PIEs, OEPIs and Restoring Trust in Audit and Corporate Governance
PIEs, OEPIs and Restoring Trust in Audit and Corporate Governance
Background
The regulations regarding what services an Auditor can provide to an Audited Entity, and its affiliated entities and connected parties, have undergone considerable change in the recent past and will be subject to more change in the near future.
The Department for Business, Energy and Industrial Strategy (BEIS) has published its response to the consultation on Restoring Trust in Audit and Corporate Governance and the FRC has responded with its own Position Paper setting out how they intend to implement many of these changes. One of the most fundamental proposed changes is the definition of a Public Interest Entity (PIE), a change which will affect some professional services firms and impact their relationship with their Auditor.
Keeping abreast of the implications of the changes to definitions of a PIE and of an Other Entities of Public Interest (OEPI) can prove challenging in this faster moving environment.
Firms who inadvertently find themselves subject to either the PIE or OEPI regulations will be forced to choose what services their Auditor provides. Tender processes to change the providers of audit or non-audit services need time to be enacted as efficiently as possible. Being aware of when the regulations might come into effect and when thresholds might be breached will give firms that time and could help deliver a more satisfactory outcome from this change process.
In this article we examine the new definitions both recent and proposed, how they will affect professional services firms and how firms can give themselves enough time to handle any change as efficiently as possible.
History of the Regulatory Changes
New EU legislation came into force from June 2016 which provided an EU wide regulatory framework for statutory audits. The new law introduced the definition of a Public Interest Entity in order to regulate what services could and couldn’t be provided by an Auditor to Audited entities which met the conditions of a PIE.
This regime was revised by the FRC in 2019, which created the definition of Other Entities of Public Interest (OEPIs), and then remained in place post Brexit.
In May 2022, following the consultation in March 2021, BEIS published its response to the feedback on Restoring Trust in Audit and Corporate Governance, closely followed by the FRC publishing its own Position Paper in July 2022
The BEIS report outlines a strategy and a timeline to revamp the UK’s corporate reporting and audit regime through a new regulator, greater accountability for big business, addressing the dominance of the Big Four audit firms in relation to FTSE350 audits, and an expanded definition of a PIE to include large private companies and LLPs.
The full government response can be found here and the FRC’s Position Paper can be found here.
The BDO summary of the regulatory requirements and the impact they will have on professional services firms which now find themselves to be a PIE can be found here.
The regulations affecting a PIE are varied and detailed and BDO can help existing PIEs understand the new regulations and can help those firms who become a PIE navigate their way through their new regulatory environment.
Summary of the effect on Auditor Services
Aside from the enhanced regulatory requirements, one of the most impactful aspects of being a PIE or indeed an OEPI is the extent to which an Auditor can provide non-audit services. This table summaries the proposed expanded definitions and the scope of services which can be provided.
|
PIE |
OEPI |
|
|---|---|---|
|
Size definition |
Large companies including LLPs with more than 750 employees and more than £750m annual turnover. |
Unlisted company with more than 2,000 employees or turnover of more than £200m and a balance sheet total of more than £2bn. |
|
Non-Audit Additional Services |
The Audit firm must not provide to the PIE or to its UK parent undertaking (e.g. the main LLP) or its worldwide controlled undertakings any non-audit / additional services except those permitted by the FRC Ethical Standard 2019 (paragraphs 1.69 and 5.42). |
The Audit firm must not provide to the OEPI or to its UK parent undertaking (e.g. the main LLP) or its worldwide controlled undertakings any non-audit / additional services except those permitted by the FRC Ethical Standard 2019 (paragraphs 1.69 and 5.42). There are also a whole list of other services that are prohibited to affiliates (in addition to controlled entities) just like any other entity eg internal audit, recruitment services, secondments, any services with contingent fees etc. |
|
70% non-Audit Permitted Services Cap |
Paragraph 5.40 details those Permitted services which can be provided to the audited entity (and the related entities noted above) and which are not subject to the non-Audit services Cap. Paragraph 5.40 also details those Permitted services which are subject to the 70% cap. |
Paragraph 5.40 details those Permitted services which can be provided to the audited entity. OEPIs are not subject to a cap on the amount of non-Audit services which the auditor can provide. |
|
The cap allows a maximum cost for permitted non-Audit Services of 70% of the average of the fees paid in the last three consecutive financial years for the statutory audit of the audited entity. |
Contrary to the current definition, LLPs will be in scope as a potential PIE when the proposed laws and regulations come into force. Large professional services firms who anticipate breaching the £750m turnover and 750 employee limits should, therefore, have a process and timeline in place to decide whether their Auditor provides either audit or non-audit services. They should also develop a process and timeline for appointing the replacement provider of either service.
Currently, with regard to OEPIs, LLPs are not in scope, however, the Auditor cannot provide non-audit services to the UK parent undertaking of the OEPI. Professional services firms which either trade through a corporate or have sizeable corporate entities in their group structure with more than 2,000 employees will, therefore, have to choose whether its current Auditor continues to provide audit or non-audit services.
It is important to note that unlike the PIE definition, the OEPI definition is an either-or test meaning that where a company has over 2,000 employees it is an OEPI and its parent undertaking is in scope. The threshold of 2,000 employees can easily be breached where professional service firms employ all their professional and non-professional staff through their service company.
In either case, PIE or OEPI, Firms who aren’t aware of when thresholds have been breached or are likely to be breached will find that their Auditor needs to resign from the provision of audit or non-audit services, sometimes in short timescales.
Where a breach of thresholds is imminent and expected, well-prepared firms will be able to manage a tender process in a sensible time-frame to ensure they get best price, quality and efficiency whilst being prepared for the impact of their new regulatory environment.
How we can help you
BDOs experienced team of audit professionals can help you understand the new proposed regulations, how they will impact your firm and how to implement an effective tender process.
Most importantly, they can help you model when the new regulations might come into effect based on your growth strategy and forecast to ensure you don’t inadvertently breach the thresholds.
For help and advice on any of these issues, please contact Nick Carter-Pegg or your usual BDO contact.