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Page 1 | Proprietary and Copyrighted Information EU Audit Legislation Liesbet Haustermans Director – Deloitte IESBA Meeting London January 12-14, 2015.

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Presentation on theme: "Page 1 | Proprietary and Copyrighted Information EU Audit Legislation Liesbet Haustermans Director – Deloitte IESBA Meeting London January 12-14, 2015."— Presentation transcript:

1 Page 1 | Proprietary and Copyrighted Information EU Audit Legislation Liesbet Haustermans Director – Deloitte IESBA Meeting London January 12-14, 2015

2 Page 2 | Proprietary and Copyrighted Information Agenda 1.EU audit legislation – Overview 2.Date of application 3.Snapshot key provisions 4.PIE definition 5.Mandatory audit firm rotation 6.Non-audit services: scope, timing and restrictions 7.Non-EU controlled undertaking of EU PIE 8.Territorial scope of prohibited NAS 9.Other key points in legislation 10.Member State options

3 Page 3 | Proprietary and Copyrighted Information EP plenary vote and Council adoption – April 2014 EU Audit Legislation: –Regulation N°537/2014 on specific requirements regarding the statutory audit of PIEs –Directive 2014/56/EC amending Directive 2006/43/EC on statutory accounts and consolidated accounts Publication in Official Journal on 27 May 2014, in 24 languages, each language version has equal binding force. Application date: 17 June 2016 Next steps: Member States to adopt legislation implementing options/secondary legislation completing the regulation/guidance EU Audit Legislation Overview

4 Page 4 | Proprietary and Copyrighted Information European Commission FAQs published in June – very high level and September – some helpful points EC organising Member State implementation workshops EU Audit Legislation Overview

5 Page 5 | Proprietary and Copyrighted Information Date of Application – Regulation and Directive * Except where mandatory firm rotation transitional measures apply. April 2014 27 May 2014 17 June 2016 Adoption of Regulation and Directive Publication in Official Journal Entry into force +20 Days Regulation comes into effect * Directive should be transposed in national law +2 Years 16 June 2014

6 Page 6 | Proprietary and Copyrighted Information EU Audit Legislation – Snapshot Key Provisions TopicEU Legislation Mandatory firm rotation (MFR) 10 years maximum + Member State option to extend  to 20 years with tender or  to 24 years with joint audit Opportunities to extend MFR where there is a tender or joint audit require individual Member States to enact legislation to be effective Member States may stipulate MFR for a period of less than or equal to 10 years before extensions Mandatory tendering (MT)Only for renewals of existing appointments

7 Page 7 | Proprietary and Copyrighted Information EU Audit Legislation – Snapshot Key Provisions TopicEU Legislation Non-audit services (NAS) Prohibited list approach 70% cap on non-audit services, applies to audit firm Cooling-in period for 1 type of service Audit committee approval required for NAS that is not prohibited Scope of key measures: Public interest entities (PIEs) EU companies listed on regulated market Credit institutions Insurance undertakings Entities designated as PIE by a Member State

8 Page 8 | Proprietary and Copyrighted Information PIE Definition Four categories of PIEs under the Directive article 2.13: Entities with transferable securities listed on EU regulated markets (see http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:209:0021:0028:EN:PDF, as opposed to all markets in the EU) and governed by the law of an EU Member Statehttp://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:209:0021:0028:EN:PDF Credit institutions authorized by EU Member States authorities (i.e., banks whose business is to receive deposits or other repayable funds from the public and to grant credit) Insurance undertakings authorized by EU Member State authorities Other entities that a Member State may choose to designate as a PIE

9 Page 9 | Proprietary and Copyrighted Information Audit firm’s appointment for statutory audit of PIE to last for at least one-year term which is renewable Maximum duration of audit engagement not to exceed 10 years, unless a Member State decides to extend rotation period to: –Maximum 20 years in case of public tendering, or –Maximum 24 years in case of joint audit Member State has the option to elect a maximum duration of less than 10 years Competent Member State authority (for instance audit oversight authority and/or securities regulator) may extend auditor appointment on an exceptional basis for a further two-year term Four year cooling off period after the end of the statutory audit services before audit firm can undertake the audit of the entity again PIE to perform a transparent audit tendering process with close involvement of audit committee when a tender does occur Explanation Mandatory Audit Firm Rotation

