Académique Documents
Professionnel Documents
Culture Documents
January 2012
Introduction
Timeline and process Audit-only firms Mandatory audit firm rotation Mandatory audit tendering Restrictions on non-audit services Audit committee requirements Fee limits imposed on auditors Audit report Private report to the audit committee
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Introduction
The proposed Directive and Regulation issued by the European Commission on 30 November, represent the latest stage in a consultation process that started with the publication of the Green Paper Audit Policy Lessons from the Crisis in October 2010.
The proposals have two main thrusts: To reduce concentration in the market for audits, with new requirements imposed for audit tendering and auditor appointment; and To address perceived threats to auditor independence, such as long tenure and non-audit services, by mandating audit firm rotation and imposing significant new limits on non-audit services, and potentially requiring the largest networks to be composed of audit-only firms within the EU.
The Commission is also proposing changes to the form and content of an auditors report to shareholders, the requirements relating to audit committees and to the structure and regulation of the audit market in the EU. The proposals introduce an expanded definition of a Public Interest Entity (PIE) which, in addition to listed entities, encompasses a range of financial institutions and a new Large PIE category (broadly listed companies with a market capitalisation, or relevant financial institutions with balance sheet/assets under management, in excess of 1 billion). The Directive amends the current Statutory Audit Directive, applying to all statutory audits. A final Directive would need to be implemented by EU member states into national law. The Regulation, which contains many of the more controversial proposals would, in its entirety, apply directly in all Member States when it comes into force.
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
End of 2012 Final texts expected to be adopted. Regulation and directive come into force 20 days from publication date
End of 2014 Most of the provisions apply two years from the date the Regulation comes into force
End of 2015 Prohibition on large firms providing non-audit services applies three years from the date the Regulation comes into force
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Audit-only firms
Proposal
This requirement would apply to any network: whose member firms have combined annual audit revenues within the EU over 1,500 million; and which has at least one member firm that generates more than one third of its annual audit revenues from audits of Large PIEs. If these thresholds are exceeded then all of the member firms of that network, including those outside the EU, would be banned from providing non-audit services within the EU. This requirement seems intended to apply only to the Big 4 networks. It could impair the ability of member firms of the affected networks to access the breadth and depth of expertise they currently bring to their audits.
Implication
In our view, audit only firms would undermine the ability to recruit top quality staff (both audit staff and other specialists) with consequent impact on audit quality and value for audit clients. Furthermore, the reduced financial scale of audit only firms would impact on their ability to invest and also therefore impact on quality. We therefore remain committed to being a full Multi-Disciplinary Firm (MDF) and do not consider prevention from continuing as a MDF to be the probable (or, indeed most likely) outcome.
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Implication
As currently drafted, this proposal contains an implicit criticism of the audit committees ability to determine whether and when to change auditor. Furthermore, this proposal represents a major change with significant cost implications due both to the frequent rotation of audit firms and also the tendering requirements noted below. It will also constrain the audit committees (and shareholders) choice of audit firm which could be detrimental to audit quality. The proposed ban on auditors providing many non-audit services (see below) means that these may also need to be rotated when a new auditor is appointed.
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Implication
As currently drafted, the Regulation would impose new statutory requirements on all PIEs (irrespective of size) in respect of the audit tender process and will most likely: restrict the flexibility currently available; and increase cost become more time-consuming be impractical (as the audit committee will have to negotiate two contracts with the two potential firms before presenting the choice to the AGM create unnecessary bureaucracy as smaller firms are unlikely to be appointed if the audit committee wouldnt naturally include them in the tender process
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
From the date the Regulation comes into force and two years thereafter (The mandated audit tender process under the Regulation will not apply when a new auditor is appointed during this period, but will apply after the two year transitional period has elapsed)
6 years for single auditor audits (extension to 8 years might be possible) 9 years for joint audits (extension to 12 years might be possible) Minimum engagement period of 2 years applies
Engagement can be renewed once, but the total engagement period is limited to a maximum of 6 years (9 years for joint audits)
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Implication
Providing adequate safeguards are in place, the provision of non-audit services by the auditor can both enhance the quality and reduce the cost of the services (and potentially the audit) with no loss of independence. This was in effect the conclusion of the recent review by the auditing Practices Board in the UK. Furthermore, provisions already exist in the UK Corporate Governance Code and associated guidance relating to both the pre-approval and disclosure of non-audit services. The extensive prohibitions currently being proposed may result in narrowing the choice both of auditor available to a company and providers of non-audit services. .
