In the loop: EU audit reform — the impact beyond Europe

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In the loop 07/07/2014 by Assurance services
In the loop: EU audit reform — the impact beyond Europe

At a glance

Audit reform in Europe could affect US multinationals.

What you need to know about EU audit reform

  • New legislation in Europe requires some EU entities to rotate statutory audit firms and puts greater restrictions on non-audit services performed by the statutory auditor and certain of its network firms. 
  • US multinationals should be aware of the requirements because they apply to subsidiaries that meet the definition of an EU public interest entity, including EU banks and insurers. 
  • The legislation contains ambiguous wording that could be open to multiple interpretations across jurisdictions. 
  • Member states may implement the requirements inconsistently, due to the various options available, resulting in additional complexities.

How new legislation in Europe affects US multinationals

Two key provisions of the new EU legislation:

  Mandatory firm rotation Restrictions on non-audit services

What is it?

Requires EU public interest entities to change statutory auditors every 10 years Expands the list of non-audit services the statutory auditor, and certain of its network firms, cannot provide and places a cap on permitted non-audit services performed by the statutory auditor
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Member state options

Member states can: (1) shorten the rotation period and/or (2) allow an extension of up to 10 years in the event of a tender or 14 years for joint audits. Member states can: (1) prohibit additional services and/or (2) permit certain tax and valuation services.
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When is it effective?

Transition period depends on the length of the current audit firm’s tenure. For example, rotation is required by 2020 for audit tenures of 20+ years. Restrictions apply beginning June 17, 2016.
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New EU legislation doesn’t directly apply to US companies – but certain European subsidiaries could be scoped in. The rules become effective in 2016, except for mandatory firm rotation, which is subject to a transition period. However, US multinationals should take steps now to understand if and how the legislation affects their EU subsidiaries. Complying with the requirements could be challenging and require advance planning, especially if EU statutory audits are performed by the same audit firm performing the US company consolidated audit. Companies should also be aware that countries outside of Europe are considering, or may have already implemented, similar requirements.

Is your European subsidiary a “public interest entity”?

The rules apply to any entity – including a subsidiary of a US company – that meets the definition of an EU public interest entity. Therefore, a first step is identifying whether any EU subsidiaries are public interest entities. While there are certain nuances to the definition, public interest entities are generally entities governed and listed in the EU, and all credit institutions and insurers (including EU subsidiaries), whether listed or not. Additionally, EU member states have the option to designate additional entities as public interest entities.

Implementation could be inconsistent across jurisdictions

US multinationals with operations in multiple jurisdictions could be faced with tracking and complying with a new patchwork of requirements. In many instances, the legislation includes ambiguous language that the EU member states could interpret differently. Member states also have the flexibility to make a number of elections when finalizing the new rules. For example, some member states might opt for shorter mandatory rotation periods. The “black list” of prohibited non-audit services could also differ by jurisdiction.

What’s next?

It’s now up to each EU member state to translate the legislation into country law over the next two years. Until then, US multinationals will not have a complete picture of the new requirements and the impact to their European operations. As the member states interpret the legislation and contemplate their various options, consider engaging with local EU and national officials to make your views known and encourage consistent application of the rules.

How PwC can help

To have a deeper discussion of how EU audit reforms might affect your company, please contact:

Beth Paul
973 236 7270
elizabeth.paul@us.pwc.com

David Taylor
646 471 2922
david.g.taylor@us.pwc.com

Angela Fergason
408 817 1216
angela.fergason@us.pwc.com

You may also want to see

European Commission FAQ
FAQ from the European Commission on the new legislation

EU audit reform legislation – the facts 
Factsheets on various aspects of the new legislation

For more accounting and financial reporting developments, visit
www.cfodirect.com