Most of the provisions included in the EU audit reform passed this morning by the European Parliament (EP), will overwrite national law of member states, so why is the profession concerned about implementation issues?
This morning the EP voted in favor of a reform of the European audit sector which will come into place as a regulation and a directive.
Under European law a regulation applies in full to all member states without the need to transpose it into national legislation, while a directive requires national authorities to draw up legislation in order for it to be enforced.
In the case of the EU audit reform, the regulation will apply to public-interest entities (PIE), while the directive will apply to all statutory audits in Europe. In terms of content, the most important provisions of the reform are in the regulation, while the directive repeats some of the provisions of the regulation in order to extend them to all european statutory audit.
Amongst the provisions included in the regulation, the accounting profession has identified the following as the most important ones:
– Mandatory audit rotation period of 10 years, extendable for an extra 10 years in case of a public tender, or an extra 14 years in case of joint audit; – A list of prohibited non-audit services for audit clients and a 70% cap on the fees earned for non-audit services rendered to an audit client;– The production of more detailed and informative audit reports by auditors;– Enhanced cross-border mobility for auditors and the harmonisation of International Standards on Auditing (ISAs);– And the creation of a Committee of the European Authority of Oversight Bodies (CEAOB) to oversee the cooperation between national audit supervisors.
Firms, regulators and professional bodies welcomed the favorable vote of the EP but raised some concerns with regards to the implementation of these provisions.
Asked why implementation is a concern as the changes will be immediately enforceable for member states overwriting their national laws, Grant Thornton International director Nick Jeffrey said: "That is because in some places the regulation reads a bit like a directive."
He offered the example of mandatory audit rotation, and said that the text of the regulation stated that audit firm rotation must happen every 10 years.
"This overwrites member states national laws," he said. "But then the law also says that member states can have a rotation period shorter than 10 years."
Member states also have the option to increase the rotation from 10 to 20 years if there is a public tender and from 10 to 24 years in the case of joint audit, he continued. "But member states don’t have to take this option and if they do take it, they don’t have to go from 10 to 20 years and could choose a shorter rotation period, from 10 to 15 years for example," Jeffrey said.
Equally he said that the law set a 70% cap on non-audit services rendered to audit clients but allowed member states to set a lower cap in their jurisdiction if they wanted to.
"There is a banned list described in the regulation but member states have the right to add services, if they think it is necessarily to insure independence in their jurisdiction," Jeffrey added.
The reform still has to be approved by the EU Council. Most of these provisions are to take effect within 2 years of the package’s entry into force, but the restriction on fee income from non-auditing services is to take effect within 3 years.