New measures to improve the EU framework on statutory audits have now come into effect.

The Directive on Statutory Audits of Annual and Consolidated Accounts (the “Directive”) and the accompanying Regulation on Statutory Audit of Public-Interest Entities (the “Regulation”) came into force on 16 June 2014.

The purpose of the Directive and Regulation is to improve the supervision and independence of auditors and to restore investor confidence in audited financial information, particularly in light of the global financial crisis.

The Directive must be implemented into Irish law by 17 June 2016. The Regulation came into effect immediately although there is a two year delay in the application of most of its provisions.

The Directive, which amends the 2006 Statutory Audit Directive, contains new and amended rules regarding all statutory audits in the EU.

The Regulation contains additional requirements applicable to a Public Interest Entity (“PIE”). The definition of PIE includes listed companies, credit institutions and insurance undertakings. In addition, Member States have discretion to designate other undertakings, which are of significant public relevance, as a PIE, having regard to the business of the entity, the size of the entity and the number of employees. An EU subsidiary company classed as a PIE will come within the legislation, notwithstanding that the subsidiary may have a non-EU parent company.

The following measures will apply to all audits, regardless of whether the entity is a PIE or not:

  • provisions to strengthen the independence of auditors/audit firms, particularly by improving the organisational requirements of auditors/audit firms;
  •  more informative audit reports so that investors are given relevant information rather than mere standardised opinions;
  • prohibition of “Big Four Only” contractual clauses which seek to limit a company’s choice of auditor; and 
  •  harmonisation of the types of sanctions used by authorities, allowing for a more effective sanctioning regime across all Member States.

The following provisions will apply to the statutory audit of a PIE only:

  • mandatory rotation of auditors/audit firms (generally every ten years);
  • a prohibition on the supply of certain non-audit services to the audited entity e.g. certain tax services and services that involve playing any part in the management or decision-making of the audited company
  •  limits on the fees that may be charged in respect of permitted non-audit services;
  • a more direct role for the audit committee regarding the appointment and supervision of the statutory auditor/audit firm; and
  • shareholders representing 5% or more of the voting power of the audited entity will be able to bring a claim before national courts to dismiss an auditor.

National oversight bodies still remain responsible for oversight at Member State level. Cooperation and coordination at European Level will be conducted by a Committee of European Auditing Oversight Bodies (CEAOB).