EU Audit Legislation
Liesbet Haustermans
Director – Deloitte
IESBA Meeting
London
January 12-14, 2015
Page 1 | Proprietary and Copyrighted Information
Agenda
1.
EU audit legislation – Overview
2.
Date of application
3.
Snapshot key provisions
4.
PIE definition
5.
Mandatory audit firm rotation
6.
Non-audit services: scope, timing and restrictions
7.
Non-EU controlled undertaking of EU PIE
8.
Territorial scope of prohibited NAS
9.
Other key points in legislation
10.
Member State options
Page 2 | Proprietary and Copyrighted Information
EU Audit Legislation
Overview
•
EP plenary vote and Council adoption – April 2014
•
EU Audit Legislation:
–
Regulation N°537/2014 on specific requirements regarding the statutory audit of PIEs
–
Directive 2014/56/EC amending Directive 2006/43/EC on statutory accounts and
consolidated accounts
•
Publication in Official Journal on 27 May 2014, in 24 languages, each language
version has equal binding force. Application date: 17 June 2016
•
Next steps: Member States to adopt legislation implementing
options/secondary legislation completing the regulation/guidance
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EU Audit Legislation
Overview
• European Commission FAQs published in June – very high level and
September – some helpful points
• EC organising Member State implementation workshops
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Date of Application – Regulation and Directive
Adoption of
Publication in
Regulation
and Directive Official Journal
Entry into
force
+20 Days
April
2014
*
27 May
2014
Regulation comes
into effect *
Directive should be
transposed in
national law
+2 Years
16 June
2014
17 June
2016
Except where mandatory firm rotation transitional measures apply.
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EU Audit Legislation – Snapshot Key Provisions
Topic
EU Legislation
Mandatory firm rotation
(MFR)
• 10 years maximum + Member State option to extend
 to 20 years with tender or
 to 24 years with joint audit
• Opportunities to extend MFR where there is a tender or joint audit
require individual Member States to enact legislation to be effective
• Member States may stipulate MFR for a period of less than or equal to
10 years before extensions
Mandatory tendering (MT)
• Only for renewals of existing appointments
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EU Audit Legislation – Snapshot Key Provisions
Topic
EU Legislation
Non-audit services
(NAS)
•
•
•
•
Prohibited list approach
70% cap on non-audit services, applies to audit firm
Cooling-in period for 1 type of service
Audit committee approval required for NAS that is not prohibited
Scope of key
measures:
Public interest
entities (PIEs)
•
•
•
•
EU companies listed on regulated market
Credit institutions
Insurance undertakings
Entities designated as PIE by a Member State
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PIE Definition
Four categories of PIEs under the Directive article 2.13:
•
Entities with transferable securities listed on EU regulated markets (see http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:209:0021:0028:EN:PDF, as
opposed to all markets in the EU) and governed by the law of an EU Member State
•
Credit institutions authorized by EU Member States authorities (i.e., banks whose
business is to receive deposits or other repayable funds from the public and to grant
credit)
•
Insurance undertakings authorized by EU Member State authorities
•
Other entities that a Member State may choose to designate as a PIE
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Mandatory Audit Firm Rotation
Explanation
•
Audit firm’s appointment for statutory audit of PIE to last for at least one-year term which is renewable
•
Maximum duration of audit engagement not to exceed 10 years, unless a Member State decides to
extend rotation period to:
–
Maximum 20 years in case of public tendering, or
–
Maximum 24 years in case of joint audit
•
Member State has the option to elect a maximum duration of less than 10 years
•
Competent Member State authority (for instance audit oversight authority and/or securities regulator)
may extend auditor appointment on an exceptional basis for a further two-year term
•
Four year cooling off period after the end of the statutory audit services before audit firm can undertake
the audit of the entity again
•
PIE to perform a transparent audit tendering process with close involvement of audit committee when a
tender does occur
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Mandatory Audit Firm Rotation
Timeline for transitional measures (EC’s current interpretation)
Entry into
force
Mandate in place <
11 years at entry
into force and at
Mandate in
least 10 years
place  20
reached
years at
Effective
entry into
force
Date
Mandate in
place  11
years < 20
years at entry
into force
10 Years
Adoption of
Regulation
Publication in
Official Journal
9 Years
6 Years
20 Days
April
2014
27 May
2014
2 Years
16 June
2014
End?
