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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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