1 Financial audits
| (a)
(33497)
16971/11
+ ADDs 1-2
COM(11) 778
(b)
(33513)
16972/11
+ ADDs 1-2
COM(11) 779
|
Draft Directive amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts
Draft Regulation on specific requirements regarding statutory audit of public-interest entities
|
| Legal base | (a) Article 50(1) TFEU; co-decision; QMV
(b) Article 114 TFEU; co-decision; QMV
|
| Department | Business, Innovation and Skills
|
| Basis of consideration | Minister's letter of 12 June 2013
|
| Previous Committee Report | HC 428-xlix (2010-12), chapter 3 (1 February 2012)
|
| Discussion in Council | No date set
|
| Committee's assessment | Politically important
|
| Committee's decision | For debate in European Committee C
|
Background
1.1 The Commission proposes both a Regulation and a Directive
in the area of statutory financial audit of companies. The proposals
lay down conditions for carrying out such audits, rules on the
organisation and selection of auditors and rules on the supervision
of compliance by auditors with those requirements. The main objectives
are to deal with (1) the expectation gap (the gap between the
public perception of the assurance that an audit provides and
what auditors actually do provide); (2) risks of conflicts of
interest which impair the independence of auditors; (3) barriers
to entry into the audit market for listed and large companies;
(4) additional compliance costs due to fragmented national regulation;
and (5) the lack of effective national and EU-wide supervision
of audit firms.
1.2 We have set out the details of the proposals,
and the Government's policy on them, in our earlier Report.[1]
The Minister's letter
1.3 The Minister for Employment Relations and
Consumer Affairs at the Department for Business, Innovation and
Skills (Jo Swinson) writes with an update on the negotiations.
1.4 The Government has been successful in securing
a definition of Public Interest Entities (PIEs) that is less extensive
than that in the proposal. Unlisted undertakings for collective
investment in transferable securities and unlisted Alternative
Investment Funds are now excluded from the definition, as well
as payment institutions, electronic money institutions, investment
firms, central securities depositories and central counterparties.
Member States will now have the flexibility to designate other
entities as PIEs. The Government supports these changes.
1.5 In line with the Government's negotiating
aim of moving elements of the proposal from the Regulation to
the Directive, Articles on increasing independence, professional
scepticism and clarifying the appropriate internal organisation
of auditors have been transferred from the Regulation to the Directive.
This will make them easier to reflect in existing UK Ethical Standards.
1.6 Similarly, enhanced sanctioning powers for
national competent authorities are now moved from the Regulation
into the Directive and therefore apply to non-PIE audits as well
as PIE audits. However these powers are still more specific and
stronger than the Government believes are necessary.
1.7 EU ownership rules under which audit firms
must be majority owned by licensed auditors have been retained.
The Government did not support this retention, but the view of
most Member States was that this was important to ensure the independence
of the auditor.
1.8 A pan European "passport" for statutory
auditors has been introduced to allow audit firms to provide statutory
audits in Member States other than the Member State in which they
have been approved. Discussion in the working groups is as to
whether the choice of aptitude test and adaptation period should
be the candidate's or the Member State's. The Government prefers
the latter.
1.9 The original proposal's prohibition of the
inspection of non PIE audits being delegated to professional accounting
bodies has been removed. The Government supported this removal.
1.10 The requirement for Member States to ensure
that audits are carried out in accordance with adopted international
auditing standards has now been moved from the Regulation to the
Directive, which the Government welcomes. This should enable Member
States to apply stricter standards at national level, since the
Directive is minimum harmonisation. The process of EU adoption
of auditing standards is still subject to negotiation.
1.11 Changes have also been made to the Regulation
by the proposed compromise text. Fees for permitted non-audit
services are now limited to 70% (up from 10% for "related
audit services" in the original proposal) of the audit fee
paid by the audited entity. The Government opposes a cap for two
reasons: first, both auditor and audit committee have to be satisfied
that there is no issue of independence before these services are
provided; and second, in circumstances such as the merger of two
global businesses, the fee for the reporting work that is most
practically and rapidly done by the auditor could easily be more
than the audit fee.
1.12 There is now a "black list" of
forbidden non-audit services, but in contrast to the original
proposal, no "white list" of services that are always
permissible, or "grey list" of services that are permissible
subject to the approval of the company's audit committee. The
Government agrees with the principle of having a black list only,
which sets out services where there is a lack of independence,
but it does not agree with the list as currently drafted. The
current list would prohibit almost all non-audit services, including
reports to prudential regulators, due diligence work and comfort
letters to investors, none of which create conflicts of interest.
The Government would like Member State audit authorities to be
able to add to the black list to reflect national concerns. The
Government is content that all permitted non-audit services are
subject to approval by the audit committee, the auditor having
first assessed the threats and safeguards to independence.
1.13 The Government has successfully achieved
the removal of the proposal to force audit firms which exceed
certain size criteria to turn into "pure audit firms".
1.14 It has managed to negotiate that some elements
of the audit report requirements should move into the Directive,
which will enable them better to align with existing requirements.