End
17 June
2016 *
17 June
2020
End
17 June
2023
End
But may be
extended if
Member State
opts for
extension
17 June 2024
* EC interpretation (2 September 2014 letter): mandates of less than 11 years that have reached 10 year mark (or less if Member State
opts to reduce the 10 year period) by the effective date must end by that date, except if Member State opts to extend. Such mandates
that have not yet reached 10 year mark by the effective date must end when the 10 year mark is reached.
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Non-Audit Services (NAS) – Scope
• Audit firms and network members prohibited from providing certain NAS
– Such NAS not to be directly or indirectly provided by the audit firm or network members to
the audited PIE, its parent undertaking in the EU or its controlled undertakings in the EU
• Article 2.7: ‘network’ means the larger structure:
– Which is aimed at cooperation and to which a statutory auditor or an audit firm belongs,
and
– Which is clearly aimed at profit- or cost-sharing or shares common ownership, control or
management, common quality-control policies and procedures, a common business
strategy, the use of a common brand-name or a significant part of professional resources;”
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NAS – Scope
• No definition in regulation of “parent undertaking” or “controlled
undertakings”
– EC September FAQs:
 “parent undertaking” as defined in the Accounting Directive
 “controlled undertaking” as defined in Transparency Directive
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NAS – Timing
• During a period covered by audited financial statements and until issuing of the
audit report
• Prior FY cooling-in period for one category of services: financial information
internal control or risk management procedures or financial information
technology systems
• No transitional measures for NAS prohibitions:
–
Apply as from 17 June 2016 (EC September 2014 FAQ: will apply to the first
financial year starting after the date of application)
–
Unclear what the impact is for cooling-in period – but general principle of nonretroactivity of EU legislation
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Tax services relating to:
Taxation Services that include:
• Tax return preparation: does not generally create a threat to
independence if management takes responsibility for the returns
including any significant judgments;
• Tax calculations for the purpose of preparing accounting entries
(including the calculation of current and deferred tax liabilities or
assets): prohibited if they are material to the financial statements on
which the firm will express an opinion (except for emergency or
unusual situations);
• Tax planning and other tax advisory services: prohibited where
the effectiveness of the tax advice depends on a particular accounting
treatment or presentation in the financial statements and
(a) The audit team has reasonable doubt as to the appropriateness of
the related accounting treatment or presentation under the relevant
financial reporting framework; and
(b) The outcome or consequences of the tax advice will have a
material effect on the financial statements on which the firm will
express an opinion;
• Assistance in the resolution of tax disputes: prohibited where the
taxation services involve acting as an advocate for an audit client
before a public tribunal or court in the resolution of a tax matter and the
amounts involved are material to the financial statements on which the
firm will express an opinion
•
•
•
•
•
•
•
Preparation of tax forms *;
Payroll tax;
Customs duties;
Identification of public subsidies and tax
incentives unless support from the statutory
auditor or the audit firm in respect of such
services is required by law *;
Support regarding tax inspections by tax
authorities unless support from the statutory
auditor or the audit firm in respect of such
inspections is required by law *;
Calculation of direct and indirect tax and
deferred tax *;
Provision of tax advice *
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Services that involve playing any part in the
management or decision-making of the
audited entity
Assuming a management responsibility
Management responsibilities involve leading and directing an entity,
including making significant decisions regarding the acquisition,
deployment and control of human, financial, physical and intangible
resources.
Whether an activity is a management responsibility depends on the
circumstances and requires the exercise of judgment. Examples of
activities that would generally be considered as management
responsibility and that are thus prohibited include:
• Setting policies and strategic direction;
• Directing and taking responsibility for the actions of the entity’s
employees;
• Authorizing transactions;
• Deciding which recommendations of the firm or other third parties to
implement; and
• Taking responsibility for designing, implementing and maintaining
internal control.
On the contrary, activities, which are routine and administrative, or
involve matters that are insignificant, generally are deemed not to be a
management responsibility. Furthermore, providing advice and
recommendations to assist management in discharging its
responsibilities is not assuming a management responsibility
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Bookkeeping and preparing accounting
records and financial statements
Preparing
Accounting
Financial Statements
Payroll services
Comprise accounting and bookkeeping services,
such as preparing accounting records or financial
statements.
Records
and
Prohibited: accounting and bookkeeping services,
including payroll services, or preparing financial
statements on which the firm will express an
opinion or financial information which forms the
basis of the financial statements
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Designing and implementing internal control IT Systems Services
Services related to information technology (IT) systems
or risk management procedures related to
include the design or implementation of hardware or
the preparation and/or control of financial
software systems. The systems may aggregate source
information
data, form part of the internal control over financial
reporting or generate information that affects the
or
accounting records or financial statements, or the systems
Designing and implementing financial
may be unrelated to the audit client’s accounting
information technology systems
records, the internal control over financial reporting or
financial statements.
