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.
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.