The UK implementation of the EU Audit Directive (EUAD), two years ago, has continued to have a significant impact on all insurance firms with insurance undertakings (‘Insurance undertakings’ include all regulated insurance companies, but not brokers).
Due to the transition arrangement set out within the EUAD, there have been several tranches for the EUAD taking effect for individual firms – primarily based on when their current auditor was appointed. However, the last tranche of firms to be affected comes into effect in June 2020, for those whose current auditor was appointed before 16 June 1994.
We explore the key issues for those charged with navigating the impact of the EU Audit Directive on their firm.
What is the EUAD?
The Audit Directive was agreed in the wake of the 2007 banking crisis, with the objective of improving auditor independence, the quality of audit reporting and the level of competition in the market. It was partly intended to reduce the perceived over-dominance of Big Four audit firms.
While the Directive covers a wide range of public interest entities (PIEs), it is made clear that the definition of a PIE includes all insurance undertakings in the EU, tackling Solvency II, irrespective of whether they are listed or not and irrespective of whether they are life, non-life, insurance or reinsurance.
The Directive brought four main provisions into force:
- mandatory audit rotation
- restrictions on non-audit services
- changes to the form and content of the audit report
- new requirements for the role of the audit committee.
Implementing the EU Audit Directive ensures a healthy rotation of auditors across large organisations, who had traditionally held the same auditor over a number of years. All PIEs are required to retender every ten years with a 20-year maximum tenure for each firm. Also, a maximum audit partner tenure of five years applies to the UK.
Role of the audit committee
Key changes to the audit committee in ensuring independence of the auditor and discussing the findings of the audit are:
- role of the audit committee selecting and appointing auditors
- approving non-audit services and challenging any safeguards to independence
- reviewing reports from their auditors - the Directive provides extended requirements on what auditors should be reporting to the audit committee
- reviewing the audit report and considering the wording used by the auditors in the report.
Form and content of audit report
To increase the level of transparency between auditor and users of financial statements, the audit report must include:
- a description of the most significant risks of material misstatement, including those due to fraud
- a summary of the auditor's response to those risks
- key observations associated with those risks
- explain the extent to which the auditors was capable of detecting irregularities.
Restriction of non-audit services
There is a list of prohibited non-audit services which cannot be performed by a PIE's statutory auditor or any member of the statutory auditors' network. The services cannot be provided to the entity, its parent undertaking or controlled undertakings within the EU. A limit will apply for all non-audit services provided by a statutory audit of 70% of the average audit fee paid for the last three years.
How we can help
The EU Audit Directive is now forcing Insurers to look outside their historical relationships in order to ensure they have sufficient coverage, not only to create genuine competition in any audit tender, but also to avoid dependence on one single supplier for tax and broader based accountancy services.
BDO is well placed in both these areas. Our audit client list includes a 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 below.
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.