EY - EU audit legislation

EU audit legislation

Frequently asked questions

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The fundamentals

New EU audit legislation entered into force on 16 June 2014 with a transition period of two years. The legislation introduces stricter requirements on the audits of EU public interest entities (PIEs), including mandatory firm rotation for all EU PIEs and significant restrictions on the non-audit services (NAS) a PIE can obtain from its auditor. This brief FAQ section has been prepared to assist in the interpretation of the legislation. However, the legislation is complex and this section does not constitute legal advice. Several areas of the EU audit legislation require interpretation and may evolve over time as Member States start implementation and make use of the available options. You are encouraged to monitor implementation of the legislation and seek legal advice before you act to comply with the legislation. Please speak to your usual EY contact for further guidance and refer to the EU website (http://eur-lex.europa.eu/) for more details on the Directive1 and Regulation2.

Q&A


Q

What is the scope of the legislation?

A

The legislation comprises a Directive amending the Statutory Audit Directive of 2006 applies to all statutory audits across the EU and a separate Regulation, which applies additional requirements for the audits of EU PIEs. These are defined as:

  • Entities governed by the laws of a Member State whose securities (shares or debt) are listed on a regulated market in the EU
  • Credit institutions
  • Insurance companies

Note that a Member State may expand the definition of a PIE.

Q

When will the new legislation come into effect?

A

EU Member States have until 16 June 2016 to implement the Directive into their national laws and decide which of a number of options in the Regulation they wish to adopt. Longer transitional provisions are provided for mandatory rotation of auditors.

Q

What date must be taken into account to calculate the length of the audit engagement?

A

  • For a company that becomes a PIE (e.g., through an IPO), the audit relationship will be measured from the date of listing.
  • For a company that already meets the definition of a PIE, the audit relationship will be measured from the date of initial appointment as auditor.
  • For takeovers/mergers between groups, the mandate of the auditors to the acquiring company will normally dictate the length of the relationship. However, legal advice will be essential.  

Q

What are the transition requirements for mandatory rotation of auditors?

A

  • Audit relationships of 20 years or longer (measured on 16 June 2014) may not be renewed as from six years after the entry into force of the Regulation, i.e., after June 17, 2020.
  • Audit relationships of more than 11 years but less than 20 years (measured on 16 June 2014) may not be renewed as from nine years after the entry into force of the Regulation, i.e., after June 17, 2023.
  • Audit relationships of less than 11 years (measured on 16 June 2014) may remain applicable until the end of the maximum initial engagement  period. In practice this means that if the auditor has been in place for financial years starting:
    • Between 16 June 2003 to 17 June 2006 — the PIE should rotate or retender* following completion of the audit of an accounting period that commenced before 16 June 2016.
    • After 17 June 2006 — the PIE should change or retender* when maximum tenure is reached as measured from the first year of engagement

*Subject to the adoption of the Member State option above to extend the engagement period

Q

Whom will the legislation affect?

A

The legislation applies to all statutory audits performed in the EU with additional requirements for the statutory audits of EU PIEs. The legislation also applies to EU PIE subsidiaries of companies headquartered outside the EU.

All companies with EU operations, wherever headquartered, will have to establish whether they are an EU PIE or have an EU PIE in their group. For help on how to determine if you are a PIE, see our guide EU audit legislation: Understanding the legislation and how it will affect you.

Q

What are the periods for mandatory rotation of auditors?

A

  • Auditors may be appointed for an initial term of up to 10 years maximum.
  • Member States may extend this period to a maximum of 20 years if a tender process is conducted at the end of the initial term.
  • Member States may extend the initial term up to a maximum of 24 years if there is a joint audit.

Member States have a range of options at their disposal. An understanding as to how Member States have adopted these options is essential in applying the legislation.

Q

What are the limitations on non-audit services (NAS)?

A

The legislation introduces significant new restrictions on the types of NAS a PIE can obtain from its auditor.

Member States have the option to add to the list of prohibited services and may also regulate those services that are still permitted.

NAS are limited to 70% of a PIE’s average audit fees over the last three years. Member States may elect to be more restrictive.

For the list of prohibited NAS, see Article 5.1 of the Regulation.

Q

Over the transition, when does the “clean period” start to apply in relation to services that fall within the definition of Article 5(1)(e)?

A

Based on the 1 October written reply from Commissioner Jonathan Hill to a written question from Member of the European Parliament Kay Swinburne, we understand that the new regime applies to the first financial year starting on or after 17 June 2016, which will be when the requirements, including the cooling-in for the previous financial year, will be assessed. For example, where the first audit within the new regime is the year ending 31 December 2017, then the auditor should have ceased to provide the Article 5.1 (e) services by 1 January 2016.

The specific services caught by the cooling-in period are “designing and implementing internal control or risk management procedures related to the preparation and/or control of financial information or designing and implementing financial information technology systems.”

Q

What are the NAS that may be permitted by derogation?

A

Member States have an option to allow certain valuation and tax services provided that these services have no direct effect, or have an immaterial effect either separately or in the aggregate, on the audited financial statements. In addition, the estimation of the effect on the audited financial statements must be comprehensively documented and the principles of independence must be complied with. See Article 5.3 of the Regulation.

Q

Are there any changes to the role of the audit committee?

A

In reality, most of the requirements set out in the legislation are being performed today; the only change is that these requirements are now enshrined in law although the new audit tendering requirements (see Article 16 of the Regulation) are quite prescriptive.

An important change is the submission of an additional and more detailed report on the results of the statutory audit to the audit committee. To some extent, the role of the audit committee has been strengthened. However, in the areas of mandatory firm rotation and prohibited NAS, the legislation has removed the audit committee’s right to decide.


1Directive 2014/56/EU of the European Parliament and of the Council of 16 April 2014 amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts Text with EEA relevance

2Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC Text with EEA relevance