There is huge amount going on for the accountancy profession. The ramification of the EU Audit Directive (EUAD) are already proving to be a problematic hurdle for insurance companies when it comes to appointing/ tendering for auditors and also sourcing non-audit services. The EUAD has been particularly tough on the insurance industry because now all insurers, no matter what size, are considered to be public interest entities (PIE).
There is further change coming through following the various reviews that have and are being carried on the audit profession following some high level corporate failing. In particular last year there were the Kingsman review and the Competition and Markets Authority review. More recently there is the Brydon Review, and financial reporting regulator, the Financial Reporting Council (FRC) is due to be replaced with the Audit, Reporting and Governance Authority (ARGA), a body which is intended to have more powerful statutory powers over all involved in financial reporting.
In the UK there is also a new Ethical Standard in the pipeline. This will raise the bar even higher than the requirements that came through with the EUAD. So again insurers need to be aware of these changes when it comes to sourcing audit and non-audit services.
We have created a checklist our clients have found useful for avoiding the procurement pitfalls… and the headaches!
EUAD Blacklisted services and future whitelist
A main cause for this headache is changes, brought in by the EUAD, prohibiting an insurer from using their auditor for non-audit services (known as ‘blacklisted’ services). In the past insurers often used their auditors for various services included tax compliance and accounting which are now not permitted. The blacklisted services are:
- Tax services (unless they have a clearly inconsequential effect on the financial statements).
- Services that involve playing any part in the management or decision-making of the audited entity
- Book-keeping and preparing accounting records and financial statements
- Payroll services
- Designing and implementing internal control or risk management procedures or financial information technology systems
- Valuation services, including valuations performed in connection with actuarial services or litigation support services
- Legal services
- Services related to the audit client’s internal audit function
- Services linked to the financing, capital structure and allocation, and investment strategy of the audit client Promoting, dealing in, or under-writing shares in the audited entity
- Human resources services relating to the provision of general counsel.
The new Ethical Standard is likely to introduce a whitelist of services, to replace the blacklist. A whitelist sets out the only services that the auditor can provide, so precludes anything else.
The whitelist is expected to consist of services which are either audit-related or required by law and/or regulation. Services not on this list would then be entirely prohibited. These rules are likely to apply to the PIE, the PIE’s UK parent entity and any controlled undertakings globally – not just limited to the EU.
This means insurers need to be ever more aware of what accountancy firms they use for audit and non-audit services across all jurisdictions.
In particular, firms need to consider the help they may need with issues in the industry, such as the implementation of new accounting standards, such as IFRS 17 and IFRS 9. For these standards external support over the interpretation and implementation of these demanding standards may be needed, however this would be considered a prohibited service for the statutory auditor.
The EU Audit Directive requires mandatory retendering every 10 years and rotation of audit firms every 20 years. It requires a formal retendering process to be implemented by insurance companies and banks, where two audit firms should be selected by the Audit Committee. The Audit Committee should then provide these two options to the Board, stating which firm they have a preference for, and the Board will select the firm of choice.
Both the tendering requirements and the ‘blacklist’ (as well as the future ‘whitelist’) means insurance companies and banks have a challenge when it comes to managing procurement of professional services. In a market where there are few service providers, these companies can easily find they are in breach of the legal and regulatory requirements of the Directive.
To comply with the legal requirements of the Directive, companies will need to make sure they have enough audit firms, which are not providing non-audit services, to be able to carry out a valid audit tender process. This will be difficult in a market where there are only the Big 4 firms and a couple of other firms with the breadth and depth of specialist services skills to be able to provide audit and non-audit services to the industry. In recent years we have seen more audit firms retracting from doing audit work for insurance companies due to the growing regulatory demands
Additionally, the EU Audit Directive requires that both the potential statutory audit firm and any affiliated firm within that audit firm’s EU network are independent. This can be complex for global financial services companies where the needs of all entities in the group can be diverse and harder to coordinate.
What to do next?
It is important for companies to ensure they have access to the right firms to fulfil the essential requirements of the EU Audit Directive. In building a roster of professional services providers, firms should:
- Identify professional services currently required and expected to be required both in the UK and worldwide.
- Identify key suppliers currently used across the group, including suppliers to international entities.
- Assess when each company within your group will need to re-tender and rotate their external auditors.
- Identify potential statutory audit firms available for the tender process and ensure their independence is not compromised.
- Establish the audit tender process and framework to be carried out by the Audit Committee.
- Ensure there is an appropriate process to monitor and control what professional services are being procured worldwide, and also for any acquisitions made, to ensure the Group is aware on conflicts of interest that may arise.
How we can help
With the EU Audit Directive forcing Insurers to look outside their historical relationships in order to ensure they have sufficient coverage, we are well placed to help. We have a wealth of insurance and financial services knowledge and expertise and offer a range of audit and non-audit services, giving companies access to the right people and a consistent team.
Our audit client list includes an impressive number of PIE clients across the EU and we are always happy to talk to companies about what they can expect from a BDO audit. We also regularly talk to clients looking to increase their roster of non-audit service providers, particularly in the context of some of the now prohibited services mentioned above.
If you would like to find out more, please contact us to arrange a free ‘risk and opportunities meeting’ where our industry specialists can discuss how your business is affected by the EU Audit Directive.