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EU reforms to audit legislation: opportunity or threat?

New audit rules only apply to Public Interest Entities (PIEs).

Four basic pillars

#1

PIEs must change audit firm every ten years (‘rotation’)

EY - PIEs must change audit firm every ten years (‘rotation’)

#2

Restrictions on non-audit services that can be performed by auditors

EY - Restrictions on non-audit services that can be performed by auditors

#3

Audit committee must play a more active role

EY - Audit committee must play a more active role

#4

Audit firms more strictly supervised

EY - Audit firms more strictly supervised

General aims

more independence, better audit

Europe versus Belgium

What does Europe require?

How is Belgium implementing the new rules?
Belgium is adopting the European legislation, with a series of additions and adaptations.
The overall result is as follows:

Rotation - Europe

  • Change auditor every 10 years
    • By specific call for tenders? Rotation can be extended up to 20 years
    • By joint audit? Can be extended up to 24 years

Start of rotation period (counting from 2014):

  • Same audit firm for more than 20 years? 2020
  • Same audit form for 11 to 20 years? 2023
  • 10 years or less? 2017

Rotation - Belgium

  • PIEs must change audit firm every 9 (!) years.
    • Rotation can be extended to 9+9 = 18 years by call for tenders
    • This can even be extended to 24 years by joint audits (3x3 single + 5x3 joint).
  • As well as the firm rotation, the individual audit partner must be changed every 6 years.
EY - Rotation
EY - Process

Non-audit services - Europe

  • List of services which cannot be performed by the same audit firm: tax, management, valuation, financing and investments, dealing in shares, internal controls, accounting, payroll, internal audit, legal, HR.
  • Option to still allow some of these services (subject to specific approval by the audit committee)
  • All other non-audit services (not on the list of banned services): allowed subject to general approval by audit committee.
  • Feesof non-audit services
    • maximum 70% of audit fees
    • averaged over 3 years
    • fees only calculated for the audit firm (not the entire network)

Non-audit services - Belgium

  • List of non-audit services which cannot be performed by the same auditor.
  • All other non-audit services can be, but only after general and specific approval of the audit committee. (see below)
  • Certain tax and valuation services only following explicit approval by the audit committee.
  • Fees for non-audit services:
    • maximum 70% of audit fee (averaged over 3 years)
    • for subsidiaries of PIEs maximum 100% of audit fee (averaged over 3 years)
    • fees only calculated statutory auditor partnership (not the entire network)
EY - Non-audit services

Audit Committee - Europe

Now governed by law rather than guidelines:

  • At least 1 member must be an independent director
  • At least 1 member must have competence in accounting and/or auditing
  • More reporting for the Audit Committee

Audit Committee - Belgium

  • Now stipulated by law:
    • At least 1 member independent director
    • At least 1 member competence in accounting and/or auditing
  • Approve all non-audit services by audit firm:
    • General approval for general non-audit services
    • Specific approval for non-audit services on the black list approved by Belgium
  • More reporting for the Audit Committee

Audit firms - Europe

Greater and more independent supervision of the audit profession and its audits.

Audit firms - Belgium

In future under the supervision of a special audit chamber within the Financial Services and Markets Authority (FSMA). This chamber is yet to be set up, but the intention is already to create a stricter supervisory environment.

What are Belgium’s trading partners doing?

The key points of how the EU rules are applied by our main trading partners are set out below. It is clear from this that international implementation varies.

UK

Network partner fees included in the 70% cap. Certain tax and valuation services can be performed by
the audit firm (but subject to stricter conditions).

France

Mandatory joint audits.

EY - What are Belgium’s trading partners doing?

The Netherlands

Strict application. Rotate statutory auditors every 5 years. Extra non-audit services will probably be added to the list of banned services.

Germany

Ten-year rotations for banks and insurers with no right of extension. All other PIEs can extend if via call for tenders or joint audit. As in Belgium, certain tax and valuation services are possible, subject to specific approval.