The Directive and Regulation were published in the Official Journal of the European Union in May 2014.  The Directive which amends the Statutory Audit Directive (Directive 2006/43/EC) (link to Europa website) applies to all audits required by EU law and the Regulation applies to all audits of “Public Interest Entities” (PIEs).

The consultation builds on a previous Discussion Paper issued by BIS in December 2014.  It is focused on “identifying legislative, and non-legislative, actions necessary to:

• strengthen standards for the audit of PIEs;
• improve confidence in the independence of auditors;
• avoid excessive concentration in the audit market; and
• make audit reporting more informative.

The consultation includes draft implementing regulations and draft amendments to the Companies Act to implement changes in a number of areas.  Some of the key areas included within the consultation include:

Definition of a PIE. 

• BIS intends not to include additional entities in the definition of a PIE.  BIS are, as previously announced, retaining the PIE definition as the EU minimum – in the UK, entities with debt or equity traded on an EEA regulated market, banks, building societies and insurance undertakings will fall within this definition. 

Rotation and tendering

• PIEs will need to put their audit out to tender at least every ten years and change their auditor at least every 20 years. 

Regulation of auditors. 

• The FRC will be the “single competent authority” – with ultimate responsibility for most matters of audit regulation and oversight.  The FRC will only have to conduct audit inspections, investigations and disciplinary cases in relation to PIEs.  It will delegate the conduct of inspections and investigations and application of sanctions for non-PIEs to the Recognised Supervisory Bodies (RSBs) (for instance the Institute of Chartered Accountants in England and Wales (ICAEW)).  The RSB will still be able to agree that the FRC undertakes the work that it has been delegated and the FRC will be able to take over any particular inspection or investigation, if it deemed it to be in the public interest. In practice, this means that the ICAEW Quality Assurance Department (QAD) will take back inspection of the larger private companies, large pension schemes and large charities and larger unit trusts and OEICs, and potentially larger AIM companies, from the FRC’s Audit Quality Review Team (AQRT).
• Audit registration for firms and Responsible Individuals (RIs) and approval of rules on Continuing Professional Development (CPD) will be overseen by the FRC as currently, with the ICAEW dealing with this at an operational level and monitoring CPD.
• Cross-border auditing changes slightly. 

Restrictive clauses in contracts

• From 17 June 2016, such clauses will cease to have any legal effect.

The consultation also includes details on further provisions that will be included in the final implementing regulations on the following areas:

• removal of auditors of PIEs by application to the court by the competent authority or a significant minority of shareholders or members;
• cooperation between competent authorities, transferring information and confidentiality;
• the reporting by auditors of PIEs to supervisory authorities; and
• the role of competent authorities in relation to the functioning of the audit market for PIEs.

The BIS consultation is one of four consultations being consulted on in the context of audit reform in the UK.  The other consultations out for comment are:

• A Financial Conduct Authority and Prudential Regulation Authority consultations on changes to audit committee requirements as a result of EU audit reform.
• A Financial Reporting Council (FRC) consultation on changes to Ethical Standards for Auditors, International Standards on Auditing (ISAs), the UK Corporate Governance Code and the Guidance on Audit Committees arising from the UK implementation of the EU Audit Regulation and Directive.  The underpinning legislation needed for the FRC to introduce these changes is included within the BIS consultation.

Comments are invited until 9 December 2015.  BIS intends that the implementing regulations should come into force for accounting periods beginning on or after 17 June 2016.

Click for:

• The consultation - Auditor regulation: technical legislative implementation of the EU Audit Directive and Regulation (link to BIS website)
• Feedback from the original consultation (link to BIS website)
• Our UK Accounting Plus project page on Audit reform