Prohibited where the services involve the design or
implementation of IT systems that:
• Form a significant part of the internal control over
financial reporting; or
• Generate information that is significant to the client’s
accounting records or financial statements on which the
firm will express an opinion
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Valuation services, including valuations
performed in connection with actuarial
services or litigation support services
Valuation services
Comprise making assumptions with regard to the future developments,
the application of appropriate methodologies and techniques, and the
combination of both to compute a certain value, or range of values, for
an asset, a liability or for a business as a whole
Prohibited where the valuations would have a material effect,
separately or in the aggregate, on the financial statements on which
the firm will express an opinion
Litigation Support Services
Litigation support services may include activities such as acting as an
expert witness, calculating estimated damages or other amounts that
might become receivable or payable as the result of litigation or other
legal dispute, and assistance with document management and
retrieval.
Prohibited where the service involves estimating damages or other
amounts that would have a material effect, separate or in aggregate,
on the financial statements on which the firm will express an opinion
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Legal services, with respect to:
• The provision of general counsel;
• Negotiating on behalf of the audited entity;
and
• Acting in an advocacy role in the
resolution of litigation
Legal services are defined as any services for which the person
providing the services must either be admitted to practice law before
the courts of the jurisdiction in which such services are to be provided
or have the required legal training to practice law. Such legal services
may include, depending on the jurisdiction, a wide and diversified
range of areas including both corporate and commercial services to
clients, such as contract support, litigation, mergers and acquisition,
legal advice, support and assistance to clients’ internal legal
departments
The position of General Counsel is generally a senior
management position with broad responsibility for the legal affairs of a
company
Prohibited where:
• Acting in an advocacy role for an audit client in resolving a
dispute or litigation when the amounts involved are material to the
financial statements on which the firm will express an opinion;
• Appointing a partner or an employee of the firm as General Counsel
for legal affairs of the audit client
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Services related to the audited entity’s
internal audit function
Internal Audit Services
Internal audit activities may include:
• Monitoring of internal control – reviewing controls, monitoring their
operation and recommending improvements thereto;
• Examination of financial and operating information – reviewing the
means used to identify, measure, classify and report financial and
operating information, and specific inquiry into individual items
including detailed testing of transactions, balances and procedures;
• Review of the economy, efficiency and effectiveness of operating
activities including nonfinancial activities of an entity; and
• Review of compliance with laws, regulations and other external
requirements, and with management policies and directives and
other internal requirements
Prohibited where internal audit services relate to:
• A significant part of the internal controls over financial reporting;
• Financial accounting systems generate information that is,
separately or in the aggregate, significant to the client’s accounting
records or financial statements on which the firm will express an
opinion; or
• Amounts or disclosures are, separately or in the aggregate,
material to the financial statements on which the firm will express
an opinion
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Services linked to the financing, capital
structure and allocation, and investment
strategy of the audited entity, except
providing assurance services in relation to
the financial statements, such as the
issuing of comfort letters in connection with
prospectuses issued by the audited entity
Corporate Finance Services
Promoting, dealing in, or underwriting
shares in the audited entity
Include assisting an audit client in developing corporate strategies,
identifying possible targets for the audit client to acquire, advising on
disposal transactions, assisting finance raising transactions, or
providing structuring advice.
