City A.M.: Introduction of the EU Audit Directive to businesses and their accountants

17 April 2016

The author analyses the impact of the EU Audit Directive on audit and advisory firms and the way they operate with Public Interest Entities. Both companies and the audit and advisory firms need to plan for this change, according to the analysis.

The EU Audit Directive extends the definition of Public Interest Entities (PIEs) to now include banks and insurance companies of any size, large or small. This is quite a shock to many of London’s insurance companies who are already facing mounting regulatory pressure, and in the past would not have considered themselves public interest, particularly those without retail customers.

The Directive is far reaching, in particular:

• Requiring PIEs to put their audits out to tender every decade and change auditors every 20 years.
• Considerably restricting the non-audit services that can be provided by external auditors to PIEs, by imposing fee caps and a service blacklist.
• Building new requirements on audit committees.
• Requiring more disclosure in PIE audit reports.

The objective of the Directive is to improve auditor independence, the quality of audit reporting and the level of competition in the audit market. It also aims to restore public confidence in the role played by statutory auditors in the financial reporting process.

In principle, this mandatory audit rotation provision should create more competition within the industry but in practice the effect is less clear.

The introduction of the Audit Directive should be welcomed by all parties looking to restore confidence in the sector, improve reporting and establish auditor independence. The proof of its success will not be realised for a number years. What is clear is that planning for the new rules is essential. Now is an important time for companies to take a fresh look at reporting and their service providers and plan for the future.

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