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Rules for statutory audit of public-interest entities

Rules for statutory audit of public-interest entities

 

SUMMARY OF:

Regulation (EU) No 537/2014 on specific requirements regarding statutory audit of public-interest entities

WHAT IS THE AIM OF THE REGULATION?

  • It aims to improve transparency in the audit market to strengthen public confidence in the annual and consolidated financial statements of public-interest entities (PIEs)*.
  • It does so by laying down rules on:
    • audits of public-interest entities;
    • organisation and selection of statutory auditors and audit firms to guarantee their independence and avoid conflicts of interest;
    • supervision of statutory auditors and audit firms.

KEY POINTS

The regulation sets out:

Conditions for carrying out statutory audit of public interest entities, notably:

  • Fee structures:
    • payments for permitted non-audit services, if supplied for 3 or more consecutive years, should be limited to a maximum of 70% of the average of the statutory audit fees paid in the previous 3 years;
    • statutory auditors or firms must declare to the audit committee* if they receive from a single PIE more than 15% of their total income 3 years running to determine whether this is a threat to their independence and if safeguards are in place.
  • Ban on non-audit services:
    • auditors carrying out a statutory audit of a PIE may not provide a wide range of non-audit activities, such as tax and legal advice or preparation of accounts, to the company, or parent or subsidiaries, while conducting the audit or during the previous financial year;
    • EU governments may relax some of the restrictions or ban other services depending on their impact on an auditor’s independence;
    • auditors carrying out a statutory audit may provide non-audit services which are not specifically banned subject to the approval of the audit committee.
  • Preparation for statutory audits: auditors, before accepting or continuing an engagement for a statutory audit of a PIE:
    • must ensure the independence requirements are met;
    • confirm annually in writing to the audit committee that the firm, partners and senior managers are independent from the PIE;
    • discuss with the audit committee any threats to their independence and the safeguards applied.
  • Irregularities:
    • Auditors must:
      • inform the company if they suspect financial irregularities or fraud have taken place and ask it to take the necessary action. If it fails to do so, they inform the appropriate authorities;
      • report promptly to the appropriate authorities if, during an audit, they uncover illegal behaviour, a threat or doubt about the PIE’s viability or decide to refuse to issue an audit opinion or to deliver an adverse or qualified one.
  • Audit reports:
    • statutory auditors produce an audit report and an additional report to the audit committee. Each is subject to a quality control review before publication;
    • the audit report, drafted in clear and unambiguous language, describes, among other things, the most significant risks identified and the auditor’s response to them and key observations;
    • the additional report provides more detailed information, such as scope and timing of the audit and methodology used, for the audit committee.
  • Additional requirements for statutory auditors:
    • publication of an annual transparency report, available on its website for at least 5 years, containing detailed information about the company and its activities;
    • submission annually to the relevant authority of income from PIEs broken down by revenue from statutory audit and various non-audit services;
    • retention for at least 5 years of documents and information specified in the regulation.

Appointment of statutory auditors or audit firms by public-interest entities

  • a general meeting of shareholders or members of the PIE appoint the auditor on the basis of a recommendation from the audit committee. This contains at least 2 choices and explains why one is preferred;
  • a PIE is free to invite any auditor or firm to submit proposals and the tender should not exclude small firms which received less than 15% of their total audit fees from PIEs the previous calendar year;
  • a PIE appoints an auditor initially for 1 year and a maximum of 10 years. This can be raised to 20 years for a public tendering process and 24 years where a company is audited by at least 2 audit firms;
  • a gap of 4 years must occur before an auditor can audit the same company again;
  • auditors provide a hand-over file containing all relevant information and the most recent audit to their successor.

Surveillance of statutory auditors and audit firms

  • EU governments appoint an authority to supervise auditors and firms carrying out statutory audits of PIEs. The authorities:
    • are independent of statutory auditors and audit firms;
    • respect professional secrecy;
    • may not interfere with the content of audit reports;
    • have the necessary supervisory and investigative powers, including accessing data and inspecting firms, either on their own, working with other authorities or help of the judiciary;
    • establish and implement an effective system of audit quality assurance;
    • follow clear rules on the appointment of inspectors and their activities;
    • monitor the market for the provision of statutory audit services to PIEs, especially the performance of audit committees, market concentration in specific sectors or any failings by firms;
    • publish a report by 17/6/2016, and every 3 years thereafter, on market developments (based on these reports, the European Commission will publish a joint report on these developments at the EU level);
    • publish annual activity reports, work programmes and assessments of the quality assurance system;
    • cooperate with their counterparts in other EU countries, particularly on quality assurance reviews, investigations and on-site inspections;
    • may exchange information with colleagues in non-EU countries subject to certain conditions.
  • The regulation establishes the Committee of European Auditing Oversight Bodies (CEAOB). This:
    • contains one senior representative from each national authority and one from the European Securities and Markets Authority;
    • provides advice to the European Commission and national authorities, contributes technical expertise, plays a coordinating role and encourages exchange of information, expertise and best practice;
    • may establish permanent or ad hoc sub-groups on specific issues.

Transitional measures

  • From 17 June 2020, a PIE may not renew a contract with a statutory auditor or audit firm if the latter has been providing it with audit services for 20 or more consecutive years when the regulation came into force;
  • From 17 June 2023, the same restriction applies if the services have been provided for between 11 and 20 consecutive years.

The regulation repeals Commission Decision 2005/909/EC.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 17 June 2016.

BACKGROUND

  • The regulation complements Directive 2006/43/EC which applies to all statutory audits (see summary) with regard to public-interest entities.
  • In 2017, the Commission published a report on monitoring developments in the EU market for providing statutory audit services to public-interest entities
  • In addition to increasing transparency in the audit market, the regulation encourages a wider choice of audit providers in an area highly concentrated in a few big accounting firms.
  • For more information, see:

KEY TERMS

Public-interest entity: companies with a significant public interest because of the nature of their business, size or number of employees or corporate status, including banks, insurance firms and listed companies.
Audit committee: each PIE has an audit committee of non-executive members or members of its supervisory body.

MAIN DOCUMENT

Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC (OJ L 158, 27.5.2014, pp. 77-112)

Successive amendments to Regulation (EU) No 537/2014 have been incorporated into the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Report from the Commission to the Council, the European Central Bank, the European Systemic Risk Board and the European Parliament on monitoring developments in the EU market for providing statutory audit services to public-interest entities pursuant to Article 27 of Regulation (EU) 537/2014 (COM(2017) 464 final, 7.9.2017)

Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157, 9.6.2006, pp. 87-107)

See consolidated version.

last update 28.07.2020

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