The European Union approved an important audit reform in 2014. Belgium already set the new limits regarding the duration of the audit engagement earlier this year. Recently, the Parliament approved an act completing the implementation of the audit reform. Mandatory rotation of auditors for public-interest entities is introduced. In addition, the role of the audit committee is strengthened, and the conditions for the provision of non-audit services are amended. Finally, "Big Four only" clauses are banned.
The European audit reform consists of (i) the European Audit Regulation 537/2014/EU and (ii) the European Audit Directive 2014/56/EU amending the current Audit Directive 2006/43/EC. Whereas the Audit Directive has a general scope of application, the scope of the Audit Regulation is limited to "public-interest entities" (such as listed entities, credit institutions and (re)insurance undertakings) ("PIEs").
Are you allowed to re-appoint your statutory auditor next year?
The maximum duration of the engagement of the auditor or audit firm responsible for carrying out the statutory audit of a PIE is significantly amended: although the duration of the audit engagement remains three years, a maximum duration of nine years now applies. Thus, a statutory auditor cannot carry out a statutory audit within the same PIE for more than three consecutive engagements. After the expiry of the maximum duration, a cooling-off period of four years applies.
The PIE can exceptionally extend the engagement of its statutory auditor:
- up to a total of 18 years (hence a maximum of three additional engagements of three years each) where a public tendering process is conducted; or
- up to a total of 24 years (hence a maximum of five additional engagements of three years each) where there is simultaneous engagement of more than one statutory auditor.
After the expiry of this maximum duration, the PIE can exceptionally appoint its statutory auditor for an additional engagement of two years with the approval of the Auditor's Supervisory Board.
The limitations mentioned above also apply to the members of the network to which the statutory auditor belongs.
The introduction of the external rotation system is an important innovation and was made subject to a (complex) set of transitional provisions:
- if the statutory auditor had been providing audit services for 20 or more consecutive years on 16 June 2014, the PIE cannot enter into or renew the audit engagement as from 17 June 2020;
- if the statutory auditor had been providing audit services for 11 or more but less than 20 consecutive years on 16 June 2014, the PIE cannot enter into or renew the audit engagement as from 17 June 2023.
For the remaining cases, the rules on mandatory rotation will apply to the first financial year starting on or after 17 June 2016. The current engagement of the statutory auditor and its previous engagements will have to be taken into account in determining whether the maximum duration has been reached.
Does your statutory auditor have to replace its permanent representative?
The key audit partners responsible for carrying out a statutory audit must cease their participation in the statutory audit not later than six years from the date of their appointment. After the expiry of this maximum period, a cooling-off period of three years is applicable. On the basis of the text the Parliament approved, it seems that this applies in particular to the permanent representative of the statutory auditor. If the statutory audit engagement is carried out by an individual, the statutory auditor will have to transfer its engagement to a fellow auditor: in other words, in this case, the mandatory internal rotation in fact constitutes a mandatory external rotation.
In addition, the statutory auditor must establish a rotation mechanism with regard to the most senior personnel involved in the statutory audit.
Does your Corporate Governance Charter take into account the modified composition and role of the audit committee?
As a rule, each PIE must establish an audit committee. The audit committee of a listed entity must still include at least one independent director. However, the audit committee of other PIEs (such as credit institutions and (re)insurance undertakings) will now have to have a majority of independent directors.
From now on, the members of the audit committee of a listed entity will need to have collective expertise concerning the activities of the entity.
The audit committee receives two new competences:
- From now on, the committee will have to submit a reasoned recommendation to the board of directors on the appointment of the statutory auditor. Except in the case of the ordinary renewal of an audit engagement, the recommendation must contain at least two choices, and the audit committee must express a duly reasoned preference for one of them. The recommendation (and the preference) must be included in the notice convening the general meeting of shareholders deliberating and resolving on the appointment. If the board of directors decides not to follow the recommendation, it must specifically reason its resolution in this regard.
- Furthermore, the audit committee must inform the board of directors of the result of the statutory audit. It must also explain how the statutory audit contributed to the integrity of the financial reporting and what role the audit committee has played in that process.
Except in the case of an ordinary renewal, the recommendation of the audit committee must, as a rule, also be prepared following a specific selection procedure organised by the audit committee.
Finally, the statutory auditor of a PIE must submit annually an additional declaration to the audit committee. The declaration must include a detailed description of the process of the statutory audit (methodology, communication with the PIE, distribution of tasks among the statutory auditors, timing, scope of the audit, etc.).
Does your statutory auditor provide (prohibited) non-audit services?
The statutory auditor is not allowed to provide certain non-audit services to the controlled entity (PIE or not), its parent undertaking or its controlled undertakings within the European Union. Such prohibited non-audit services include accounting, valuation services, certain legal services (assistance with negotiations, taking up an advocacy role in the resolution of litigation) and human resources services.
For PIEs in particular, prohibited non-audit services include, for example: tax services, payroll services and the provision of general legal counselling.
Other non-audit services for PIEs may be performed, but the total fees for such services must be limited to no more than 70% of the average fees paid in the last three consecutive financial years for the audit of the (consolidated) annual accounts of the PIE, of its controlling undertaking or of its controlled undertakings.
For non-PIEs which are part of a group that must draw up consolidated annual accounts, the "one-to-one" rule continues to apply (although the calculation method has been modified).
Do your contracts contain prohibited "Big Four only" clauses?
All contractual clauses that would restrict the choice of the general meeting of shareholders regarding the appointment of the statutory auditor to certain categories or lists of auditors or audit firms will, in future, be null and void.