The EU Audit Directive (EUAD) is proving to be a major headache for insurance companies, and this means they need to be very careful when choosing the provider of their audit, accountancy and advisory services, or risk falling foul of the legal and regulatory requirements triggered by the Directive.
We have created a checklist our clients have found useful for avoiding the procurement pitfalls… and the headaches!
The main cause for this headache is the requirement, brought in by the EUAD, prohibiting an insurer from using their auditor for non-audit services (known as ‘blacklisted’ services). Before the introduction of the EUAD, it was highly typical that insurers would seek non-audit services, such as tax compliance or actuarial advice, from their statutory auditor. As the EUAD has kicks in for more and more firms, insurers now need to look outside of their existing professional services advisor for a roster of services including:
- 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.
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 blacklisted service for the statutory auditor.
For services outside the ’blacklist’, there is a requirement that the fees which the statutory auditor receives for these services is limited to 70% of the average audit fee for the past three years. This limits the help the statutory auditor can provide in a world of changing regulatory and accounting requirements and business pressures.
The EU Audit Directive also 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’ 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.
Additionally, the EU Audit Directive requires that both the potential statutory audit firm and any affiliated firm within that audit firm’s 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.
- Identify key suppliers currently used across the group, including suppliers to international entities.
- Assess when each company within your group will need to be re-tendered and rotated.
- 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.
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.
Our insurance team has an impressive roster of international clients. And, while BDO has a total combined fee income of US$ 8.99 billion and provides professional services in 162 countries through 1,591 offices, we’ve retained speed of response and a personal approach, reinforced by our market-leading partner to staff ratio of 1 to 9.
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.