26 August 2014

FEE´s briefing paper on the appointment of the auditor and the duration of the audit engagement

In the context of the European Directive on Statutory Audits and the Regulation on Statutory Audit of Public Interest Entities, FEE has prepared the briefing paper on The Appointment of the Auditor and the Duration of the Engagement.

FEE seeks to provide an overview of the changes included in the updated EU requirements regarding the appointment of the auditor and the duration of the audit engagement.

A significant change in the Directive is the prohibition of contractual clauses restricting the choice of auditors. FEE believes in free competition and therefore supports the prohibition of such clauses.

Whilst the above applies to every audit, the following sections deal with the selection of the auditor and the duration of the audit engagement for PIEs as defined in the SAD 2006 and the EU Accounting Directive. These provisions are included:

• In the Directive to the extent that they relate to the responsibilities of the audit committee with respect to the auditor selection and supervision of the audit; and

• In the Regulation that provides detailed requirements with respect to the auditor selection process, the audit tenure and reporting requirements by the audit committee to the general meeting.

The audit committee of a PIE is charged with the responsibility for selecting the auditor for the PIE via a formal process. FEE welcomes the enhanced involvement and increased transparency in the way in which the audit committee operates in many areas including the auditor selection process.

As per the Regulation, PIEs need to appoint their auditor or audit firm for a minimum of one year and a maximum of ten years, although, as discussed below, Member States can extend the maximum duration period in specified circumstances. Member States are provided with an option regarding both of these deadlines:

• Member States are allowed to set the minimum duration to longer than one year; and

• Member States are allowed to set the maximum duration to shorter than ten years.

FEE understands that the different minimum durations of the audit engagement across Member States are carried forward from a long tradition of a variety of local corporate governance laws and regulations. In addition, in some Member States, a maximum duration of the audit engagement is already set at national level for a period shorter than the maximum period permitted by the Regulation.

Providing flexibility to businesses within the EU to allow PIEs to set the same rotation rules at group level for the entire entity would be beneficial to those businesses operating cross-border. Specifically, this flexibility permits parent companies and their subsidiaries in different EU Member States to more easily achieve compliance with one another’s respective national maximum duration requirements based on Article 17 of the Regulation. Disruption due to different rotation timeframes could lead to additional audit procedures and inefficiencies in the coordination of audits with potential effects on the quality and cost of audits.

Briefing paper

© FEE