The changes to auditor independence requirements resulting from the new European audit Regulation and Directive.
In April 2014 the European Union published its
The changes affect all areas of audit regulation, including market competition, auditor oversight, audit quality and standards application, audit reporting, corporate governance related to auditors, auditor selection and auditor independence. This briefing relates only to the latter aspect: auditor independence
In December 2014 discussion papers were issued by both the Department of Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC) on how to implement the requirements and member state options, in the UK. ICAEW has responded to the consultations from BIS and the FRC. Both BIS and FRC issued further consultation papers in late 2015 setting out precise proposals, taking into account responses to the earlier papers.
The BIS consultation paper set out proposals for an audit regulatory framework in which the FRC would be the ultimate competent authority responsible for audit regulation, but would be required to delegate all tasks to the Recognised Supervisory Bodies (including ICAEW) except those reserved to it by the EU Regulation (in essence, monitoring and certain disciplinary action in respect of audits of public interest entities (PIEs)). The paper also addressed the definition of a PIE, tendering of audit appointments and rotation of audit firms for PIE audits, auditor reporting to supervisory authorities and a number of other matters needing legislation, such as changes to the details of removing auditors, and restrictive clauses in contracts relating to audit appointments. ICAEW’s response on 11 December 2015 is available here.
FRC's consultation set out its precise proposals in respect of amendments to ISAs, the Ethical standards on auditor independence (ES), the UK Corporate Governance Code (CGC), and some other matters. The consultation documents can be found here. ICAEW's response is available here.
The final Ethical Standard and Statutory Regulation were published on 17 June 2016 and take effect immediately for general requirements, or for audits of financial periods where those periods commenced on or after that date, in respect of individual audits.
As far as the ES (now combined into one) is concerned, the FRC has to a large extent listened to the responses to the December consultation and most of the changes are those required by the ADR. The additional requirements impact largely only on full market and ISDX main market listed and other PIE audits. The ES-PASE has been retained as section 6 of the new document. However, the proposals do go beyond the ARD in some areas. Key changes include:
The Regulation (which has direct application as if it were UK law) and the Directive (which amends the existing 2006 Directive and which has to be applied through UK law) apply from 17 June 2016 (subject to transitional arrangements for, primarily, mandatory audit firm rotation).
By and large, the Directive includes provisions applicable to all statutory company audits within the European Union. It includes a number of changes but these are not significant to auditors and the companies they audit
The Regulation applies to the audit of ‘Public Interest Entities’ (‘PIEs’) (see below). The Regulation in particular, imposes additional independence requirements for PIE audits, over and above those in the original APB Ethical Standards and ICAEW’s Code of Ethics section 290.
FRC has issued a number of staff notes and additional comments by way of a rolling record of actions arising from its Technical Advisory Group. ICAEW, following discussions with FRC, has also issued guidance to assist members in applying the Ethical Standard. Both of these sets of guidance can be expected to evolve.