What does the EU Audit Reform mean for PIEs and their Audit Committees?
The audit committee of a public interest entity (PIE) is now required to carry out a transparent tender procedure when selecting an audit firm. The audit committee has to invite audit firms to tender for the audit and prepare tender documents on the basis of a transparent and non-discriminatory selection procedure. Another requirement for the audit committee is that it can demonstrate to the local regulator the fairness of this process. The auditor selection procedure should result in the audit committee submitting to the PIE’s supervisory body at least two choices of an audit firm to carry out the external audit of the PIE. This submission should also include a justified recommendation for selection of an auditor.
Please note that national legislation governing the tendering process and the exact rules to be followed may vary across the Member States. Moreover, there may be additional requirements for the tender process in some jurisdictions.
Periodical auditor rotation
Besides the new requirements on mandatory audit tendering, audit committees are now required to rotate PIE auditors periodically, though application of this rule varies greatly across Member States. The general rule is that the auditors have to be rotated at least every ten years. However, Member States may choose to reduce this period to less than ten years and impose rotation after a shorter period (e.g. five or seven years). Member States may also permit PIEs to continue with the incumbent auditor for a maximum of 20 years if a transparent tender procedure has taken place, or for a maximum of 24 years if there have been joint audits. As all these options depend on the specific domestic legislation, PIEs are advised to scrutinise how the EU Audit Regulation has been transposed into the national law of their country of domicile to ensure compliance. Further information on domestic implications and additional advice on local implementation can be found on the European Contact Group website here.
Restrictions on non-audit services
The new EU Audit Regulation prohibits the incumbent audit firm from providing an extensive list of non-audit services (NAS) to their PIE audit client, its parent or any controlled undertaking within the EU. These NAS can be divided up into two categories: those strictly prohibited by the Regulation (e.g. services that involve playing any part in the management or decision-making of the audited entity), and those that may be allowed by the Member State (e.g. preparation of tax forms) provided the Member State has explicitly determined such an option in its national legislation. In addition to the list of prohibited NAS, there is also a cap on the provision of ‘permissible’ non-audit services that is basically set at 70 % of the average audit fees paid in the previous three years.
Under the new rules, Member States can optionally impose stricter rules on the provision of NAS to PIEs. Some Member States, for example, may not allow tax forms to be prepared by the auditor. In addition, local regulators may have broader or narrower interpretations of the definition and scope of the restricted and/or permissible NAS (e.g. what constitutes legal counsel).
Many PIE audit committees now take the view that the days of cleverly navigating the rules are over. The strict requirements, fee cap limit and serious consequences if the stringent conditions are not met have led them to separate auditing from all non-audit services, with different firms providing the one or the other.
For more information on the precise rules in your local jurisdiction and how the audit committee should address these rules contact BDO