What does the new act on auditors mean for non auditors?

The Chamber of Deputies of the Czech Parliament is going to consider in September a new governmental bill on auditors that transposes the European Union Statutory Audit Directive into Czech law. Although this law does not change the scope of companies requiring a statutory audit or the preparation of the audited financial statements and is focused particularly on the regulation of the audit profession, it also contains provisions relevant for the Czech business environment.

The law extends the scope of the directive’s definition of a public interest entity from banks, insurance companies and listed companies to all financial institutions regulated by the Czech National Bank (ČNB), health insurance companies and all groups with more than 4,000 employees.

The auditors of public interest entities will be subjected to more stringent regulatory rules, including publishing a transparency report annually, rotating the key audit partner every seven years and limiting the provision of some no audit services to the audited public interest entities in the case those services could limit the auditors’ independence. However, no rotation of audit firms is required by the bill. A new entity The oversight of the audit profession will be performed by a new body established by law, the Public Audit Oversight Board. It will have six members appointed by the minister of finance in agreement with the central bank. It will include one auditor and five non-professionals who are experts in accounting, auditing and business law based on proposals from any stakeholder organization.

Public interest entity auditors will be subjected to inspection every three years and all other auditors every six years. The inspections will be carried out by the supervisory authorities of the Chamber of Auditors under oversight, direction and the ultimate responsibility of the Public Audit Oversight Board.

Auditor’s appointment and independence a legal person has to appoint a statutory auditor through its supreme body, which means in the case of companies that it is through the general meeting. The statutory body is entitled to enter into contractual arrangement only with the auditor designated by the general meeting.

The audit contract can be terminated by the audited entity only if the audit is not performed in line with the law, internal rules and the code of ethics and not for a different opinion on financial reporting or audit approach and must be reported to the Public Audit Oversight Board.

Auditors will continue to be bound by the Code of Ethics of the International Federation of Accountants (IFAC). The auditor’s independence continues to be a fundamental requirement of ensuring the reliability of the audit reports. Therefore, the auditor is strictly prohibited from participating in any decisions of the audited entity and is also prohibited from performing an audit in the case of any direct or indirect financial, commercial, labour or other relationship that could be considered a threat to the auditor’s independence, including the situation where the volume of income from the audited entity creates a dependency. The auditor is also required to list all significant threats to his independence and document the measures taken for its mitigation in the audit file, which would allow the inspectors to properly review his compliance with these requirements. Confidentiality the auditors will continue to be subjected to strict confidentiality rules by law. These requirements are being extended to all employees of the audit company, including its board members and partners and supervisory authorities. The bodies authorized to release the auditor from confidentiality are the audit client and, in justified cases, the chamber.

These confidentiality rules will be exempted in limited cases of public interest, information being provided:

• by the prior auditor to a new auditor appointed by the audited entity and by the subsidiary auditor to the auditor of a group;
• to the Finance Intelligence Unit of the Ministry of Finance in accordance with anti-money laundering legislation and to the Czech National Bank in the area of its financial market supervisory role;
• on regulated entities and their subsidiaries and associates to the banking or state supervision in the case of breach of specific regulatory rules, facts with fundamental detrimental effect on their performance including going concern uncertainties and information which might lead to a qualified opinion in the audit report;
• by the Public Audit Oversight Board or auditor to the audit oversight body of other EU member states in accordance with specific procedural provisions;
• to penal authorities on facts evidencing potential corruption;
• to courts or penal authorities should the penal procedures relate to the statutory auditor.