Other elements which only apply to PIEs remain in the Regulation,
but the precise requirements are still being discussed in the
working group. One of the most onerous requirements, to assess
the entity's internal control systems, has been removed and replaced
with a more acceptable requirement to report on significant deficiencies
in the entity's internal financial control system. Drafting of
the requirement for the auditor to report ongoing concern and
risk is changing and the Government is seeking to ensure that
it ends up as useful to the reader of the accounts whilst not
imposing unnecessary additional audit requirements which may be
costly for companies, but deliver little benefit.
1.15 Some elements of the audit report in the
original proposal (details of the audit work undertaken) have
been moved to the private report of the auditor to the company's
audit committee, which the Government welcomes. This will cut
clutter in the annual report and accounts as well as enable the
auditor to bring confidential information formally to the attention
of the audit committee.
1.16 The requirement for large audit firms to
publish a corporate governance statement has been deleted.
1.17 The requirement for PIEs to have one member
of the audit committee with competence in auditing and another
member with competence in accounting/auditing is retained. The
UK and a number of other Member States continue to find this requirement
too burdensome.
1.18 Audit firms are now appointed for a minimum
of one year, which the Government welcomes, rather than the two
years originally proposed. Audit firms were originally to rotate
off the engagement for PIEs after six years, unless joint auditors
have been in place, in which case rotation must occur after nine
years. The audited entity could exceptionally ask the national
audit supervisor to reappoint the auditor for a further two years
(or in the case of joint audit, three years). In the compromise
text, rotation is now 14 years (for joint audit 16 years), provided
there has been a tender process after seven years (for joint audit
eight years). The Government's position on this was set out by
Lord Green at an open session of the Competitiveness Council on
28 May. Whilst believing that tendering is the better solution,
in the interests of compromise, and provided satisfactory agreement
is reached on other areas of the dossier, the Government may be
able to accept mandatory rotation of the auditors of systemic
companies. However it would prefer 25 years, which is the period
proposed by JURI Committee of the European Parliament. Some Member
States are very much in favour of mandatory rotation, others want
to limit the number of companies that rotation applies to but
are content with the number of years that the compromise text
proposes.
1.19 The requirement for the largest audit firms
to produce and submit a contingency plan to the competent authority
has been removed.
1.20 The compromise text still gives the European
Securities and Markets Authority (ESMA) a significant role and
duties as a pan-European audit supervisor. The only change has
been to establish a sub-Committee of ESMA made up of national
audit supervisors. As set out by Lord Green in the Competitiveness
Council the Government continues to believe that ESMA should not
be involved at all, and cooperation between national audit supervisors
should be improved by an enhancement of the role of the existing
European Grouping of Audit Oversight Bodies (EGAOB), which consists
of the national audit supervisors. This would be a less expensive
and lighter touch regime than that proposed in the compromise
text. The Government's view is shared by a significant number
of Member States.
1.21 There is still negotiation as to whether
or not competent authorities will be permitted to contract practising
auditors to inspect audits done by other firms as part of the
competent authority's quality assurance role.
1.22 The JURI Committee of the European Parliament
has now reported, adopting the report by 15 votes to 10. The Minister
highlights the following conclusions of the report:
- that there should be mandatory
rotation of all Public Interest Entity (PIE) audits every 25 years,
provided there has been a tender after a maximum of 14 years;
- a Public Interest Entity (PIE) definition should
comprise all listed companies, banks and insurers, which will
include listed Alternative Investment Funds (AIFs) and listed
UCITS;
- the proposed 10% cap on audit related services
as a proportion of the audit fee should be removed; and
- Member States should be allowed to add to a black
list of prohibited non-audit services.
1.23 Finally, the Minister says that the Presidency
will try to reach compromise on the outstanding areas of disagreement
before the summer in order to reach a General Approach and then
move rapidly to trilogue with the European Parliament.
Conclusion
1.24 We thank the Minister for this detailed
and helpful update.
1.25 We note that many of the amendments to
the original proposals meet the UK's negotiating objectives, or
do not harm them significantly.
1.26 But some provisions still do not meet
UK negotiating objectives. We note in particular the Government's
concern about:
- the proposed 70% cap on
fees for permitted non-audit services;
- the scope of a "black list" of forbidden
non-audit services, which prohibits almost all non-audit services
and additions by Member States to reflect national concerns;
- burdensome requirements for members of audit
committees of Public interest Entities (PIEs);
- mandatory rotation of the auditors of PIEs
every 14 years; and
- the role of the European Securities and Markets
Authority as a pan-Europe audit supervisor.
1.27 These strike us as significant concerns
that may affect whether the proposals meet national interests.
We therefore recommend them for debate in European Committee C,
which should take place as soon as possible — preferably
before a General Approach is adopted in the Council. In the course
of the debate we expect the Minister to provide both an update
on the negotiations and an assessment of whether it is in the
UK's interest to be bound by them.
1 See headnote. Back
| 
