Audit Policy Update

• Two new publications with proposals on how to streamline EU audit rules across countries
• EU legislators reach agreement on sustainability reporting, including rules on its assurance

Two new publications with proposals on how to streamline EU audit rules across countries

We have issued two new publications:

• Defining a public interest entity: How to streamline the scope of EU audit rules across countries
• Public audit oversight: Streamlining European countries’ oversight regimes

They highlight how different the regimes in the relevant areas are in 30 European countries, following the implementation of the 2014 EU audit legislation.

Different national regimes lead to complexity, additional compliance costs and practical and operational difficulties for internationally operating companies and audit firms. Therefore, to create a level playing field, we propose to streamline how:

• public interest entities (PIEs) are defined across Europe. This will help with harmonising the scope of applicability of the EU Audit Regulation’s rules for PIE audits and auditors across countries
• public audit oversight is organised and carried out in European countries

Refer to the publications for detailed proposals with which we aim to contribute to enhancing the corporate reporting ecosystem.

In this series, we earlier issued papers on streamlining countries’ implementation of EU audit rules on:

• non-audit services
• mandatory auditor rotation

With these four publications, we aim to inform policymakers in the context of the European Commission’s (EC) ongoing initiative on corporate reporting. They follow up on our response to the related consultation from earlier this year. See also other related publications, including our recent papers on internal controls and audit quality indicators, here.

EU legislators reach agreement on sustainability reporting, including rules on its assurance

On 21 June, the Council of the EU and the European Parliament (EP) reached a political agreement on the Corporate Sustainability Reporting Directive (CSRD).

This agreement is a major step as financial and sustainability information will be put on an equal footing for the first time in the EU and beyond.

On 29 June, the EU ambassadors approved the political agreement. The EP Legal Affairs (JURI) Committee is expected to vote on the provisional agreement on 14 July.

Some of the main changes the agreement brings are:

• scope enlarged to all large and all listed companies (250+ employees); non-EU companies (Euro 150 million net turnover)
• gradual approach to reporting:
  • first reports are expected in 2025 (for financial year 2024) by companies covered by the Non-Financial Reporting Directive (NFRD)
  • other large listed and non-listed companies will report in 2026 (for financial year 2025)
  • listed small and medium-sized enterprises (SMEs) will report in 2027 (for financial year 2026), but can ‘opt-out’ from reporting requirements for a two-year transitional period
• non-EU companies will be expected to issue first reports in 2029 for the financial year starting 1 January 2028
• the EC shall adopt the first set of sustainability reporting standards by 30 June 2023; second set and sector specific standards as well as for SMEs – by 30 June 2024
• the CSRD introduces an EU-wide requirement for limited assurance on sustainability information with moving to reasonable assurance as an end goal
• the EC is empowered to adopt limited assurance standards before 1 October 2026 and has to adopt assurance standards for reasonable assurance no later than 1 October 2028, following an assessment to determine if reasonable assurance is feasible for auditors and companies
• the statutory auditor, another auditor or an independent assurance service provider (IASP) can conduct an assurance engagement
• sustainability assurance will be excluded from the Audit Regulation’s 70% cap on the provision of non-audit services to PIE audit clients

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Easier access to corporate information for investors: Council agrees its position on ESAP

The Council has agreed its position on the European Single Access Point (ESAP) proposal.

The aim of this initiative is to improve public access to relevant corporate information. ESAP will centralise entities’ financial and non-financial information and present it in an easy to compare digital format. This will enable investors, financial analysts and intermediaries, public authorities and civil society to have a better understanding of the capital market and make informed decisions.

ESAP does not introduce new reporting obligations but builds on the disclosure requirements in the current EU legislation, including audit legislation. This means that the ESAP platform will contain already established types of data, as well as publicly available information, including:

• annual financial statements
• management reports
• transparency reports
• audit reports
• public register of auditors
• sanctions on auditors imposed by the competent authorities

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IAASB to develop a standalone sustainability assurance standard

In its June meeting, the International Auditing and Assurance Standards Board (IAASB) decided to work on an assurance standard for sustainability reporting. The aim is to have an exposure draft in the second half of 2023 which will cover both limited and reasonable assurance engagements.

In the same meeting, the IAASB also agreed to move forward with a separate standard for audits of less-complex entities (LCEs).

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IESBA commits to readying sustainability-related ethics and independence standards

The International Ethics Standards Board for Accountants (IESBA) has unanimously resolved to take timely action to develop global ethics and independence standards related to sustainability reporting and assurance.

As a first step, the Sustainability Working Group has been established to perform fact-finding and to develop a strategic vision for the IESBA.

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Accountancy Europe’s response to the IESBA Strategy Survey

The IESBA is seeking input for its 2024-27 strategy through a survey.

Our response to the survey highlights that:

• sustainability reporting and assurance should be given the highest priority by all stakeholders including the IESBA and coordination is key in this area
• the IESBA should start working towards a principles-based ethical framework for sustainability assurance
• there is a need for a slow-down period (with no further revisions to the Code) in which the IESBA should focus on supporting the consistent and effective implementation of the Code

Read our response

UK FRC launches consultation on audit quality indicators

The UK’s Financial Reporting Council (FRC) has issued a consultation on audit quality indicators (AQIs) to be published by the largest audit firms in the UK.

11 firm-level AQIs are proposed, and they cover various matters such as perceived culture within an audit firm, audit quality inspection results, staff workloads, and the level of partners’ involvement in audit engagements.

Stakeholder views are requested by 18 August 2022.

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