10 Page 10 | Proprietary and Copyrighted Information Timeline for transitional measures (EC’s current interpretation) Mandatory Audit Firm Rotation April 2014 27 May 2014 17 June 2020 Adoption of Regulation Publication in Official Journal Entry into force 20 Days 10 Years * EC interpretation (2 September 2014 letter): mandates of less than 11 years that have reached 10 year mark (or less if Member State opts to reduce the 10 year period) by the effective date must end by that date, except if Member State opts to extend. Such mandates that have not yet reached 10 year mark by the effective date must end when the 10 year mark is reached. 17 June 2016 * 17 June 2023 17 June 2024 2 Years 9 Years Mandate in place  20 years at entry into force Mandate in place  11 years < 20 years at entry into force Mandate in place < 11 years at entry into force and at least 10 years reached Effective Date But may be extended if Member State opts for extension End 6 Years 16 June 2014 End?

11 Page 11 | Proprietary and Copyrighted Information Non-Audit Services (NAS) – Scope Audit firms and network members prohibited from providing certain NAS –Such NAS not to be directly or indirectly provided by the audit firm or network members to the audited PIE, its parent undertaking in the EU or its controlled undertakings in the EU Article 2.7: ‘network’ means the larger structure: –Which is aimed at cooperation and to which a statutory auditor or an audit firm belongs, and –Which is clearly aimed at profit- or cost-sharing or shares common ownership, control or management, common quality-control policies and procedures, a common business strategy, the use of a common brand-name or a significant part of professional resources;”

12 Page 12 | Proprietary and Copyrighted Information NAS – Scope No definition in regulation of “parent undertaking” or “controlled undertakings” –EC September FAQs:  “parent undertaking” as defined in the Accounting Directive  “controlled undertaking” as defined in Transparency Directive

13 Page 13 | Proprietary and Copyrighted Information NAS – Timing During a period covered by audited financial statements and until issuing of the audit report Prior FY cooling-in period for one category of services: financial information internal control or risk management procedures or financial information technology systems No transitional measures for NAS prohibitions: –Apply as from 17 June 2016 (EC September 2014 FAQ: will apply to the first financial year starting after the date of application) –Unclear what the impact is for cooling-in period – but general principle of non- retroactivity of EU legislation

14 Page 14 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Tax services relating to: Preparation of tax forms *; Payroll tax; Customs duties; Identification of public subsidies and tax incentives unless support from the statutory auditor or the audit firm in respect of such services is required by law *; Support regarding tax inspections by tax authorities unless support from the statutory auditor or the audit firm in respect of such inspections is required by law *; Calculation of direct and indirect tax and deferred tax *; Provision of tax advice * Taxation Services that include: Tax return preparation: does not generally create a threat to independence if management takes responsibility for the returns including any significant judgments; Tax calculations for the purpose of preparing accounting entries (including the calculation of current and deferred tax liabilities or assets): prohibited if they are material to the financial statements on which the firm will express an opinion (except for emergency or unusual situations); Tax planning and other tax advisory services: prohibited where the effectiveness of the tax advice depends on a particular accounting treatment or presentation in the financial statements and (a) The audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and (b) The outcome or consequences of the tax advice will have a material effect on the financial statements on which the firm will express an opinion; Assistance in the resolution of tax disputes: prohibited where the taxation services involve acting as an advocate for an audit client before a public tribunal or court in the resolution of a tax matter and the amounts involved are material to the financial statements on which the firm will express an opinion

15 Page 15 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Services that involve playing any part in the management or decision-making of the audited entity Assuming a management responsibility Management responsibilities involve leading and directing an entity, including making significant decisions regarding the acquisition, deployment and control of human, financial, physical and intangible resources. Whether an activity is a management responsibility depends on the circumstances and requires the exercise of judgment. Examples of activities that would generally be considered as management responsibility and that are thus prohibited include: Setting policies and strategic direction; Directing and taking responsibility for the actions of the entity’s employees; Authorizing transactions; Deciding which recommendations of the firm or other third parties to implement; and Taking responsibility for designing, implementing and maintaining internal control. On the contrary, activities, which are routine and administrative, or involve matters that are insignificant, generally are deemed not to be a management responsibility. Furthermore, providing advice and recommendations to assist management in discharging its responsibilities is not assuming a management responsibility

16 Page 16 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Bookkeeping and preparing accounting records and financial statements Payroll services Preparing Accounting Records and Financial Statements Comprise accounting and bookkeeping services, such as preparing accounting records or financial statements. Prohibited: accounting and bookkeeping services, including payroll services, or preparing financial statements on which the firm will express an opinion or financial information which forms the basis of the financial statements

