EU audit reform – summary of potential extra-territorial impacts Briefing Note

Briefing Note – potential extra-territorial impacts
February 2015
EU audit reform – summary of potential extra-territorial
impacts
Summary of scope of the adopted legislation regarding potential extra-territorial impacts
This Briefing is intended to provide a high level summary of potential extra-territorial impacts resulting
from the recent EU legislation providing a new EU framework for statutory audit which was adopted in
May 2014. The laws will apply to the first financial year starting on or after 17 June 2016 – with the
exception of mandatory firm rotation (MFR), which is subject to complex transition arrangements based on
length of tenure.
The legislation comprises two legal instruments:


A Directive applicable to all EU-based entities required to have a statutory audit
A Regulation applicable to EU-defined and based public interest entities (PIEs) (Fact Sheet 5)
Who outside of the EU could be impacted by these new requirements?
An ‘entity’ can only be an EU PIE if it has its own legal identity. A branch (which is an indivisible part of its
‘parent’) of an overseas or an EU-based entity is not a PIE in its own right (including branches of non-EU
banks or insurance undertakings) and is not caught by the requirements of the Regulation.
The European Commission (EC) has indicated that the legislation should not, in principle, have any extraterritorial impacts. However, due to issues around definitions of some of the measures, and in some
instances, the need to adapt to a range of member state approaches, it is possible that some extra-territorial
impacts could result. Some examples of how these impacts might arise are described below. Discussions
are on-going with member state governments and regulators to clarify these issues.
Potential areas of impact
Measure
Commentary
Mandatory
Firm
Rotation
(MFR)
The provisions requiring MFR (Fact Sheet 1) relate only to the statutory audits of EU-based
PIEs. The MFR provisions do not apply to non-EU based entities or to the ‘Group’ audit –
unless the ‘group’ parent is itself an EU PIE and subject to a statutory audit.
However, a non-EU based entity which has one or more EU PIE subsidiaries in one or more
EU member states may, as a consequence of the new requirements including the range of
member state options, now find itself managing multiple auditor rotation requirements. In
some territories, such as Switzerland, where best practice guidance suggests the use of a
single auditor by a group these considerations will be particularly important.
Non-audit
services
(NAS)
The legislation prohibits the provision of certain NAS (Fact Sheet 3) by the statutory
auditor of an EU PIE. The network firms of the EU PIE are also bound by the same
prohibited list when providing services to the EU PIE, its controlled undertakings within
the EU and its parent(s) within the EU. (See overleaf for some examples of how this might
impact companies).
When providing NAS outside the EU, most services can be delivered, subject to an
appropriate assessment of threats to the independence of the statutory auditor and the
establishment of safeguards to mitigate such threats.
However, when NAS are being provided to controlled non-EU undertakings of the EU PIE,
there are three types of services that are deemed ALWAYS to affect independence and are
incapable of mitigation by safeguards, and so can never be provided. These are:
(a) Services involving “playing any part in the management or decision making of the
entity”
(b) Bookkeeping/preparing accounting records; and
(c) Designing and implementing internal control or risk management procedures related to
the preparation and/or control of financial information or financial information
technology systems
Note: member states can restrict additional services and/or make geographical restrictions
more extensive (for example, existing NAS prohibitions in the Netherlands, France & Italy).
PwC – EU audit reform: potential extra-territorial impacts │ 1
Briefing Note – potential extra-territorial impacts
February 2015
Illustrative examples of potential impacts of EU rotation requirements
My Japanese audit client (consumer products) has a number of subsidiaries in the EU,
one of which is involved in banking activities. ‎Are all subsidiaries in the EU subject to
MFR, and if so, at what intervals?
The only entity which would need to rotate is the banking subsidiary as this is a PIE. The requirements
do not relate to parent or controlled undertakings unless these are themselves PIEs and then only if
they are located within the EU.
The interval for rotation will be determined by the position for the member state in which the banking
subsidiary is located, and in particular whether or not the member state has decided to adopt the
options to extend or reduce the initial term.
A large US company has a number of subsidiaries in EU member states some of which are
PIEs. We are the group auditor.‎Would our rotation off the EU PIE(s) require our
rotation off the US company?
No. In principle, the requirement to rotate at the EU subsidiary (ies) would not create a requirement
for the non-EU parent to rotate. However, this position is subject to complying with any specific
territory policies relating to the conditions under which we can serve as the principal auditor.
We audit a large Australian multi-national company ‎which has subsidiaries in certain EU
member states, some of which are a PIE. Can we continue to provide the group with
immigration services? What about tax advice?
Where, subject to local legal requirements, we are able to provide immigration services there are no
additional prohibitions in the new EU legislation other than the requirement for approval of these
services by the audit committee of an EU PIE. Which entity this is will depend on the Group structure.
Tax advice may be a prohibited service to PIE entities, their parent undertaking and or controlled
undertakings subject to whether or not the member state(s) where the PIE subsidiary (ies) is (are)
located has ( have) adopted the member state option to permit certain of these services. The current
position is unclear: some member states have indicated that they are likely to permit certain tax
services; others that they are unlikely to do so, and some member states have yet to indicate their
position. It is likely the prohibition applies equally to PIE and non-PIE entities in the 'chain' within the
EU – but clarification is being sought.
Fee Cap
The legislation also includes a cap on the fees for any NAS provided by the statutory
auditor of the EU PIE only (not network firms) to the EU PIE, its parent undertaking and
controlled undertakings. The cap only applies if NAS have been provided for three
consecutive financial years, and it is a cap of 70% of the average audit fees provided to the
group during those three years. The cap should not have extra-territorial impact as it only
applies to the statutory auditor of the EU PIE, and not to its network firms.
Role of the
audit
committee
(AC)
Non-EU based companies with subsidiaries in the EU need to consider appropriate
governance arrangements to meet certain new requirements regarding AC responsibilities
(Fact Sheet 2):
 Approval by an EU-based AC (or equivalent) is required for NAS provided to EU PIE
subsidiaries - a non EU AC (e.g. the AC of an ultimate US parent) cannot give this
approval
 Eligibility for exemption from the requirement to have an AC requires the ‘group’ to
have an EU-based AC with appropriate responsibilities for the EU-based entities
seeking the exemption
 Oversight of compliance by the auditor with additional transparency reporting
requirements by an EU-based AC (Fact Sheet 4)
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