BIS and FRC consult on implementing EU Audit Reforms
The department for Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC) have separately issued much anticipated consultation documents setting options for implementing reforms in the UK audit market, under the European Union's new audit directive and audit regulation.
The BIS consultation document also takes account of recommendations from the UK's Competition and Markets Authority and other regulatory changes.
The BIS consultation calls for views on the following key areas, among others:
- Whether the current definition of a public interest entity (PIE) should be expanded beyond the EU minimum of banks, listed companies, building societies and insurers;
- the future regulatory framework and the respective responsibilities of the FRC and recognised supervisory bodies (RSBs);
- the proposed restrictions and cap on the provision of non-audit services by auditors to PIE audit clients;
- the proposal to extend the maximum duration of the audit engagement with a PIE to 20 years, subject to a retender process after a maximum of 10 years;
- alignment of the increase in the small company audit exemption thresholds with the increase in the small company thresholds, for financial reporting purposes resulting in increased turnover and balance sheet totals of £10.2m and £5.1m respectively.
BIS has suggested that the current RSBs, including ICAS, might retain their responsibility for licensing firms to audit non-PIE clients, even after responsibility for licensing auditors of PIE clients passes to a "single competent authority", probably the FRC.
Many of the articles in the audit directive and audit regulation relate to matters covered in the FRC's auditing standards and ethical standards for auditors. Therefore, when there are member state options, both BIS and the FRC believe that where these affect the FRC's standards, the responsibility for development of the relevant audit and ethical standard should fall to the FRC. BIS is seeking views on whether the FRC should be given this responsibility.
The EU requirements come into effect on 17 June 2016 are likely to apply to financial years starting on or after that date.
The FRC's consultation document seeks stakeholder views on the member state options allowed under the EU's legislation. In some respects, the UK's current requirements go beyond those of the legislation. In those cases, and where the member state options allow, the FRC seeks views on whether or not to retain current provisions, or to extend them further, or to align with the new legislation:
- Entities not covered by the definition of PIEs – the EU definition of a PIE is different to the current requirements of the FRC's auditing and ethical standards;
- non-audit services – the regulation prohibits the provision of certain non-audit services by auditors of PIEs through a "black list" and places a cap on permitted services. The FRC is consulting on how to apply the cap and the list most effectively in the UK;
- the geographic extent of application – under the regulation, the prohibitions on non-audit services to PIEs or their controlled entities within Europe, apply to auditors and their network firms. The consultation seeks views on whether these prohibitions should apply in relation to all audited group entities, irrespective of their location.
Stephen Haddrill, FRC chief executive, said: "We hope to hear from all stakeholders, and particularly from investors as the leading beneficiaries of high-quality audit."