Réforme de l'audit : Rencontre avec Hilde Blomme, FEE

Pour faciliter la lecture, l’auteur nous a proposé d’identifier en gras les paragraphe concernant le rôle de la FEE dans la réforme et en italique – gras les implications pour les jeunes auditeurs.

What is the Federation of European Accountants about ?

FEE (Fédération des Experts-comptables Européens – Federation of European Accountants) is an international non-profit organisation based in Brussels. It was formed on 1 January 1987 as the merger of two bodies: the Union Européenne des Experts-comptables Economique et Financiers (UEC) and the Groupe d’Etudes des Experts-comptables de la CEE. In its early days the Federation’s work was clearly divided between two committees, one focussing on coordination and the second with the competences to discuss EU directives.

The Federation of European Accountants has enlarged its membership in several steps, uniting professional bodies of accountants in EU Member States and other European countries which comply with the conditions in FEE Statutes. FEE now represents 50 institutes of professional accountants and auditors from 37 European countries, including all of the 28 EU Member States.

It has a combined membership of over 875,000 professional accountants, working in different capacities in public practice, small and large accountancy firms, businesses of all sizes, government and education – all of whom contribute to a more efficient, transparent and sustainable European economy.

The Federation of European Accountants is committed to inform the European public policy debate independently. It offers technical expertise and coordinated views on developments affecting the European economy. FEE’s contributions are based on the practical experience that professional accountants gain daily in all economic sectors and the values underpinning the profession’s practice. In representing the European accountancy profession, FEE recognises the public interest.

FEE’s strategic priorities are focused on activities in the areas of corporate reporting, audit and assurance, public sector, professional ethics and competences, tax policy, small and medium-sized entities (SMEs) and small and medium-sized practitioners (SMPs), financial services and capital markets union, corporate governance and company law as well as environment, social and governance matters.

Over the last 30 years, the Federation of European Accountants has also contributed to several key European initiatives, namely, the Green Paper on statutory auditors in the EU, projects on direct taxation and VAT, the introduction of the Euro, the EU Regulation on International Financial Reporting Standards (IFRS), and the new Directive and Regulation on statutory audit.

FEE is also a Regional Organisation recognised by the International Federation of Accountants (IFAC).

What is the role of FEE in the European Audit Reform?

What will the reform imply for young auditors?

Introduction

On 27 May 2014, the European Union (EU) published in its Official Journal1 :

● The Directive 2014/56/EU2 on statutory audits of annual accounts and consolidated accounts, amending the Directive 2006/43/EC3 on statutory audits, containing a series of amended and new requirements governing every statutory audit in the European Union (hereafter referred to as “the Directive”);

● The Regulation (EU) No 537/20144 on statutory audit of public-interest entities containing additional requirements that relate specifically to statutory audits of Public Interest Entities (PIEs) in addition to the ones stated in the Directive (hereafter referred to as “the Regulation”).

For further information, we refer to two FEE Fact Sheets5-6. The Directive needs to be transposed by the EU Member States into their national legislation by 17 June 2016 at which date the Regulation will also become directly applicable.

Both the Directive and Regulation introduce a number of options whereby Member States have to choose the way in which they want to transpose and implement the legislation. Young auditors working with clients from other EU Member States will need to be aware of and take into accounts these differences in implementation from country to country.

The definition of Public Interest Entities (PIEs)

The definition of PIEs continues to be listed entities, credit institutions, insurance undertakings and entities designated by Member States as public-interest entities.

The identification of PIEs is now crucial to determine the entities within the scope of the Regulation.

This is the reason why FEE recently undertook a survey on the current definition of Public Interest Entities (PIEs) applicable in Europe7. The objective was also to get some insight into the number of PIEs within the EU and to indicate any anticipated changes.

Young auditors should appreciate that the definition of PIEs can vary significantly from one country to another.

The provision of non-audit services to audit clients being PIEs

The Regulation includes some important new requirements related to non-audit services (NAS) to PIE audit clients, including:

● A list of prohibited NAS (or “black list”) that the audit firm and any member of its network are not allowed to provide to any statutory audit client which is a PIE, to its parent undertaking in the EU or to its controlled undertakings within the EU; and

● A limitation of the amount of allowed non-audit services provided to an audit client (the so called “70% cap”). This requirement relates to the specific audit firm and not to the rest of the network to which it may belong.

Various options are available to Member States to apply stricter conditions on and to add to the list of prohibited non-audit services. FEE believes that the use of such options should be carefully considered to avoid unintended consequences. This regulatory divergence and fragmentation across the EU Single Market might heavily bear on PIEs operating across the EU. This will make it impossible for young auditors to offer many NAS to their PIE audit clients, but it might create opportunities to offer such prohibited services to many more non-PIE clients.

