Audit Policy Update

• Commissioner’s speech and new study assessing the 2014 EU audit legislation 
• Council gives its final green light to the CSRD 
• IFAC releases additional support for small firms on the IAASB’s quality management standards 
• FRC plans to increase competition and resilience in the audit market

Commissioner’s speech and new study assessing the 2014 EU audit legislation

Commissioner McGuinness presented (see her full speech here) on 7 December the European Commission’s (EC) current thinking on: 

Sustainability reporting and its assurance 

• assurance will improve the reliability of sustainability information and reduce the risk of greenwashing 
• the Commissioner called on both auditors and other independent assurance providers to take on this vital role of verifying sustainability information 
• consistency between European and international standards has been and continues to be a priority 

The ongoing corporate reporting ecosystem initiative 

• corporate governance, audits and supervision need further enhancement in a holistic way, i.e. looking at the ecosystem as a whole 
• on audit, the Commissioner noted there had been progress since the 2014 EU audit legislation, but some issues have been identified or confirmed by the newly published study (see below) 
• the Commission plans to deepen its overall understanding of the relevant matters, will need time to build consensus on policy options, and will continue to engage with stakeholders 

The new CEPS/Milieu/Europe Economics study, see also the Executive summary, assesses the impact of the 2014 EU Audit Directive and Regulation and how the legislation achieved its objectives. Some of the main findings include the following: 

• audit reporting is compliant with EU legal requirements, management reports and corporate governance statements show compliance issues, and 2/3 of audit committee reports have one or more deficiencies 
• lack of harmonisation of audit requirements across Europe, including on auditor reporting, mandatory audit firm rotation and prohibition of certain non-audit services 
• large majority of the stakeholders indicates that the audit reform has improved or not changed the quality, independence, competition between audit firms and transparency to investors 
• reform has effectively increased levels of independence but did not impact competition as intended, there remains a high market share for the Big Four audit firms in the Public Interest Entity (PIE) audit market 
• national authorities are concerned about the number of auditors and audit firms in the market, in particular, those capable of carrying out an audit of a PIE 
• differences in the audit fees paid – depending on the sector or whether it is PIE or non-PIE audit 
• significant persisting differences in the organisation of audit supervision across the different countries  

Amendments to European Parliament’s draft report on Pandora Papers published

European Parliament’s FISC Committee’s amendments to the draft report Lessons learnt from the Pandora Papers were published in early December. 

The 183 amendments mostly add to, rather than extensively modify, the draft report’s existing recommendations. Several amendments relate to the provision of tax services by intermediaries or the recently announced division of activities of one of the major accounting firms. 

ECON Committee is scheduled to vote on the draft report on 31 January 2023. This is a non-legislative procedure. Neither EC nor the member states are obligated to take legislative action based on the report’s recommendations. 

Council gives its final green light to the CSRD 

The Council approved the Corporate Sustainability Reporting Directive (CSRD) on 28 November. After being signed by the President of the European Parliament and the President of the Council, the CSRD will be published in the Official Journal of the EU and come into force 20 days after its publication (before the end of 2022).  

Accountancy Europe published FAQs providing a snapshot of the changes that the CSRD brings.

IFAC releases additional support for small firms on the IAASB’s quality management standards

The International Federation of Accountants (IFAC) released the first instalment of a three-part publication series to help small- and medium-sized practices implement the International Auditing and Assurance Standards Board’s (IAASB) new quality management standards.  

This supporting material aims to provide tips and guidance for practical implementation of the IAASB’s standards. 

The IAASB’s suite of quality management standards was issued in December 2020 and will become effective on 15 December 2022. 

Read more

New IAASB consultations coming in January, including on LCE group audits

The IAASB approved the exposure draft on a new Part of its less complex entities standard that addresses group audits on 9 December. It also approved the consultation paper on its 2024–2027 Strategy and Work Plan. Both should be issued for public consultation in mid-January.

FRC plans to increase competition and resilience in the audit market

The new policy paper provides an overview of the UK Financial Reporting Council’s (FRC) work on competition in the audit market to support an ongoing dialogue with stakeholders. It focuses on:  

• FRC’s approach to competition 
• recent relevant developments in the UK’s audit market  
• FRC’s current competition policy work, for example, on promoting effective competition, developing a standard for audit committees, market opening measures, audit market resilience 

FRC states it wants competition that drives higher audit quality and market resilience. 

Stakeholders can provide feedback on this paper to inform FRC’s ongoing work by 28 February 2023. 

Read more 

Read also about the FRC’s plan to introduce new support measures for smaller audit firms as their market share grows.

FRC consults on Standard for Audit Committees

The FRC has issued a consultation on an Audit Committee Standard. This follows the Government’s White Paper Restoring Trust in Audit and Corporate Governance.  

The Standard will apply to FTSE 350 companies. The draft Standard focuses on the audit committees’ responsibilities, including auditor tendering. In this context, it refers to the public interest in audit market diversity and the market as a whole having sufficient resilience, capacity and choice.  

The deadline for comments on the draft Standard is 8 February 2023.

Read more here and listen to this podcast for more details 

PCAOB consultation on quality control systems

The US Public Company Accounting Oversight Board (PCAOB) proposed a new standard that would entirely replace the current quality control standards. The new standard follows a risk-based approach where a firm’s quality control system is grounded in proactively identifying and managing risks to quality. 

The deadline for comments is 1 February 2023, and Accountancy Europe will submit high-level comments on the proposals. 

Read more