The Audit Regulation is applicable to Public Interest Entities only. It introduces a mandatory rotation of auditors. In addition, the role of the Audit Committee is strengthened and the conditions for the provision of non-audit services are amended. Finally, "Big Four only" clauses are banned.
EU legislation to reform the audit market consists of (i) Audit Regulation 537/2014/EU and (ii) Directive 2014/56/EU amending Audit Directive 2006/43/EC.
The (amended) Audit Directive has a general scope of application, but the scope of the Audit Regulation is limited to so-called Public Interest Entities (such as listed entities, credit institutions and insurance undertakings) ("PIEs").
The Audit Regulation will be directly applicable as from 17 June 2016. The (amended) Audit Directive has to be implemented by 17 June 2016 at the latest. It looks as if the Belgian legislator will not meet that deadline.
Mandatory rotation of auditors of PIEs
The rules on the duration of the engagement of the auditor or audit firm responsible for carrying out the statutory audit are significantly amended. The minimum duration of an initial audit engagement is one year and the maximum duration – in combination, where applicable, with any renewed engagements – is 10 years. Member States may extend the minimum duration and limit the maximum duration. After the expiry of the maximum duration, a cooling-off period of 4 years applies.
Member States may provide for a limited number of cases in which the maximum duration may be extended, including up to 20 years where a public tendering process is conducted and even up to 24 years if more than one auditor or audit firm is engaged simultaneously.
The limitations mentioned above also apply to the members of the network to which the auditor or the audit firm belongs.
The introduction of external rotation is an important innovation and was made subject to a (complex) set of transitional provisions:
- if the auditor or the audit firm had been providing audit services for 20 or more consecutive years as at 16 June 2014, the PIE cannot enter into or renew the audit engagement as from 17 June 2020;
- if the auditor or the audit firm had been providing audit services for 11 or more but less than 20 consecutive years as at 16 June 2014, the PIE cannot enter into or renew the audit engagement as from 17 June 2023.
For the remaining cases, the rules on the mandatory rotation will apply to the first financial year starting on or after 17 June 2016. The current engagement and its previous renewals will have to be taken into account for determining whether the maximum duration has been reached.
Mandatory internal rotation
The key audit partners responsible for carrying out a statutory audit must cease their participation in the statutory audit not later than 7 years from the date of their appointment. After the expiry of this maximum period, a cooling-off period of 3 years has to be taken into account. Member States may further limit the maximum period of 7 years.
In addition, the auditor or the audit firm must establish a rotation mechanism with regard to the most senior personnel involved in the statutory audit.
Role of the audit committee strengthened
As a rule, each PIE has to establish an audit committee. The audit committee will have to submit a recommendation to the board of directors for the appointment of auditors or audit firms responsible for carrying out a statutory audit. Unless it concerns the renewal of an audit engagement, the recommendation has to be reasoned; it must contain at least two choices for the audit engagement, and the audit committee must express a duly reasoned preference for one of them. The recommendation (and the preference) must be included in the notice convening the general meeting of shareholders deliberating and resolving on the appointment.
Unless it concerns an ordinary renewal, the recommendation of the audit committee must, as a rule, be prepared following a specific selection procedure, supervised by the audit committee.
(Prohibited) non-audit services
The auditor or audit firm responsible for carrying out the statutory audit must not provide certain non-audit services to the PIE, its parent undertaking or its controlled undertakings within the European Union. Such prohibited non-audit services include certain tax services, bookkeeping, payroll services, valuation services, certain legal services and human resources services.
The provision of other non-audit services is permitted, but the total fees for such services must be limited to no more than 70% of the average fees paid in the last three consecutive financial years for the audit of the (consolidated) annual accounts of the PIE, of its controlling undertaking or of its controlled undertakings.
Member States may apply more stringent requirements and, for example, may extend the list of prohibited non-audit services.
"Big Four only" clauses
Under the Audit Regulation, as from 17 June 2017, all contractual clauses entered into by and between a PIE and a third party restricting the choice of the general meeting of shareholders to certain categories or lists of auditors or audit firms will be null and void.
The (amended) Audit Directive includes a similar provision, but with a broader scope of application: all contractual clauses restricting the choice of the general meeting of shareholders to certain categories or lists of auditors or audit firms are prohibited, regardless of the parties to such clauses.
Therefore, it should be verified whether any existing agreements need to be amended to ensure their legal validity.