The Department for Business Innovation and Skills (BIS) is consulting on the technical legislative implementation of the EU Audit Directive and Regulation, which will require Public Interest Entities (PIEs) to put audits out to tender every 10 years and change auditors every 20 years, as well as capping the proportion of non-audit fees
The consultation proposals state that the government does not intend to include additional entities in the definition of a PIE. This means that PIEs will only be those entities with securities admitted to trading on a regulated market, banks, building societies, and insurers. Companies traded on AIM will not be PIEs and nor will credit unions.
The proposal means that unlisted insurers and unlisted banks and building societies will have to have an audit committee - the Prudential Regulation Authority (PRA) is currently consulting on new rules on audit committees for PRA regulated entities.
Auditors of unlisted banks and insurers will need to comply with more stringent ethical standards covering independence and objectivity, on which the FRC is now consulting; and auditors of unlisted banks and insurers that do not also audit listed entities will be required for the first time to prepare an annual transparency report – in due course, this will be the subject of consultation by the FRC, BIS says.
The BIS proposals confirm the requirement that all PIEs put their audit out to tender at least every 10 years and change auditor at least every 20 years. The consultation also contains proposals for transitional arrangements for PIEs who first appointed their current auditor in the 13 years up to the application date for the regulation, which will be from 17 June 2016.
The consultation also outlines the underpinning legislation needed for the Financial Reporting Council (FRC) to introduce changes in ethical and technical standards for auditors as part of the implementation of the new directive and regulation.
The earlier discussion document proposed the FRC should be the competent authority under the new framework. This proposal has been adopted and the consultation sets out how the FRC will delegate tasks to the Recognised Supervisory Bodies (RSBs).
This will mean the FRC will only have to conduct audit inspections, investigations and disciplinary cases in relation to PIEs, and oversee the work of the RSBs for other audits. However it would still be open to an RSB to agree the FRC would undertake work that would otherwise have been delegated. As now, the FRC would also have the ability to take over any particular inspection or investigation, if it deemed it to be in the public interest.
The main changes are: inspections of all audits of PIEs will have to be conducted by the competent authority with ultimate responsibility; the frequency of inspections of auditors of those PIEs that come within the EU definitions of small and medium sized undertaking for accounting purposes is reduced (from at least once every three years to at least once every six years); the RSBs will no longer conduct inspections of PIE audits, even where audit firms only have a small number of clients that are PIEs, as is presently permitted under the Companies Act; and those firms that only audit non-PIE undertakings that are small for accounting purposes will no longer be required by law to be subject to the 6 year minimum frequency for inspections.
Having considered responses to the discussion document, BIS says that disclosure of non-audit services by large companies, other listed companies and other companies that are excluded from the small and medium sized companies accounting regimes may need to be amended so that services required by EU or national legislation are disclosed under a separate heading from other non-audit services.
This information would be needed in part to monitor compliance with the cap on non-audit services, where services required by EU or national legislation are exempt. However, given that the cap will not apply for the first time until the first accounting year beginning on or after 17 June 2019, this amendment is not urgent and so will be published at a later date.
In the consultation document, BIS is publishing details of the draft implementing regulations and draft amendments to the Companies Act to include measures to deliver all of these changes. They also include measures to make ineffective any agreement with a third party that restricts an audit client’s choice of auditor. As well as being required as part of the EU reforms, this measure was recommended by the Competition and Markets Authority.
Additional provisions will cover the removal of auditors of PIEs by application to the court by the competent authority or a sufficient minority of shareholders or members; the application of the implementation of the 2006 Directive (as amended) to additional entities audited under EU law; cooperation between competent authorities, transferring information and confidentiality; the reporting by auditors of PIEs to supervisory authorities; and the role of competent authorities in relation to the functioning of the audit market for PIEs.
Vernon Soare, ICAEW executive director said: ‘This consultation is the next step in delivering an effective framework for audit regulation. It is good that the government recognises the respective strengths of the FRC, as a competent authority, and RSBs in regulating the audit profession.
‘What is crucial is that regulators can show that investors and the public can still have confidence in the audit market. This means we must all, as regulators, continue to work together to ensure that this new model does what it sets out to achieve – and command the public trust.’
The consultation is open until 9 December 2015. The government’s intention is that the implementing regulations should come into force for accounting years beginning on or after 17 June 2016.
The BIS consultation is here
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