Photo: European Union

Board members on company audit committees within the European Union will see their role grow in importance under revamped EU audit rules that came into force on 17 June, experts have advised.

A joint ecoDa (European Confederation of Directors Associations)–PricewaterhouseCoopers (PwC) conference on “Audit committees at the heart of the Audit Reform”, staged in Brussels, heard how.

Opening the conference, Daniel Lebègue, chairman of an ecoDa/PwC working group on the audit reform, stressed that audit committees were a key part of the board.

In his opening address, Lebègue said: “A key element of good governance is the quality of relations between the board, the full board and different committees of the board, including the audit committee.”

He said that there had to be “transparency, trust, cooperation” in the audit committee, just as with other board committees.

He was “convinced” that the board should remain the unique and ultimate responsible body towards shareholders on one side and public authorities on the other, arguing that this was “a fundamental principle of good governance everywhere in Europe”.

Lebègue suggested that this principle was under threat by provisions in the new EU legislation—a directive covering all statutory audits and regulation, setting specific requirements for auditing public interest entities (PIE).

He said that some countries—especially his own country, France—had concerns about the regulation’s article 27, which requires national competition authorities to monitor developments in the market for providing statutory audit services to PIEs, notably the performance of audit committees.

Closely linked to this, article 30 allows regulators to sanction audit committees that fail to comply with either the directive or the regulation.

However, Lebègue added: “I’m sure we will find a pragmatic solution to combine this basic principle of good governance on one side and the objectives of the new regulations.”

Audit reforms

While the directive has only just taken effect, experience with audit reforms in the UK, particularly a tendering requirement that the UK Financial Reporting Council introduced in 2010, gives a strong indication how the new EU requirements will pan out.

The fact that the EU legislation mirrors UK practice should reduce the uncertainty over the implementation of new EU legislation in Britain following Brexit.

Also speaking at the conference, Gilly Lord, partner and head of regulatory affairs at PwC UK, said the requirement that companies put their auditing out to tender at least every ten years had been “a really big change in the UK market”. Before that, companies almost never changed, but since 2010 there have been more than 120 tenders, she said.

She added that audit committee members selected auditors and “had not been over influenced by the cost of the audit”.

“Instead we’ve seen audit committees get really interested in audit quality,” she explained. This means committee members asked for advice about how best to judge quality. Lord said it “ended up a virtuous circle,” with auditors competing on quality.

The UK was in its third year of extended auditor reporting, which is a very similar requirement to new rules under the audit regulation. These involve individually tailored reports that set out risks and responsibilities for that audit.

Lord noted that in the past her audit plans had never prompted any questions from audit committees. But with the advent of new extended reporting, audit committees have started to respond differently to audit plans as they knew the key elements in it were going to be public.

“Three years on, we’re also starting to see some engagement from the shareholder community on the audit report,” said Lord, acknowledging that this could mean an “awkward moment” for the audit committee, before asking: “but isn’t that a good thing?”

The UK has also put the onus on audit committees to produce their own reports on key judgements in the audit reports.

Lord explained that these key judgements used to be the domain of chief financial officers (CFOs) but now audit committees are playing a major role in challenging CFOs, with “a really positive effect on the UK market”. She said: “I really recommend that approach.”

But she recognised that “none of that has been easy for audit committees”.

Ten years ago, she would have said the hardest role on the board was chair of the remuneration committee, but after talking to non-executive directors she would now probably say that it was audit committee chairs, as they face a lot of media and other scrutiny.

Keynote speaker at the event Alain Deckers, head of the audit and credit rating agencies unit in the European Commission’s directorate general for financial stability, financial services and capital markets union (DG FISMA), which wrote the legislation, mapped out the system of oversight bodies in the member states that will assess audit committee performance.

A Committee of European Auditors’ Oversight Bodies (CEAOB) will steer national regulators to ensure harmonisation “as we really can’t afford to have authorities across Europe taking conflicting decisions”. Deckers said that some EU member states have already done a lot of work, and through the CEAOB—which first met in July (2016)—others could benefit from their experience, not least because assessing the performance of audit committees was “not a legalistic compliance tick-the-box sort of approach”.