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’AUDIT POLICYCONFERENCE

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PARIS, 17 OCTOBER 2014

MINUTES

TABLE OF CONTENTS

EXECUTIVE SUMMARY

TRANSCRIPT

• Opening Session

• First round table Definition and scope of PIEs

• Second round tableMandatory audit firm rotation

• Third round tableNon Audit services

• Fourth round tableAudit in SMEs

• Conclusion

INTRODUCTION

The process of European audit reform has been launched in 2010 with the issuance of the Green Paper on statutory audit by the European Commission which has resulted with the publication in May 2014 of a regulation and a directive.The purpose of this conference was an attempt to share from a technical and practical point of view our opinions on some of these requirements posed by the regulation and which are now relevant to the competence of our Member States.The proposed four round tables were no doubt the cornerstones of the reform: the scope of the regulation, the nature and scope of our engagement terms and their duration, the additional services which can be offered to our clients, and to what extent the statutory audit can rema in appropr ia te to the SME ’s environment.At what remains an early stage, there is no room for an explicit conclusion but the purpose of this conference was to provide a clear picture on the expectations of the profession all over Europe.

Yves NicolasPresident of CNCC

AUDIT POLICY CONFERENCE MINUTES • 17th october 2014 • 5

EXECUTIVE SUMMARY

AUDIT POLICY CONFERENCEMINUTES17th october 2014

EXECUTIVE SUMMARY

I think it's clear for everyone here that it was necessary to launch a regulatory reform at the EU level. Perhaps we wouldn’t have said so in 2000 before the Enron crisis. Now we have a situation where each national legislator has approached this issue from a different perspective and it's quite natural because the businesses themselves and the profession are organized differently. However when we look at the outcome I must say that the business community is disappointed. Disappointed because it seems first of all that the level of harmonization achieved is limited, quite limited compared to what we had hoped for. But also it's a disappointment because of the accumulation of constraints that now are imposed on an EU-wide level. It means that the alleviation of the burden we were hoping for will not be achieved. Another area of disappointment is that we are not convinced that the reform has achieved the right balance between the objectives of the reform. I mean on the one hand the search for a better guarantee for the independence of the statutory auditor and the quality of audit. So we are in a conundrum here because on the one hand, we would like to keep some of the features which we are used to, on the other hand, as a general matter, the business community would like to see as much harmonization as possible - therefore reduce as much as possible the options the Member States will effectively select to implement the reform in their own jurisdictions. This is the challenge we are now facing in the next 18 months basically, since it's about the amount of time the Member States have to implement the reform before it becomes applicable in 2016.


Mr. Christian SCHRICKE, Representative of MEDEF (French Business Confederation)

EXECUTIVE SUMMARY

We have a regulation and for a lawyer like me it's quite extraordinary to see an EU regulation which is supposed to be directly applicable which is in fact not directly applicable because there are so many options that the Member States have to decide on.

When we look at how the regulatory audit framework is organized in Europe we see an extraordinary variety of situations. It is not surprising to see it has been difficult to move forward to agree on what should be done, I think it's critical that each party- I mean here the profession itself, but also the business community - try to better understand where they're starting from and what their views are because it's critical to achieve an as large as possible consensus on what should be done on the implementation phase.

My view has always been business managers and auditors of listed business companies are business partners. They are business partners who need to respect the responsibilities of each partner but they need to move together with the aim of providing financial markets, shareholders and the economy at large with a confidence that the performance and the financial statements of the companies are what they look like.



At FEE, with the strong support of our members in each country, we try to align our views to convey coherent messages to policy makers.

I will try to give some examples on how it was important in the past years to influence the evolution of some provisions.

The first example I would like to address is the public audit report: in the original proposal, the provisions regarding the audit report was very detailed and it was also proposed to report in details about the audit methodology; this was widely questionable. You remember how the proposal addressed the necessity of having a maximum of 10.000 characters, a 4-page audit report, etc. We tried to influence the debate and instead, the final text approved is much more meaningful and in line with the current developments taking place at an international level with the IAASB.