Worth noting as well that the audit committee of the PIE is now charged with the responsibility to oversee the provision of NAS by the audit firm and thus requested to establish an approval process for the audit client to commission NAS to its audit firm. FEE explains in its recent Briefing Paper on the impact of the audit reform on audit committees in Europe8 how this could be performed.

As further detailed in the FEE Briefing Paper on the provision of non-audit services, there is a need for a consistent approach throughout the 28 EU Member States, both in the scope and in the meaning of these provisions9.

Mandatory audit firm rotation for audits of PIEs

The Regulation sets out requirements with regards to the appointment procedure in selecting the statutory auditor or audit firm of a PIE. These new requirements make the appointment procedures more transparent by introducing some new features and by continuing to reinforce the role of the audit committee.

In addition, one of the major changes requires mandatory rotation of audit firms by all PIEs after a set number of years. The Regulation defines a ten-year maximum duration for audit engagements with options possible to extend this under certain conditions. Member States are indeed given two options with which they may allow companies to prolong the initial maximum duration of an audit engagement, via “tendering” or “joint audit” up to 20 or 24 years respectively.

Although it is not realistic to expect all Member States to adopt the same approach, FEE would like to point out that Member States which do not take up these duration extension options will significantly limit flexibility for businesses, their audit committees, boards and shareholders, as demonstrated in the FEE Briefing Paper on the appointment of the auditor and the duration of the audit engagement10.

Young auditors should appreciate that mandatory rotation of audit firms is considered by regulators as contributing to enhancing independence and objectivity of the auditor and a possible means to decrease audit market concentration. However, young auditors will also need to deal with the effect of disruption for their PIE clients operating cross border due to different rotation timeframes and deadlines across the EU should not be underestimated.

Cooperation at EU level of national authorities competent for audit oversight

The new legislation strengthens the way oversight is carried out at national level. For further insight into the revised provisions, you may refer to the FEE Briefing Paper11. FEE has also compiled a survey on how public oversight is organized at national level in Europe and what kind of changes can be expected in the future12.

A new body is to be established to ensure closer cooperation and harmonisation of oversight at EU level – the Committee of European Auditing Oversight Bodies (CEAOB).

Since one of the goals of the audit reform is to move towards greater harmonisation across EU Member States, FEE welcomes the creation of the CEAOB as a dedicated independent committee responsible for the cooperation and coordination of the oversight of the audit profession. Considering the activities of the CEAOB, FEE believes that the creation of subgroups or advisory bodies comprising a wider range of stakeholders including representatives of business, investors, the audit profession and regulators would be beneficial in a number of areas, especially regarding ISA adoption and other matters such as supervision coordination at international level. As far as ISA adoption is concerned, FEE recently surveyed its member bodies to have a clear understanding of the status of adoption of ISAs in Europe. Young auditors should be aware that currently, only three EU Member States have not formally adopted these global standards, including France13.

The requirements for the auditor’s public reporting on PIE audits

Amongst other new requirements, according to the new Regulation provisions, the audit report of PIEs shall provide the following:

● A description of the most significant assessed risks of material misstatement, including assessed risks of material misstatement due to fraud;

● A summary of the auditor’s response to those risks; and

● Where relevant, key observations arising with respect to those risks.

FEE welcomes the approach taken by the EU policy makers to enhance public auditor reporting in a meaningful way and supports an audit report that is user friendly and easier to understand. In particular, the inclusion of these key observations enhances the informative value of the audit report for its users.

Young auditors are about to start a journey towards implementing the new European and international requirements concerning the new public audit report. The changes introduced, especially the requirement to describe in the audit report the most significant assessed risks of material misstatement, are particularly momentous in that they will enable young professionals to provide more meaningful and transparent information to stakeholders. These changes represent key historical steps towards improving the way young auditors communicate the value of their work and FEE anticipates that, as young auditors gain experience from practice, this will continue to evolve.

As FEE demonstrated in one of its publications14, it is worth emphasising that a report prepared under the recently revised ISAs dealing with auditor reporting (ISA 700, new ISA 701, …), whilst not mirroring it, will be compatible with the EU legislation and auditors who have to comply with both sets of requirements will not need to produce two differing sets of reports. Comparability is important for investors and global markets and FEE firmly believes that the audit report should remain as consistent as possible across jurisdictions.

Hilde Blomme,Reviseur d’Entreprises MBA FCCA CPA
FEE Deputy CEO