17 Page 17 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Designing and implementing internal control or risk management procedures related to the preparation and/or control of financial information or Designing and implementing financial information technology systems IT Systems Services Services related to information technology (IT) systems include the design or implementation of hardware or software systems. The systems may aggregate source data, form part of the internal control over financial reporting or generate information that affects the accounting records or financial statements, or the systems may be unrelated to the audit client’s accounting records, the internal control over financial reporting or financial statements. Prohibited where the services involve the design or implementation of IT systems that: Form a significant part of the internal control over financial reporting; or Generate information that is significant to the client’s accounting records or financial statements on which the firm will express an opinion

18 Page 18 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Valuation services, including valuations performed in connection with actuarial services or litigation support services Valuation services Comprise making assumptions with regard to the future developments, the application of appropriate methodologies and techniques, and the combination of both to compute a certain value, or range of values, for an asset, a liability or for a business as a whole Prohibited where the valuations would have a material effect, separately or in the aggregate, on the financial statements on which the firm will express an opinion Litigation Support Services Litigation support services may include activities such as acting as an expert witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval. Prohibited where the service involves estimating damages or other amounts that would have a material effect, separate or in aggregate, on the financial statements on which the firm will express an opinion

19 Page 19 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Legal services, with respect to: The provision of general counsel; Negotiating on behalf of the audited entity; and Acting in an advocacy role in the resolution of litigation Legal services are defined as any services for which the person providing the services must either be admitted to practice law before the courts of the jurisdiction in which such services are to be provided or have the required legal training to practice law. Such legal services may include, depending on the jurisdiction, a wide and diversified range of areas including both corporate and commercial services to clients, such as contract support, litigation, mergers and acquisition, legal advice, support and assistance to clients’ internal legal departments The position of General Counsel is generally a senior management position with broad responsibility for the legal affairs of a company Prohibited where: Acting in an advocacy role for an audit client in resolving a dispute or litigation when the amounts involved are material to the financial statements on which the firm will express an opinion; Appointing a partner or an employee of the firm as General Counsel for legal affairs of the audit client

20 Page 20 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Services related to the audited entity’s internal audit function Internal Audit Services Internal audit activities may include: Monitoring of internal control – reviewing controls, monitoring their operation and recommending improvements thereto; Examination of financial and operating information – reviewing the means used to identify, measure, classify and report financial and operating information, and specific inquiry into individual items including detailed testing of transactions, balances and procedures; Review of the economy, efficiency and effectiveness of operating activities including nonfinancial activities of an entity; and Review of compliance with laws, regulations and other external requirements, and with management policies and directives and other internal requirements Prohibited where internal audit services relate to: A significant part of the internal controls over financial reporting; Financial accounting systems generate information that is, separately or in the aggregate, significant to the client’s accounting records or financial statements on which the firm will express an opinion; or Amounts or disclosures are, separately or in the aggregate, material to the financial statements on which the firm will express an opinion

21 Page 21 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Services linked to the financing, capital structure and allocation, and investment strategy of the audited entity, except providing assurance services in relation to the financial statements, such as the issuing of comfort letters in connection with prospectuses issued by the audited entity Promoting, dealing in, or underwriting shares in the audited entity Corporate Finance Services Include assisting an audit client in developing corporate strategies, identifying possible targets for the audit client to acquire, advising on disposal transactions, assisting finance raising transactions, or providing structuring advice. Prohibited where corporate finance advice depends on a particular accounting treatment or presentation in the financial statements and: The audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and The outcome or consequences of the corporate finance advice will have a material effect on the financial statements on which the firm will express an opinion Prohibited where services involve promoting, dealing in, or underwriting an audit client’s Shares

22 Page 22 | Proprietary and Copyrighted Information List of Prohibited Non-Audit Services EU Regulation (art. 5)IESBA Code of Ethics (PIEs) Human resources services, with respect to: Management in a position to exert significant influence over the preparation of the accounting records or financial statements which are the subject of the statutory audit, where such services involve: ˗ Searching for or seeking out candidates for such positions; or ˗ Undertaking reference checks of candidates for such positions; Structuring the organisation design; and Cost control Recruiting Services Prohibited where the statutory auditor or audit firm would assume management responsibilities, including acting as a negotiator on the client’s behalf, and where the hiring decisions would not be left to the client Prohibited with respect to a director or officer of the entity or senior management in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion: Searching for or seeking out candidates for such positions; and Undertaking reference checks of prospective candidates for such positions