The second example in which we tried to be influential (with the support of our Member Bodies) is the mandatory audit firm rotation: remember that the proposal in 2011 as put forward by the EC was a mandatory length of 6 years without any possibility for extension. After some discussion with the different actors, the text was amended and now we have a solution where the audit engagement of PIE could be to a maximum of 20 years with a tendering and when the option available to Member States is taken up and 24 years in case of joint audit. If consistently applied across Member States, this increase in duration will provide we think more flexibility to European businesses than the period of 6 years originally proposed.

The last example I would like to raise is the proposal regarding the role of ESMA originally responsible for the coordination of the European audit oversight. We demonstrated that a great measure to improve the coordination of audit oversight on the European level would be better achieved via the strengthening of the so-called EGAOB now called CEAOB. This is another example in which we tried to influence the debate in this respect.


Mr. André KILESSE, President of FEE

EXECUTIVE SUMMARY

We have recently published three briefing papers on the most sensitive topics:

• oversight of the audit profession, • provision on non-audit services • the appointment of the auditor and the duration of the audit

engagement

These areas are definitely the most sensitive ones because the options available to Member States could create regulatory divergence and fragmentation across the single market. As already raised by my colleagues here on stage before me, there are a lot of options available in the regulation, which is quite odd for a regulation but it is a fact. In this context we are committed to informing the debate with the objective to enhance consistency in scope and in meaning as far as possible. It's probably not realistic to expect that all Member States could adopt the same approach. We acknowledge that there are different cultures across Europe, but it is strategic to try to align the views in order to reach a consistent approach to implementation as much as possible. And it will be an important role for FEE in the coming months and years.

The main challenge ahead of us in the coming months is to try to speak, I would not say with one voice, but with a coordinated voice. And I really think it will be important for the profession in Europe to have a harmonized view, to be able to efficiently lead the discussion with policy makers. A harmonized market is also a necessity for companies, for the business community.


EXECUTIVE SUMMARY

Mr. André KILESSE, President of FEE

The definition and scope related to the definition of PIEs is one of the most important parts of the reform. There is a growing debate in a significant number of countries.

• In the Czech Republic this is considered pragmatically as a technical term related on one side to a set of requirements, and on the other side to a set of companies that should be attached to these requirements. It’s a pragmatic approach.

• A small definition exists in Belgium in the sense that PIEs are listed entities, credit institutions and insurance companies. Pension funds, local public sector entities are not included in the scope of PIEs. This is a limited scope. Belgium thinks the scope should remain limited to the current definition.

• In Spain there is hope that the regulator will keep to the strict definition of PIEs (to the nature of the entities, the activity and size).

• In Spain there is hope that the regulator will reduce the scope of the definition regarding those companies that are considered PIEs because of their size.

• In France the CNCC’s proposal is to have a definition of PIEs as close as possible to the directive, without adding other categories as allowed by point d) of the definition.Being considered as a PIE would be a huge burden for non-relevant entities (mandatory firm rotation, partners rotation, audit committees, requirements regarding audit report, restrictions for fees, for non-audit services, quality control every 3 years, transparency report...).

• There is no discussion in Germany about enlarging further the definition but the PIE is just a regulatory definition.The fact is that non-PIE entities are asking for PIE-like audits, because of the stricter requirements. Many public sector institutions, non for profit, ask for stricter rules.

AUDIT POLICY CONFERENCE • 17th october 2014 • 11

First round table Definition and scope of PIEs

EXECUTIVE SUMMARY

This is probably one of the most controversial provision of the regulation.

• The Irish profession would prefer the most flexible solution, so it would favor the 10+10 and even 10+14 options. But we must take into account the influence of the UK position as Ireland has a tendency to align itself with the UK on these issues.

• Italy is the country with the most experience with mandatory firm rotation (almost 40 years now). The audit profession tried without success for 30 years to persuade the public authorities that it was not a good solution. And now the practice is spread across Europe in favor of the new legislation.Team jumping has not been seen between firms in Italy after rotation.Regarding the implementation of the reform, the Ministry of Economics and Finance Is expected to maintain the existing 9 years, no extension is foreseen and partner cycle rotation will be maintained.

• In France mandatory rotation is mostly felt as a threat. While obviously seeking reinforcement of audit quality the European reform will lead to a more concentrated market. So how can we moderate these risks and the possible side effects of the reform?As a matter of fact joint audit may be the only way to moderate the effects of the reform and our European colleagues should be interested in the French joint audit experience. Our opinion so far is that mandatory rotation may create concentration on the market and threaten audit quality.The current debate about the tendering option shows no clear benefit compared to joint audit.

