EU audit legislation
Impact and expectations
The new European Union (EU) statutory audit legislation went into effect on June 17, 2016 (or for several measures, as from the first financial year starting on or after June 17, 2016 according to European Commission guidance, with the exception of mandatory rotation, which is subject to a transition period). Some member states have enacted change, and businesses are taking steps to proactively comply with these measures. Certain member states have provided other start dates for the specific provisions of this legislation.
What does this legislation mean?
The legislation has two components—a directive and a regulation.
The directive contains a series of requirements governing every statutory audit in the EU and amends the existing Statutory Audit Directive of 2006. The regulation contains a series of additional requirements that have received much attention, but relate only to the statutory audits of public interest entities (PIEs). These additional requirements include mandatory firm rotation (MFR) and prohibited non-audit services (NAS).
Estimates indicate that there are approximately 300,000 companies in the EU that are currently required to have a statutory audit. Of these, approximately 30,000 are thought to fall within the PIE definition and will need to comply with the additional requirements.
Where does the legislation apply?
This legislation is applicable in the 28 EU member states as well as Iceland, Liechtenstein, and Norway as these countries are bound by the legislation as members of the European Economic Area (EEA), as well as Gibraltar. EU member states had until June 17, 2016, to transpose the directive into their national law and decide on a number of options that have been afforded to them. The regulation also contains a number of options and if an EU member state has not (yet) made use of such options in national law, the regulation will apply as written. The formal agreement of the EEA Joint Committee on the date of application of the regulation and the transposition date of the directive for Iceland, Liechtenstein, and Norway is still pending.
Does this legislation affect my business?
The legislation applies to any entity, including subsidiaries of multinationals headquartered outside of the EU that falls within the definition of a PIE. Complexities occur when there are multiple subsidiaries operating in different EU member states, as member states have the opportunity to tailor the local legislation. It will not be fully apparent how this legislation affects multinationals until each member state enacts legislation.
Key aspects of the legislation and implementation considerations
This legislation is complex, and this website does not constitute a legal advice. Several areas of the legislation require interpretation and may evolve over time, and market participants may wish to seek legal advice before taking measures to comply with the legislation.
Other useful links:
European Commission memos
Answers to parliamentary questions