UK implementation of EU audit legislation – PwC response

Published at 10:05 AM on 17 June 2016

The EU audit legislation for UK public interest entities (PIEs – see notes to editor) and their statutory auditors comes into effect today. The new rules cover many areas, but those with the greatest impact are: (1) mandatory audit firm rotation rules (latest tendering statistics below); and (2) restrictions on non-audit services, which include a “blacklist” of prohibited non-audit services and a fee cap on the level of permissible non-audit services.

Gilly Lord, PwC’s UK head of regulatory affairs, commented:

“The new rules are challenging in their volume and complexity. Our experience tells us that familiarity with the rules is mixed, especially at a detailed level.

“In some areas, notably the “blacklist” of prohibited non-audit services, there’s still a lot of debate about the right interpretation. Auditors and audit committees will need to make some important judgements under the new regime. The 70% fee cap on the level of permissible non-audit services sounds simple – but the calculation is actually very complex. Monitoring compliance will need a lot of care. There is still some time to plan as, technically, the fee cap does not apply until the first financial year beginning on or after 17th June 2019.

“The new regime will be particularly challenging for new public interest entities, such as insurance companies, which will have to wrestle for the first time with the logistical challenges presented, such as more frequent rotation periods for audit engagement partners.

“It is unlikely that these new rules would fall away in the event of the UK voting to leave the EU in next week’s referendum. In the short term, we wouldn’t expect legislative change in this area, and in the medium term, it’s likely that the UK would continue to apply much of the European regime in order to maintain market access.”

In the UK, the EU rules are being implemented by the Department of Business, Innovation & Skills (BIS) and the Financial Reporting Council (FRC). BIS's focus has been the new Statutory Auditors and Third Country Auditors Regulations 2016 and amendments to the Companies Act 2006. The FRC has issued a Revised Ethical Standard which will apply to audits of financial years beginning on or after 17 June 2016. The Revised Ethical Standard will replace the existing Ethical Standards for auditors and will sit alongside a new set of auditing standards, revisions to the UK Corporate Governance Code and guidance for audit committees.

At the core of the Revised Ethical Standard are the overarching principles of integrity, objectivity and independence. These are intended to establish a framework of ethical outcomes which in turn will provide a base for trust and confidence in the audit. The FRC has been clear that auditors must always have these principles at front of mind, enabling them to apply judgment and not to apply a "rules-based" mind-set.

Gilly Lord, PwC’s UK head of regulatory affairs, commented:

“We will see the final version of the Ethical Standard for the first time on 17 June, so there’s still a little uncertainty regarding the final detail of the regime.

“This aside, the UK is ahead of most other EU Member States as many will not have their regime finalised until after today’s application date. Currently, only eight member states have final legislation in place.

“To achieve the FRC's objective of enhancing confidence in audit quality, we are looking forward to working with BIS, the FRC and the wider profession on common interpretations of the new rules. This will assist audit firms, audit committees, shareholders and the regulators themselves. Without this work, there is a risk that inconsistent practice could emerge.”

Current audit tendering statistics:

 151 FTSE 350 companies have tendered their audit since 1 October 2012 (50 FTSE 100 audits, 101 FTSE 250)

% of current FTSE 350 which have switched auditor since 01/10/2012

FTSE 100 – 41%

FTSE 250 – 27%

FTSE 350 – 29%

Switch rate for 151 FTSE 350 companies which have conducted audit tenders since 01/10/2012)

FTSE 100 – 82%

FTSE 250 – 66%

FTSE 350 – 72%

Overall

FTSE 100 audit tenders (since 1 October 2012):

50 tenders

41 switched

FTSE 250 audit tenders (since 1 October 2012):

101 tenders

67 switched

Current market share compared to 2015:

 

Market share 13/06/2016

Market share 10/06/2015

FTSE 100

   

FTSE 100

   

PwC

35

35%

PwC

39

39%

KPMG

25

25%

KPMG

26

26%

Deloitte

23

23%

Deloitte

20

20%

EY

16

16%

EY

13

13%

BDO

1

1%

BDO

1

1%

Grant Thornton

0

0%

Grant Thornton

1

1%

           

FTSE 250

   

FTSE 250

   

PwC

70

28%

PwC

68

27%

KPMG

69

28%

KPMG

69

28%

Deloitte

59

24%

Deloitte

64

26%

EY

46

18%

EY

41

16%

BDO

2

1%

BDO

4

2%

Grant Thornton

4

2%

Grant Thornton

4

2%

           

FTSE 350

         

PwC

105

30%

PwC

107

31%

KPMG

94

27%

KPMG

95

27%

Deloitte

82

23%

Deloitte

84

24%

EY

62

18%

EY

54

15%

BDO

3

1%

BDO

5

1%

Grant Thornton

4

1%

Grant Thornton

5

1%

 

Ends

 

Notes to editor:

 

About Public Interest Entities (PIEs)

Public Interest Entities: (1) All entities that are both governed by the law of a Member State and listed on a regulated market (2) All credit institutions in the EU, irrespective of whether listed or not (3) All insurance undertakings in the EU, regardless of whether they are listed or not and regardless of whether they are life, non-life, insurance or reinsurance undertakings (4) Entities designated by Member States as public-interest entities, for instance undertakings that are of significant public relevance because of the nature of their business, their size, or number of employees.

 

Media contact:

Katherine Howbrook, PwC media relations, Tel: 020 7212 2711/07595 609 737, Email: [email protected]


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