• As for the initial discussion regarding the rotation, the real trend now in Germany will be with a mainstream 10+10 although the profession in general is not in favor of tendering. The tendering process in Germany is not considered to guarantee enough transparency. Because of its cost, tendering would be only affordable with full transparency of process.Jumping team is considered to be a risk especially in the very concentrated market. For example, the Assurance market in Germany


Second round table Mandatory audit firm rotation

EXECUTIVE SUMMARY

is very concentrated, with 1 firm covering 80 % of the market. Because of the expertise needed, mandatory rotation will cause the team in place to jump to the successor.

• From the UK point of view:MAFR is about perception. It cannot be right that at the time of the financial crisis the average auditor tenure in the FTSE 100 was 48 years! This has led to the CMA inquiry in the UK which concluded with an order for 10 year mandatory tendering, with equivalent implementation and transitional rules to the EU regulation and directive last month. FTSE companies recognise this: the top 350 companies tendered 18 audits in 2012, 30 in 2013 and are expected to tender 56 in 2014 - before any requirement comes into force. Over a recent 10 year period the FTSE 350 switched 131 audits and also had 346 exits/entrants. Only 30% had no change. This level of activity indicates it's not much of a burden on business. So, the profession should focus on making public policy work, for that is surely in the public interest. We should therefore focus on anti-avoidance: single tenders, walking teams, regulatory arbitrage. We could usefully address the measurement of tenure and concentration in the market (too big to fail - how does that impact on the audit?) and the management of quality under MAFR.

• Netherlands became a supporter of mandatory firm rotation though it is not yet in application in the Netherlands. We opted for a partner rotation for a 7-year period with a cool down period of 2 years, and in 2016 firm rotation. This position came through a strong stakeholder debate (issues raised about audit quality, loss of trust)Mandatory rotation is just one part of the process, other issues are considered as important in the Netherlands. We have to adapt and we think it will improve trust.


EXECUTIVE SUMMARY


Also critical for the profession.

• For Nordic countries, the main issues are: Preapproval process, audit committee relationship, and what should be allowed or not especially related to taxation.

• What are the expectations from the German Profession? - the German legislator should allow prohibited non-audit services

of art 5 section 1 regulation as far as section 3 provide for this possibility

- Provision of tax services, evaluation services by the auditor should be maintained as far as possible

- There is an opposition to the 70 % cap• France’s expectations are :

- No gold plating: keep the list of prohibitions and the 70 % cap (no decrease of cap)

- Removal of the current white list in the French legislation no longer compatible with the European legislation as it is based on a prohibition list. All other services would then be allowed, though subject to monitoring measures making sure the non-audit services respect the general principles of independence from the directive and from the national regulation (as receiving prior authorization by the audit committee and the related fees do not exceed the cap of 70% by a 3-year period)

- As we expect from these provisions: what is not prohibited must then be allowed.

• Expectations from ACCA in the UK :We wish to avoid the nightmare that would occur if too many differences between the Member States were caused through gold plating and choice of different options.


Third round table Non Audit services

EXECUTIVE SUMMARY

The directive introduce two new concepts- Proportionate audit- Proportionate quality control

This round table is the opportunity to assess the implications of these novelties through a few questions regarding:

- The current state of the regulation- Market needs- The meaning of proportionate audit and proportionate quality

control- The possible consequences on the nature of audit insurance- The state of mind of local institutions and governments on these

issues- The way to achieve European harmonization on this issue

• The question in Spain is how a regulator in a situation of problem will identify your options and decisions. That's why in Spain we are working closely with the regulator in order to identify these matters which will not create conflict of interest in the future.There cannot be audits of different quality. The ISAs already have a definition of a review, a compilation, and these products are used when the market needs them but we felt in Spain that we do not favor another form of audit that would be a review. This would create confusion in the market. This will be negative for the profession and have an impact on the small and medium practitioners.

