Amid the controversy of the Brexit debate here in the UK, a little-noticed piece of legislation came into force affecting audit and audit committees, and will potentially making big changes to their working practices.
Ironically emanating from Brussels, the 2014 EU Audit Directive might be sneaking into the UK’s governance regime just in time, but it should not be ignored because it has much to concern non-executives—especially those chairing or serving on audit committees.
First thing to note is that it will change relationships with auditors. Coming into force on 17 June, the new laws will limit the time an auditor can spend serving a single client. Long gone are the times when an auditor could expect to remain incumbent for decades or, in some exceptional circumstances, even a century.
The services an auditor can provide for your business is also now strictly limited. In particular, they can no longer supply tax services and expect to do the audit at the same time. The EU says that’s not on. Fair enough—it was always an arrangement that aroused concerns, so why boards ignored it in the past is anybody’s guess.
But the people facing the biggest change are the audit committee members. The EU now makes it clear they have a legal obligation to run a fair process for selecting a new auditor and that tenders happen at the right time.
Running a fair tender process means, in the UK context at least, that a company cannot favour Big Four auditors only. In short, non-Big-Four firms cannot be excluded from having a pitch.
Committees must also provide transparent selection criteria upfront so that everyone knows what’s required of the tender.
Trouble is, as many experts will tell you, there isn’t much guidance from the EU on how to achieve all this.
How do you ensure smaller audit firms aren’t excluded? One solution may be that we’ll companies publishing notices of their tender
The transparent, upfront selection criteria presents its own challenges. With some warning, this presents difficulties for audit committees that develop their thinking on what they want from an auditor after the tender process is underway. The only reasonable options looks like sufficiently flexible criteria that allows a company to change its opinion mid-tender.
That said, it’s uncertain whether an unsuccessful and disgruntled auditor candidate could challenge the fairness of such a process.
What experts agree is that audit committees will need to be absolutely clear what their responsibilities are, and begin their tender procedures in plenty of time and with lots of preparation to ensure they avoid conflicts of interest or disappointment as a result of conflicts.
Audit committees face a new dawn. It would be easy to curse the EU for introducing new audit rules and increasing the responsibilities for audit committees. And while practice in compliance of the new regulations will need time to bed down, there’s a lot of sense in what they seek to achieve.
However, we are yet to see what the unintended consequences may be. Perhaps one thing they may do is make the leadership of an audit committee a specialist task. Of course, that was always the case. After all, who understands the language of auditors other than auditors or CFOs? But the new rules will surely increase the time commitment, especially around the time of the tender process. Who would be surprised if chairing the audit committee increasingly looks like a full-time job?