Mandatory Firm Rotation
Mandatory firm rotation is one of the most significant areas of change introduced by the EU audit legislation. This fact sheet outlines the new EU requirements, the circumstances under which audit tenure may be extended and areas where Member States are able to enforce rules that go beyond the EU baseline. It also examines the proposed timelines for implementation, which are phased and dependent on current audit firm tenure.
The new EU legislation introduces additional requirements for EU public interest entities (PIEs), including mandatory firm rotation. The rules mean PIEs must switch their audit firms at regular intervals. How and when businesses are affected will differ from company to company, depending on a number of variables such as the potential variation across Member States and the views of investors.
Companies considered PIEs will, under the baseline requirements, be required to rotate their auditor at least every ten years. Member States have the option to allow the period to be extended to 20 years, if a public audit tender is held after the first ten years, or to 24 years if there is a joint audit arrangement. The full picture is made more complex by transitional arrangements, with the introduction of rotation rules staggered depending on how long a company’s current auditors have been in place.
There is also still a requirement for key audit partners to rotate after a maximum of seven years, although a number of Member States currently require shorter partner rotation periods.
Key questions addressed by this fact sheet include:
- What does the transitional timeline look like for mandatory firm rotation?
- How will the rules apply across borders for businesses that operate in more than one EU Member State?
- Are there any circumstances where a company may extend an auditor’s tenure beyond the initial rotation requirements?
This fact sheet applies to the EU baseline rules. The final regulatory environment will be impacted by how each EU Member State interprets the legislation and any derogations they choose to implement.