The BIS has published a summary of the responses it has received, and the government's response, to its consultation paper seeking views on proposed legislative changes, including to the Companies Act 2006, required to implement the Amending Directive (2014/56/EU) amending the Statutory Audit Directive and the Regulation on the statutory audit of public interest entities. The BIS consultation paper, entitledAuditor Regulation – Consultation on the technical legislative implementation of the EU Audit Directive and Regulation, was published in October 2015 and closed to comments on 9 December 2015. The Regulation will have direct effect in Member States on 17 June 2016 and the Amending Directive must have been transposed into national law by that date.

Background

The Statutory Audit Directive applies to statutory audits (that is, all audits of annual accounts or consolidated accounts required by EU law) and imposes additional requirements on the statutory audit of "public-interest entities" (PIEs). PIEs are defined as listed companies, credit institutions (i.e. banks and building societies) and insurance undertakings. Member States may also designate other entities as PIEs (for example, entities that are of significant public relevance because of the nature of their business, their size or the number of their employees).

The Regulation introduces a framework for mandatory rotation and re-tendering of audit engagements. It also introduces significant new controls on the provision of non-audit services by statutory auditors to their audit clients. The Regulation only applies to PIEs and all PIEs will be required to put their audit out to tender at least every 10 years and change their auditor at least every 20 years.

Both the Regulation and the Amending Directive include opportunities for Member States to exercise derogations and options. BIS determined that it would be appropriate to allocate to the Financial Reporting Council responsibility for the application of the provisions that clearly relate to matters currently covered by the FRC's standards through changes to the audit and ethical standards framework and revision of the relevant standards and the FRC has been designated as the UK’s competent authority with ultimate regulatory tasks under the Statutory Audit Directive (as amended) and the Regulation.

Following its designation as the UK's competent authority, the FRC published a consultation paper in September 2015 seeking views on its proposed amendments to auditing standards and the response to its paper indicated support for BIS's minimal implementation approach, which is intended to ensure that the legislative changes allow maximum flexibility for auditors, their clients and the relevant regulatory bodies.

Proposed changes

The legislative changes proposed by the government include the following:

  1. to restrict the definition of a PIE to that provided in the Directive (which does not include companies traded on AIM);
  2. to address the division of responsibilities between the FRC and recognised supervisory bodies (RSBs) by means of a revised direction by the Secretary of State, setting out when the FRC should delegate tasks to the RSBs. The direction will require the FRC to delegate inspections and investigations of audits of non-PIEs unless the FRC and RSBs agree otherwise;
  3. that the Directive will be applied to audits of LLPs. The changes to Part 42 of, and Schedule 10 to, the Companies Act will apply to LLPs as from the commencement date. Similarly, the changes in the implementing regulations will affect LLPs as from the commencement date. Some amendments however, on the appointment and removal of auditors, require amendments to LLP-specific legislation and will follow as soon as possible; and
  4. to require the FRC to fulfil the independence requirements of the Regulation, in order for it to become the competent authority, and to ensure that its processes with regard to disciplinary arrangements and the right of appeal are compliant with Article 6 of the European Convention on Human Rights. In the government's opinion, the FRC will need a new statutory right to seek the enforcement of sanctions determined by the disciplinary tribunal.