Today on 17 June 2016 Regulation 537/2014 (on specific requirements regarding statutory audit of public-interest entities; the Regulation) becomes directly applicable in the Netherlands. Directive 2014/56/EU (amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts; the Directive) should be implemented in national legislation of all Member States ultimately today. The Act implementing the Directive is currently under discussion in the Second Chamber (Tweede Kamer).
The Directive provides a set of requirements regarding all statutory audits, whereas the Regulation provides specific auditor reporting requirements for public-interest entities (PIE’s). PIE’s include entities established in the EU whose securities are admitted to trading on an EU regulated market as well as licensed credit institutions and insurance companies having their registered office in the EU1.
The Directive mainly imposes changes for the internal governance of audit firms (including the separation of statutory audit and non-audit services) and extends the authorities of the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten) (see our Dutch Legal Flash of 10 June 2016). The Directive also contains mandatory provisions in respect of the composition of audit committees of PIE’s (see our Legal Flash of 4 February 2016).
The Regulation provides for a mandatory firm rotation by limiting the possible duration of engagement of a statutory auditor (five years) and audit firm (ten years). A ‘cool off’ period of four respectively three years applies following the ten/five year period of engagement. The calculation of the duration starts from the moment that the audited entity becomes a PIE.
The Regulation furthermore includes rules regarding the procedure of appointment of the statutory auditor or audit firm. The purpose hereof is to provide for an increased role of the audit committee in the selection of a (new) statutory auditor or audit firm.
In short, the procedure of selection of a new auditor can be divided in three steps:
(i) the selection procedure, for which the audit committee is responsible; (ii) the recommendation of the audit committee of at least 2 statutory auditors or audit firms to the (supervisory) board of the audited entity; and (iii) the proposal of the (supervisory) board to the general meeting of shareholders for the appointment of the preferred statutory auditor or audit firm. This proposal shall include the recommendation made by the audit committee. If the proposal departs from the preference of the audit committee, it shall justify for not following such recommendation.