FRC consults on EU Audit Directive and Regulation impact on auditing and ethical standards
18 December 2014
The Financial Reporting Council (FRC) has today issued a consultation on options for amending its framework of auditing and ethical standards for auditors to give effect to the EU Audit Directive and Regulation.
Read Consultation: Auditing and ethical standards implementation of the EU Audit Directive and Audit Regulation.
In May 2014 the European Commission published a new Audit Directive and Audit Regulation. The Directive establishes requirements for the audit of annual consolidated financial statements. The Regulation establishes further requirements in relation to the audit of Public Interest Entities. The new requirements come into effect on 17 June 2016 and will apply to financial years starting on or after that date.
Stephen Haddrill, Chief Executive of the FRC, said,
“The FRC will consider the effect of the Directive and Regulation to ensure that its auditing and ethical standards play their part in ensuring that the roles and responsibilities of auditors are clear and aligned with the interests and needs of investors, and that auditors act with integrity, serve the public interest and consistently meet high standards. The new provisions are complex and we have significant decisions to take about how to reshape the UK regime. We therefore hope to hear from all stakeholders, and particularly from investors as the leading beneficiaries of high quality audit.”
The FRC’s Consultation Document seeks stakeholder views on a range of Member State options allowed under the EU’s legislation. In some respects, the UK's current requirements go beyond those of the legislation. In those cases, and where the Member State options allow, the FRC seeks views on whether or not to retain current provisions, or to extend them further, or to align with the new legislation:
The FRC will consult on specific changes to its standards during 2015, taking into account responses received to this initial consultation. The closing date for this consultation is 20 March 2015.
Notes to editors:
- Entities not covered by the definition of Public Interest Entities - The EU definition of a public interest entity (PIE) is different to the current requirements of the FRC’s auditing and ethical standards;
- Non-audit services - The Regulation prohibits the provision of certain non-audit services by auditors of PIEs through a ‘black list’ and places a cap on permitted services. The FRC is consulting on how to apply the cap and the list most effectively in the UK; and
- The geographic extent of application - Under the Regulation, the prohibitions on non-audit services to PIEs or their controlled entities within Europe, apply to auditors and their network firms. The consultation seeks views on whether these prohibitions should apply in relation to all audited group entities, irrespective of their location.
- The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
- The Department for Business, Innovation and Skills (BIS) is seeking views on the implementation of the Audit Directive and Audit Regulation in the UK in its Discussion Document ‘Auditor Regulation – Discussion document on the implications of the EU and wider reforms – December 2014’
- Articles in both the Audit Directive and Audit Regulation establish provisions that relate to matters that are the subject of the FRC’s auditing standards and ethical standards for auditors. In relation to a number of these provisions there are Member State options, BIS and the FRC consider that it would be most appropriate for the application of the provisions that clearly relate to matters currently covered by the FRC’s standards, to be allocated to the FRC to implement via development of the audit and ethical standards framework and revision of the relevant standards.
- BIS, in their Discussion Document, are therefore seeking views on whether, in a revised statutory framework, the FRC should be given the specific responsibility to deal with the subject matter of these Articles, including the ability to exercise all the associated Member State options, in accordance with the FRC’s usual processes for setting such standards.
- This FRC consultation document identifies and explains the range of positions the FRC is considering with respect to these Member State options, should it have a delegated power to exercise them, and seeks stakeholder views about them. Any proposed specific changes to the FRC’s standards, taking into consideration responses received, will be consulted on in 2015