Audit regulatory change
UK and EU-wide
The scrutiny that professional services firms are under from regulators, politicians, investors, companies and other stakeholders is high - and has grown in intensity since the financial crisis. Recent and ongoing regulatory change includes:
- In 2012, the Financial Reporting Council updated the UK Corporate Governance Code, introducing ten-yearly tendering on a comply or explain basis
- Between 2011 and 2013, the Competition and Markets Authority (CMA; formerly Competition Commission) conducted an inquiry into the statutory audit market for large companies. The CMA published its final order on the mandatory use of competitive tender processes and Audit Committee responsibilities in September 2014, taking into account the market reforms introduced through the EU legislation and duly concluding the CMA (former CC) process. The order entered into force on 1 January 2015 and applies to financial years beginning on or after this date. See Deloitte’s Governance in Brief on the final order.
- The European Commission’s 2011 audit reform proposals led, two and a half years later, to the entry into force of the EU’s Audit Directive and Regulation. See Deloitte’s Governance in Brief on the BIS and FRC consultations on the pending UK implementation of the new audit legislation. Key measures include the following (but note that not all detail is yet clear or confirmed and will be subject to the outcomes of the FRC and BIS consultations):
- Mandatory firm rotation for auditors of PIEs (Public Interest Entities) at least every 10 years (member states may extend this to 20 years where a public tender is conducted after the first maximum period, or to 24 years where a company has joint auditors during the extended period)
- 70% cap on non-audit services provided to audit clients
- List of prohibited non-audit services, including tax advice and services linked to the financing and investment strategy of the audit client (but with a member state option to allow certain tax services, providing they have no direct / an immaterial effect on the audited financial statements)
- Prohibition of clauses limiting choice of auditor.