21 February 2014

FEE's involvement in the implementation of the new Audit Reform Directive and Regulation

A number of questions arise when one starts to reflect on the practical implementation of the legislative texts of the new Audit Directive and Regulation. The answers to these questions may significantly impact the application of the new requirements in practice.

FEE would like to flag some issues that will need clarification to enhance consistency in application. FEE would like to work with you and all involved parties over the coming months to develop the best possible technical and practical solutions. This is especially important for Public Interest Entities (PIEs) as most of these operate across borders.

More specifically, some of the clarifications needed are as follows:

• Clarification on timing: what about the timing of the issuance of the documents, the translation, the publication in the official journal of the EU? What will be the different transitional periods applicable? What about the phased application of certain provisions?

• Clarification on the application of article 9 of the regulation on ‘audit fees’: how does the calculation of the 70 per cent over three years work? The provision governing the cap of 70 per cent is open to multiple interpretations and should be explained further.

• Clarification on the application of article 10 of the regulation on ‘prohibition of the provision of non-audit services’: what is the meaning of certain terms used like ‘any part in the management or decision-making’? FEE can also observe discrepancies between some language used in the recital and in the article, for instance with regard to the provision of due diligence services. There is a general demand for clarification as the provisions of the regulation must be unequivocal: practitioners should be left in no doubt about the definition or scope of prohibited non-audit services.

• Clarification on some options, including the ones in article 33 of the regulation on the duration of the audit engagement: what about cross border impacts of such measures? What if a group of companies based in one Member State has PIE subsidiaries in other Member States that have different rotation rules? Audit quality may suffer from inconsistencies in the implementation or divergent interpretations of such measures. The period set for mandatory audit firm rotation should also be compatible with the internal audit partner rotation, which is currently taking place every seven years in the EU.

• Clarification on the ISA 2 adoption mechanism: according to the published text, the ISA adoption does not seem to be as straightforward as it could have been. Who is going to advise the EC for the delegated acts? It seems that the newly created Committee of European Auditing Oversight Bodies (CEAOB) would have a role in the ‘examination’ of the ISAs in view of adoption. How would this work in practice? It is important that this does not result in carve-ins and carve-outs at the detriment of the internal market and an international level playing field. FEE has long promoted and continues to support a full European adoption of ISAs that is instrumental to sustain audit quality.

Full letter

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