23 Page 23 | Proprietary and Copyrighted Information Restrictions on non-audit services Other NAS permitted to be provided to the audited PIE subject to audit committee approval (and application general principles of independence) Member States may prohibit additional non-audit services and establish stricter rules for NAS which are not prohibited Member States may adopt legislation allowing valuation services and certain tax services (= preparation tax forms; identification subsidies and tax incentives; support re tax inspections; calculation of direct and indirect tax and deferred tax and tax advice) providing that these services have no direct effect, or have an immaterial effect, on the audited financial statements Fees for permissible NAS provided by the statutory auditor or the audit firm to the audited entity, its parent undertaking or its controlled undertakings for three consecutive financial years not to exceed 70% of the average fees paid in the last three consecutive financial years for statutory audits of the PIE and, where applicable, its parent or controlled undertakings, and of the group consolidated financial statements. Services required by EU or national legislation are excluded. Competent authorities may exempt audit firm from cap “on an exceptional basis” for maximum of two financial years Cooling-in period for the design and implementation of internal control or risk management procedures related to the preparation and/or control of financial information or financial information technology systems applies during the fiscal year prior to the period covered by the audited financial statements NAS: Restrictions

24 Page 24 | Proprietary and Copyrighted Information Threats & safeguards approach, assessment by the statutory auditor But:  deemed to impact independence, no mitigation possible: –Services that involve playing any part in the management or decision-making process of the audited entity –Bookkeeping and preparing accounting records and financial statements –Designing and implementing internal control or risk management procedures related to the preparation and/or control of financial information or financial information technology systems  all other services on NAS list: threats & safeguards approach Special regime for services by network member Non-EU Controlled Undertaking of EU PIE

25 Page 25 | Proprietary and Copyrighted Information NAS: Territorial Scope of Prohibited NAS PIE – EU Member State A Sub* - EU Member State B NAS special regime EC September FAQ: Law of Member State where subsidiary is located, applies * Non PIE Sub* - Outside EU

26 Page 26 | Proprietary and Copyrighted Information Other Key Points in Legislation Audit committee (AC) and reporting PIEs must have AC composed of non-executive members Responsibility for auditor selection procedure – at least 2 choices and duly justified preference More comprehensive report from auditor directly to the audit committee (incl. results of audit, declaration of independence, materiality, judgment explanations about events that may cast significant doubt on the going concern, significant deficiencies in the internal financial control system/accounting system, significant matters involving actual or suspected non compliance with laws and regulations or articles of association)

27 Page 27 | Proprietary and Copyrighted Information Other Key Points in Legislation Audit procedures and reporting Compliance with international audit standards All statutory audits to have statement on any material uncertainty related to events or conditions that may cast significant doubt on ability to continue as a going concern For PIEs only - description of the most significant assessed risks of material misstatement; statement that no prohibited NAS were provided; number of years in place

28 Page 28 | Proprietary and Copyrighted Information Other Key Points in Legislation Other Cooperation between EU Member State auditor oversight authorities - New Committee of European Auditing Oversight Bodies (CEAOB); composed of one member from each Member State and one member appointed by the European Securities and Markets Authority (ESMA) Dialogue between regulators and auditors with shared responsibility for effective dialogue Annual meeting between European Systemic Risk Board (ESRB) and auditors of global systemically important institutions - at least annual European passport for the audit profession - key audit partner carrying out the audit to be duly approved as a statutory auditor in that other Member State Prohibition of clauses limiting choice of auditor Penalties – dissuasive penalties to apply to auditors and audit firms if statutory audits under EU law are not carried out in conformity with the Directive and Regulation (by member states) Audit market – monitoring and reporting by competent authorities and competition authorities every 3 years, ultimately EC report to Council, ECB, ESRB and EP where appropriate

29 Page 29 | Proprietary and Copyrighted Information Member State options The Regulation and Directive contain over 50 Member State options, including: –Expanding the PIE list –Reducing the length of the initial engagement period to less than 10 years –Extending the initial engagement period by a further 10 or 14 years (tender or joint audit) –Adding to the list of prohibited NAS –Establishing stricter rules setting out the conditions under which permitted NAS may be provided –Allowing the exception for valuation and certain tax services –Stricter rules on the fee cap –… Exercising these options will lead to a patchwork of different regulation throughout the EU Will be costly and complex for PIEs and the statutory auditor and audit firms to manage

30 The Ethics Board www.ethicsboard.org


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