BIS publishes government response to the consultation on measures to implement the EU Audit Regulation and Directive

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12 May, 2016

The Department for Business, Innovation and Skills (BIS) has published the government’s response to its earlier consultation on measures to implement the EU Audit Directive (2014/56/EU) (‘the Directive’) and Audit Regulation (537/2014) (‘the Regulation’) in the UK as well as other changes that to enhance confidence and strengthen the audit regime.

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 in October 2015, 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 included draft implementing regulations and draft amendments to the Companies Act to implement changes in a number of areas.  Key areas that were consulted on included:

  • Definition of a PIE
  • Rotation and tendering
  • Regulation of auditors
  • Restrictive clauses in contracts

Overall there was support for the proposals.  Key highlights of the implementation of the Directive and Regulation 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 Financial Reporting Council (FRC) will be the Single Competent Authority responsible for the regulation of statutory audits, delegating tasks to the ICAEW and other Recognised Supervisory Bodies (RSBs) in line with a ministerial direction. The Direction will require delegation of functions in respect of non-public interest entities unless the FRC and RSBs agree; the FRC’s Scope of Independent Inspection 2016/17 indicates that the only entities where non-delegation has been agreed are the larger AIM companies (broadly those with an average market capitalisation > €200m).  The ministerial direction, issued on 17 June, is available on the Department for Business, Energy and Industrial Strategy (BEIS, formerly BIS) website here
  • Limited Liability Partnerships.  Changes for the regulatory mechanism for auditors of LLPs will take place at the same time as for companies, so that only one regulatory regime will be in place at any one time.

The government’s response follows the publishing by the FRC of “final drafts” of the 2016 UK Corporate Governance Code, the revised Guidance on Audit Committees, the Ethical Standard 2016 and revised International Standards on Auditing (UK and Ireland) arising from the UK implementation of the EU Audit Regulation and Directive. 

The Financial Conduct Authority and Prudential Regulation Authority are expected to issue responses to their consultations on changes to audit committee requirements as a result of EU audit reform in due course.

*Update 10/06/2016 - A revised version of the UK regulations to implement the EU Audit Directive and Regulation has been laid before Parliament.  A link to these regulations is here.*

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