EU enacts amendments to statutory audit rules

The amend­ments to the sta­tutory au­dit ru­les were ad­op­ted by the EU Par­lia­ment on 3 April 2014 and by the EU Coun­cil of Mi­nis­ters on 14 April 2014. The re­form con­sists of a Di­rec­tive and a Re­gu­la­tion. The di­rec­tive amen­ding the Au­dit Di­rec­tive (2006/43/EC) ap­plies to all au­di­tors and must be trans­po­sed into Ger­man law wi­thin two years. The Re­gu­la­tion ap­plies im­me­dia­tely, but pro­vi­des for tran­si­tio­nal pe­riods. It go­verns the re­qui­re­ments for sta­tutory au­dits of pu­blic-in­te­rest en­ti­ties. The prin­ci­ple of "en­ga­ge­ment-re­la­ted" ru­les ap­plies, so that the stric­ter pro­vi­si­ons of the Re­gu­la­tion ex­pressly ap­ply only to au­di­tors of pu­blic-in­te­rest en­ti­ties, to the ex­tent that they au­dit such en­ti­ties.

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The goal of the re­form is to in­crease trans­pa­rency and con­fi­dence in sta­tutory au­dits by streng­the­ning the cre­di­bi­lity of the au­di­ted fi­nan­cial state­ments of pu­blic-in­te­rest en­ti­ties. The ori­gi­nal goal pur­sued by the EU Com­mis­sion - to fos­ter com­pe­ti­tion among au­di­tors - was lar­gely aban­do­ned in the course of the de­li­be­ra­ti­ons in the EU com­mit­tees.

The de­fi­ni­tion of pu­blic-in­te­rest en­tity from the pre­vious Au­dit Di­rec­tive re­mains es­sen­ti­ally in­tact. It con­ti­nues to in­clude all banks, in­surance com­pa­nies and lis­ted com­pa­nies. Howe­ver, fi­nan­cial in­sti­tu­ti­ons and in­surance com­pa­nies will no lon­ger be able to ex­empt cer­tain areas of busi­ness in the fu­ture. Ne­vert­he­less, Mem­ber Sta­tes are free to ad­opt their own de­fi­ni­tion of pu­blic-in­te­rest en­ti­ties on the ba­sis of their busi­ness, their size, head­count or cor­po­rate form.

The re­form in­clu­des the fol­lo­wing key points:

  • Man­datory ex­ter­nal ro­ta­tion of the au­di­tor of pu­blic-in­te­rest en­ti­ties
    The au­di­tor of a pu­blic-in­te­rest en­tity must be ro­ta­ted af­ter ten years. Howe­ver, Mem­ber State op­ti­ons al­low this pe­riod to be ex­ten­ded by
    ten years if a pu­blic ten­der is held to select the au­di­tor, or
    14 years if at least two au­di­tors are en­ga­ged (in a joint au­dit).
    Mem­ber Sta­tes may also es­ta­blish shor­ter ro­ta­tion pe­riods.
    As a tran­si­tio­nal pe­riod for au­di­tors of a pu­blic-in­te­rest en­tity that have been its au­di­tors for 20 years or more, an ex­ter­nal ro­ta­tion is not re­qui­red un­til six years af­ter the Re­gu­la­tion en­ters into force. If the au­di­tors have been in place bet­ween 11 and 19 years, a ro­ta­tion must oc­cur nine years af­ter the Re­gu­la­tion en­ters into force.
  • Pro­hi­bi­tion and li­mi­ta­tion of pro­vi­sion of non-au­dit ser­vices by the au­di­tor to the en­tity being au­di­ted
    In or­der to avoid con­flicts of in­te­rest and ad­verse ef­fects on in­de­pen­dence, cer­tain non-au­dit ser­vices, set forth in a black list in Ar­ti­cle 5 of the Re­gu­la­tion, can no lon­ger be pro­vi­ded by the au­di­tor to the pu­blic-in­te­rest en­tity being au­di­ted. These in­clude tax and cor­po­rate con­sul­ting ser­vices and pre­pa­ra­tion of the fi­nan­cial state­ments. Ser­vices pro­vi­ded to pa­rent com­pa­nies and sub­si­dia­ries of the com­pany being au­di­ted and ser­vices by net­work part­ners are also pro­hi­bi­ted. The black-lis­ted ser­vices can be mo­di­fied by Mem­ber Sta­tes un­der cer­tain con­di­ti­ons.
    The Re­gu­la­tion also in­tro­du­ces a li­mit on non-au­dit fees for pu­blic-in­te­rest en­ti­ties, which can­not amount to more than 70% of the aver­age au­dit fee for the last th­ree years. Fees for pa­rent com­pa­nies and sub­si­dia­ries are in­clu­ded in this amount.
  • Coope­ra­tion by au­di­tor over­sight bo­dies
    The Re­gu­la­tion re­qui­res an over­sight agency, made up of only in­de­pen­dent mem­bers or peo­ple from out­side the pro­fes­sion, that is ul­ti­mately re­spon­si­ble for au­di­tors of pu­blic-in­te­rest en­ti­ties. Over­sight can re­main with the Cham­ber of Au­di­tors for au­di­tors of all other ty­pes of com­pa­nies in Ger­many.
  • Ap­pli­ca­tion of In­ter­na­tio­nal Stan­dards on Au­diting
    So that all sta­tutory au­dits can be con­duc­ted in ac­cor­dance with In­ter­na­tio­nal Stan­dards on Au­diting (ISA) in the fu­ture, the Eu­ro­pean Com­mis­sion is aut­ho­ri­zed to ad­opt the ISAs. Howe­ver, the ad­op­tion of ISAs is not al­lo­wed to ex­pand the Re­gu­la­tion, ex­cept for the re­qui­re­ments of Ar­ti­cle 7 (ir­re­gu­la­ri­ties), Ar­ti­cle 8 (en­ga­ge­ment qua­lity con­trol) and Ar­ti­cle 18 (hand-over file) of the Re­gu­la­tion. The prin­ci­ple of pro­por­tio­na­lity is ap­plica­ble when ap­ply­ing the ISAs to the au­dit of small and mid-si­zed com­pa­nies.
  • Au­dit re­port
    Ar­ti­cle 10 of the Re­gu­la­tion con­ta­ins ad­di­tio­nal au­diting re­spon­si­bi­li­ties in con­nec­tion with au­dit re­ports, in kee­ping with the cur­rent IAASB pro­noun­ce­ments, and also in­clu­des pro­vi­si­ons for an ad­di­tio­nal re­port to the au­dit com­mit­tee, which is si­mi­lar to the Ger­man au­dit re­port.
From a prac­tical stand­point, the nu­me­rous Mem­ber State op­ti­ons in the Re­gu­la­tion will pro­bably make it dif­fi­cult to handle in­de­pen­dence is­sues with large groups of com­pa­nies. Prac­tice will show whe­ther the ru­les that were spe­cially de­ve­lo­ped for pu­bli­cly-tra­ded com­pa­nies will have a ripple ef­fect on other com­pa­nies sub­ject to au­dit.

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