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Implication
While most UK listed companies already have established audit committees, the new Regulation looks set to impose stricter requirements in terms of composition and the qualifications of audit committee members. If the proposals remain unchanged, boards and nomination committees will need to consider the current composition of the audit committee and any changes necessary to meet the new requirements. The role and responsibilities of the audit committee described in the UK Corporate Governance Code are similar, but not identical to those currently being proposed. Some of the new requirements, for example more frequent audit tendering, will require a greater time commitment from audit committee members. As a result, audit committee terms of reference and standing agenda may need to be updated to reflect the new requirements.
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Implication
The fee caps for total fees generated from a single audit client imposed by the new Regulation should not cause a problem for most audit firms, as limits under current Ethical Standards are lower. However, the limit on fees currently proposed on revenues generated from related financial audit services will be a new requirement and may restrict to what extent an auditor can perform such services. Since theses services are in the main dictated by law or regulators it is difficult to see the logic in such proposals.
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Audit report
Proposal
The proposals identify over 20 items that would have to be addressed in the auditors report, including:
Implication
As currently drafted, auditors will be required to report on more matters and in greater detail than is currently the case. As a result, issues previously covered by client confidentiality and reported privately to the audit committee or board will potentially be made public in the audit report. The proposed requirement to report on the assessment of the entitys ability to meet its obligations in the foreseeable future and therefore continue as a going concern potentially goes further than the current requirements imposed on directors. The proposed requirement that auditors report publicly on their assessment of the internal control system is not fleshed out in any detail, but it could imply something similar to SOX 404 (perhaps extended beyond internal controls over financial reporting).
the auditors assessment of the entitys ability to meet its obligations in the foreseeable future and therefore continue as a going concern;
how much of the balance sheet has been tested substantively and how much has been audited based on system and compliance testing; the variation in the weighting of substantive and compliance testing compared to the previous year; the levels of materiality applied to perform the audit; the key areas of risk of material misstatements of the financial statements; an assessment of the internal control system, including significant internal control deficiencies identified during the statutory audit, as well as the bookkeeping and accounting system (note that this appears to cover only the parent entity in the case of a group); violation of accounting rules, laws, articles of incorporation, and accounting policy decisions and other matters significant to the governance of the entity; whether the statutory audit was designed to detect irregularities, including fraud; The identity of each audit team member and a confirmation of the audit teams independence; in the event of a qualified or adverse opinion or a disclaimer of opinion, the reasons for such a decision; any non-audit services provided; and consistency of the audit opinion with the additional report to the audit committee. The length of the audit report would be limited to four pages or 10,000 characters.
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
Implication
While auditors should already engage in a two way regular dialogue with those charged with governance (generally the audit committee), the proposed Regulation will make part of this communication process mandatory and will impose more prescriptive rules. As currently drafted, the Regulation also provides the Board with a statutory right to disclose the report from the auditor to the audit committee to shareholders. Given the commercial sensitivity attached to much of the information currently reported to Audit Committees, Boards may be reluctant to exercise this right. Nonetheless shareholders expectations may be raised somewhat. There is therefore a danger therefore that the existence of this right together with the detailed prescriptive list of matters to be included could lead to boilerplate disclosure and thus reduce the quality of existing communications between auditors and audit committees
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved
2012 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International").