Audit Policy Update

• European Commission’s audit market monitoring report confirms trends of concentration
• Accountancy Europe commented on the European Commission’s proposed regulation concerning DORA
• Reviewing the audit framework could strengthen the powers of national supervisors
• Member States take action on the one-year delay of ESEF
• IFAC warns that covid-19 environment might create opportunities for fraudulent activities
• The IAASB released its quality management standards
• The Netherlands: Disciplinary body Accountantskamer is expecting extra disciplinary cases due to the covid-19 crisis

European Commission’s audit market monitoring report confirms trends of concentration

The European Commission (EC) has published the outcome of its assessment of developments in EU market for carrying out statutory audits on public-interest entities (PIEs). The assessment relates to years 2015 – 2018.

The report highlights that:

• the number of statutory auditors and audit firms in the EU shrank which means also less choice for PIEs. The number of PIE statutory audits also decreased between 2015 – 2018
• the PIE audit market concentration continues, with Big Four firms dominating in most countries. The reports notes that measures taken to address conflicts of interest, such as mandatory auditor rotation or limitations on the provision of non-audit services, could further worsen market concentration by further limiting the choice of PIE statutory auditors
• the assessment of quality deficiencies remains challenging, partly due to lack of, or inappropriate, monitoring of high-risk audited entities and deficiencies in audit firms’ internal quality control systems
• differing approaches to monitoring across the EU challenge National competent authorities’ (NCA) assessment of audit committees’ performance. Audit committees are subject to NCA oversight in 21 Member States

The EC notes that further assessments should take into account recent cases involving high-profile corporate entities (e.g. Carillion, Thomas Cook and Wirecard), which can undermine the reputation of the audit profession and investor confidence.

Finally, the EC has launched a study into the effects of the EU audit legislation on the statutory audit market. The study will feed into a future review of the audit framework’s effectiveness in improving transparency, audit quality and competition in the audit market, particularly for PIEs. The evaluation will also examine the effects of the economic crisis caused by covid-19 on the audit sector.

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Accountancy Europe commented on the European Commission’s proposed regulation concerning DORA

In our comment on the proposed regulation on digital operational resilience for the financial sector (DORA), we suggest to the EC to perform a cost/benefit analysis to justify the decision for scoping-in auditors. We also suggest to clarify whether the proposed scope has captured entities faced with significant information and communication technology (ICT) risks.

If the EC concludes to include auditors in the scope, it remains to clarify whether:

• all auditors should be included, considering that most auditors are not involved at all in the financial sector. We believe that only auditors who audit core financial service providers that fall in the scope of DORA should be concerned
• how the proportionality principle should apply to them

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Reviewing the audit framework could strengthen the powers of national supervisors

In a reply to a question of Member of the European Parliament (MEP) Carmen Avram (S&D/Romania), the EC announces that it is closely monitoring the developments of the Wirecard case.

The EC will also consider recent publications to base its decision to review the audit market framework. If those analyses conclude that EU requirements about supervision of auditors should be strengthened, a review of the audit framework could include strengthening the powers of national supervisors and/or of relevant European-level bodies.

The publications upon which the EC will base its decision include the:

• assessment of the effectiveness of the EU audit framework
• 2021 EC’s audit market monitoring report
• outcome of the national investigations and of the fast-track peer review of the German Federal Financial Supervisory Authority (BaFin) published by the European Securities and Markets Authority (ESMA)

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The European Commission specifies its upcoming evaluation of the audit framework  

The EC has replied to a question raised by Catalonian MEPs about concentration of audit firms and market distortion on 7 January. It declares that there had been no changes to market concentration despite the audit reforms to increase competition, as concluded by the 2017 market monitoring report and as the 2021 market monitoring report confirms. The EC’s forthcoming evaluation of the audit framework will focus on audit quality, auditor independence and enhancing competition.

The EC is also launching a study to assess the impact of the Audit Directive and Regulation. This, together with the recent market monitoring report, the ESMA fast-track peer review and the results of ongoing investigations into the Wirecard case, will feed into EC’s review of the audit framework.

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Member States discuss Wirecard 

The EU Council’s Financial Services Committee (FSC) held a meeting to discuss various financial services topics, including Wirecard on 20 January. During the meeting, the EC presented its analytical work on Wirecard and discussed aspects such as corporate governance, auditing, supervision and enforcement with the Member States’ representatives.

On audit, Member States’ views were apparently divided related to expanding auditors’ auditing requirements, increasing their liability and audit market concentration measures.

Member States take action on the one-year delay of ESEF  

The EP and Council agreed to grant the EU Member States the option to delay by one year the application of the European Single Electronic Format (ESEF) requirements on 11 December 2020.

The uncertainty at national level perseveres, as the EP and the Council still need to ratify the delay-option before it takes legal effect.

We have been monitoring national regulatory developments related to ESEF and identified several Member States that found practical solutions to mitigate the burden on the issuers created by this uncertainty. Those measures greatly help issuers in preparing their 2020 annual financial reports.

Read more on our ESEF Collected Guidance webpage

IFAC warns that covid-19 environment might create opportunities for fraudulent activities 

The pandemic caused financial distress on many companies, resulting in an environment susceptible to illegal activities.

In response, the publication of the International Federation of Accountants (IFAC) asks auditors to play an ethical leadership role in helping to minimise the incidence of fraud and demonstrate that they uphold the public interest. Auditors must observe and understand the incentives and opportunities that lead companies to commit fraud.

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The IAASB released its quality management standards

The International Auditing and Assurance Standards Board (IAASB) approved its three quality management standards:

• International standard on quality management 1 (ISQM 1) – quality management for firms
• ISQM 2 – engagement quality reviews
• International standard on auditing (ISA) 220 (Revised), quality management for an audit of financial statements

The new standards:

• require a proactive and risk-based approach for firm-level quality management
• include improvements related to engagement quality reviews
• clarify engagement partner’s responsibility for audit quality

The IAASB has noted that additional support materials will be published later in 2021. These standards have a 24-month implementation period, becoming effective in December 2022.

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UK: ACCA and ICAEW’s Brexit hubs keep you up to date

The Association of Chartered Certified Accountants (ACCA) and Institute of Chartered Accountants in England and Wales (ICAEW) regularly analyse the evolution of Brexit and gather the key outcomes in their Brexit hubs. They update the hubs as new developments come with the aim to inform on relevant topics for the profession.

Read more at ACCA Brexit hub

Read more at ICAEW Brexit hub

The Netherlands: Disciplinary body Accountantskamer is expecting extra disciplinary cases due to the covid-19 crisis

In the Netherlands, entrepreneurs must justify their application for covid-19 related support measures above EUR 100.000 to the Employee Insurance Agency UWV. That means more work for accountants/auditors and also a higher chance of corona-related disciplinary procedures at the disciplinary body Accountantskamer, says its Chair Sandra Schreuder.

Some entrepreneurs are dealing with an auditor and obtain an audit opinion for the first time. If an auditor refuses to sign a clean audit opinion, there is a risk that an entrepreneur files a complaint. This goes along with a trend that has been around for some time in disciplinary law for auditors: disciplinary complaints as a means of pressure to settle disputes.

Read more (in Dutch, after free registration)