Prohibited where corporate finance advice depends on a particular
accounting treatment or presentation in the financial statements and:
• The audit team has reasonable doubt as to the appropriateness of
the related accounting treatment or presentation under the relevant
financial reporting framework; and
• The outcome or consequences of the corporate finance advice will
have a material effect on the financial statements on which the firm will
express an opinion
Prohibited where services involve promoting, dealing in, or
underwriting an audit client’s Shares
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List of Prohibited Non-Audit Services
EU Regulation (art. 5)
IESBA Code of Ethics (PIEs)
Human resources services, with respect to:
Recruiting Services
•
Prohibited where the statutory auditor or audit firm would
assume management responsibilities, including acting as a
negotiator on the client’s behalf, and where the hiring
decisions would not be left to the client
•
•
Management in a position to exert significant
influence over the preparation of the
accounting records or financial statements
which are the subject of the statutory audit,
where such services involve:
˗ Searching for or seeking out candidates
for such positions; or
˗ Undertaking reference checks of
candidates for such positions;
Structuring the organisation design; and
Cost control
Prohibited with respect to a director or officer of the entity
or senior management in a position to exert significant
influence over the preparation of the client’s accounting
records or the financial statements on which the firm will
express an opinion:
• Searching for or seeking out candidates for such
positions; and
• Undertaking reference checks of prospective candidates
for such positions
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NAS: Restrictions
Restrictions on non-audit services
•
Other NAS permitted to be provided to the audited PIE subject to audit committee approval (and application general principles of
independence)
•
Member States may prohibit additional non-audit services and establish stricter rules for NAS which are not prohibited
•
Member States may adopt legislation allowing valuation services and certain tax services (= preparation tax forms; identification
subsidies and tax incentives; support re tax inspections; calculation of direct and indirect tax and deferred tax and tax advice)
providing that these services have no direct effect, or have an immaterial effect, on the audited financial statements
•
Fees for permissible NAS provided by the statutory auditor or the audit firm to the audited entity, its parent undertaking or its
controlled undertakings for three consecutive financial years not to exceed 70% of the average fees paid in the last three
consecutive financial years for statutory audits of the PIE and, where applicable, its parent or controlled undertakings, and of the
group consolidated financial statements. Services required by EU or national legislation are excluded. Competent authorities may
exempt audit firm from cap “on an exceptional basis” for maximum of two financial years
•
Cooling-in period for the design and implementation of internal control or risk management procedures related to the preparation
and/or control of financial information or financial information technology systems applies during the fiscal year prior to the period
covered by the audited financial statements
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Non-EU Controlled Undertaking of EU PIE
Special regime for services by network member
• Threats & safeguards approach, assessment by the statutory auditor
• But:
 deemed to impact independence, no mitigation possible:
–
Services that involve playing any part in the management or decision-making
process of the audited entity
–
Bookkeeping and preparing accounting records and financial statements
–
Designing and implementing internal control or risk management procedures
related to the preparation and/or control of financial information or financial
information technology systems
 all other services on NAS list: threats & safeguards approach
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NAS: Territorial Scope of Prohibited NAS
EC September FAQ:
Law of Member
State where
subsidiary is located,
applies
PIE – EU Member State A
Sub* - EU Member State B
NAS special regime
Sub* - Outside EU
* Non PIE
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Other Key Points in Legislation
Audit committee (AC) and reporting
• PIEs must have AC composed of non-executive members
• Responsibility for auditor selection procedure – at least 2 choices and duly
justified preference
• More comprehensive report from auditor directly to the audit committee (incl.
results of audit, declaration of independence, materiality, judgment
explanations about events that may cast significant doubt on the going
concern, significant deficiencies in the internal financial control
system/accounting system, significant matters involving actual or suspected
non compliance with laws and regulations or articles of association)
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Other Key Points in Legislation
Audit procedures and reporting
• Compliance with international audit standards
• All statutory audits to have statement on any material uncertainty
related to events or conditions that may cast significant doubt on ability
to continue as a going concern
• For PIEs only - description of the most significant assessed risks of
material misstatement; statement that no prohibited NAS were
provided; number of years in place
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Other Key Points in Legislation
Other
• Cooperation between EU Member State auditor oversight authorities - New Committee of European
Auditing Oversight Bodies (CEAOB); composed of one member from each Member State and one
member appointed by the European Securities and Markets Authority (ESMA)
• Dialogue between regulators and auditors with shared responsibility for effective dialogue
• Annual meeting between European Systemic Risk Board (ESRB) and auditors of global systemically
important institutions - at least annual
• European passport for the audit profession - key audit partner carrying out the audit to be duly approved
as a statutory auditor in that other Member State
• Prohibition of clauses limiting choice of auditor
• Penalties – dissuasive penalties to apply to auditors and audit firms if statutory audits under EU law are
not carried out in conformity with the Directive and Regulation (by member states)
• Audit market – monitoring and reporting by competent authorities and competition authorities every 3
years, ultimately EC report to Council, ECB, ESRB and EP where appropriate
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Member State options
•
The Regulation and Directive contain over 50 Member State options, including:
–
Expanding the PIE list
–
Reducing the length of the initial engagement period to less than 10 years
–
Extending the initial engagement period by a further 10 or 14 years (tender or joint audit)
–
Adding to the list of prohibited NAS
–
Establishing stricter rules setting out the conditions under which permitted NAS may be provided
–
Allowing the exception for valuation and certain tax services
–
Stricter rules on the fee cap
–
…
•
Exercising these options will lead to a patchwork of different regulation throughout the EU
•
Will be costly and complex for PIEs and the statutory auditor and audit firms to manage
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The Ethics Board
www.ethicsboard.org