The EU Audit Directive – trying to make sense of it all and what it means for businesses and their accountants

Alex Barnes
Competitive Eaters Devour Mince Pies
Will the new PIE definition catch out many in the City? (Source: Getty)

Time is running out before implementation of the EU Audit Directive on 17 June 2016. The Directive will have a significant impact on audit and advisory firms and the way they operate with Public Interest Entities (PIEs). Both companies and the audit and advisory firms need to plan for this change, and be ready for the final UK implementation measures.

The EU Audit Directive extends the definition of PIEs to now include banks and insurance companies of any size, large or small. This is quite a shock to many of London’s insurance companies who are already facing mounting regulatory pressure, and in the past would not have considered themselves public interest, particularly those without retail customers.

The Directive is far reaching, in particular:

  • Requiring PIEs to put their audits out to tender every decade and change auditors every 20 years.
  • Considerably restricting the non-audit services that can be provided by external auditors to PIEs, by imposing fee caps and a service blacklist.
  • Building new requirements on audit committees.
  • Requiring more disclosure in PIE audit reports.

The objective of the Directive is to improve auditor independence, the quality of audit reporting and the level of competition in the audit market. It also aims to restore public confidence in the role played by statutory auditors in the financial reporting process.

In principle, this mandatory audit rotation provision should create more competition within the industry but in practice the effect is less clear.

The Directive certainly means companies will need to think much more strategically about who they get to provide both audit and non-audit services. They will not only need to think about who cannot provide non-audit services, because of the blacklist restrictions, but they will also need to ensure they have an appropriate set of audit firms available when the statutory audit comes up for retender.

This is particularly important when in some areas of industry there may be few service providers with the specialist skills to deal with the companies' requirements. PIEs are likely to be in a position that they run out of options if they use too many of the potential pool of audit firms for blacklisted non-audit services.

The introduction of the Audit Directive should be welcomed by all parties looking to restore confidence in the sector, improve reporting and establish auditor independence. The proof of its success will not be realised for a number years. What is clear is that planning for the new rules is essential. Now is an important time for companies to take a fresh look at reporting and their service providers and plan for the future.

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