EU Audit Directive

UK implementation of the EU Audit Directive, due June 2016, will have a significant impact on all insurance businesses. The Directive brings into force four main provisions: mandatory audit rotation, restrictions on non-audit services, changes to the form and content of the audit report, and new requirements for the role of the Audit Committee.
 
While the Directive covers a wide range of public interest entities (PIEs), it is made clear that the definition of a PIE will include all insurance companies in the EU, irrespective of whether they are listed or not and irrespective of whether they are life, non-life, insurance or reinsurance.  
 
Key aspects of the EU Audit Directive
 
Audit Rotation
The two key changes following implementation on 17 June 2016:
  • all PIEs will be required to retender every 10 years with a 20 year maximum tenure for each firm; and
  • a maximum audit partner tenure of 7 years will apply across the EU (the UK is likely to apply a shorter 5 year limit).
The Directive stipulates various transitional provisions dependent on when your last change of auditor took place. Download our brochure for a detailed break down of how your business will be affected.

Restrictions on non-audit services
The Regulation has introduced a list of prohibited non-audit services. These prohibited services cannot be performed by a PIE’s statutory auditor or any member of the statutory auditors’ network. The services cannot be provided to the entity, its parent undertaking or controlled undertakings within the EU. A limit will apply for all non-audit services provided by a statutory audit of 70% of the average audit fee paid for the last three years.

Form and content of audit report
The Directive has new requirements for audit reports, intended to increase the level of transparency between auditor and users of financial statements.  Among other things the audit report will need to include:
  • a description of the most significant risks of material misstatement, including those due to fraud;
  • a summary of the auditor’s response to those risks;
  • key observations associated with those risks; and
  • explain the extent to which the auditors was capable of detecting irregularities.
Role of the Audit Committee
Throughout the Directive reference is made to the role the Audit Committee plays in ensuring independence of the auditor and for discussing the finding of the audit. Key changes include:
  • role of the Audit Committee selecting and appointing auditors;
  • approving non audit services and challenging any safeguards to independence;
  • reviewing reports from their auditors - the Directive provides extended requirements on what auditors should be reporting to the Audit Committee; and
  • reviewing the audit report and considering the wording used by the auditors in this report.
The PRA is currently consulting on new rules for audit committees of PRA regulated entities. This will increase the role of independent non-executive directors.