• From the Irish point of view: the issue around proportionality is to understand the standards themselves. We're talking about proportional application and not proportional understanding. It's important because an audit is an audit and whether its public policy, public confidence, the market requires an audit to be an audit. And it really doesn't matter if the company has 10 euros of turnover: if it is


Fourth round table Audit in SMEs

EXECUTIVE SUMMARY

an audit it has to have the same level of integrity.The issue then comes as to whether the standards make that a more onerous process for smaller entities. The other thing to recognize is that when the standards are drafted in the first instance there is always the equivalent of a stand back to say are there specific SME/SMP considerations that need to be brought into play. There are already in the standard considerable amounts of consideration on how they would impact on the audit of SMES

• The debate in Italy has not started yet. It is not even sure whether it will happen. There is a major constraint in Italy. A law approved in 2011 allows the Italian Parliament to introduce in the Italian legislation only the requirements that are mandated by any piece of European Union legislation; the Italian Parliament cannot introduce additional requirements unless they do not create additional costs. This law applies in any field, not only accounting and audit.The Italian institute in its dialogue with the Government pointed out:- the outcome of a study published in 2008, which concluded that

companies with audited financial statements are 30 % less likely to go bankruptcy;

- that the audit is not an administrative burden, but it is part of the accountability process that is required to companies which have the benefit of the limited liability regime;

- that the cost of an audit could be potentially recovered through the assignment of a better rating and the resulting lower cost of capital;

- that it would be in the public interest to have an audit of companies which receive government grants irrespective of their size;

- that financial statements are the basis upon which income tax is calculated and an audit would provide a shield against tax inspections.

• In Poland - As for the SMP Committee, referring to proportionality of audit relating to SMEs, I don't think that the intention of European


EXECUTIVE SUMMARY


policy makers was to define something like simplified audit or proportionate audit.When we saw the first draft of the directive there was a recommendation about implementing a review for SMEs, review that provides a lower level of assurance. So we tried to anticipate a black scenario in which the audit threshold would go up. Then what can we do? We would like to have ready-made products, regulatory products. We try to educate our regulator that apart from the audit there are other global standards on review. This review is still difficult to understand not by the regulator but by SMEs and auditors. It is the main issue on promoting and developing these instruments on the market.But fortunately the audit threshold would remain the same it was before the audit reform in Poland. So no necessity to push the review forward but we know that in the long term the debate on alternative to audit will be back.

• In France we are currently auditing only 3.2% of the SME market. The market in France is very specific. We have 3.5 million companies in France and 3.4 million have less than 20 employees. We audit 68 % of the 100 000 biggest companies. When we talk about increasing the threshold in France it will dramatically reduce the number of companies we audit in the SME market. We don't agree with the point of view shared by public authorities, that an audit can be a burden. But we already anticipated the fact that we have to work differently for small PIEs and SMEs. For them we can decrease the time spent to perform an audit when conditions are met (accounting is very simple, chartered accountant in the company, CEO directly works on internal control procedures, and there are only a few partners in the SME). The opinion will be based on the same kind of work, have the same value but you work on different types of information. It has an impact on the cost which is also reduced.


EXECUTIVE SUMMARY


TRANSCRIPT

AUDIT POLICY CONFERENCEMINUTES17th october 2014

TRANSCRIPT

Mr. President, Dear André, Dear Didier, Dear Patrick, Dear friends,

Welcome to Paris for this 1st meeting on the audit reform. I am pleased to welcome you today to debate on this issue that has been on our agenda for the last 3 years: the European Audit reform. I would like to thank my two regional Presidents Patrick and Didier without whom nothing would have been possible. And I extend those thanks to our speakers who come from various part of Europe, not forgetting the Institute staff members for their presence and willingness to prepare this event.

The process of the European audit reform was initiated in 2010 with the issuance of the green paper on audit by the European commission which has resulted in the publication in May 2014 of a regulation and a directive. We certainly have had on several occasions the opportunity to exchange our point of view within our European professional bodies including FEE on the objective of such a reform and some of the iconic requirements such as audit rotation. However


Yves NICOLASPresident of CNCC, France

Opening Session

we have not yet started to share from a technical and practical point of view our opinions on some of these requirements posed by the regulation and which lay within the competence of our respective Member States.

As a matter of fact this European Audit reform displays a genuine peculiarity since it takes the form of a regulation with multiple options on the most significant subjects whereas it could have been anticipated that such a regulatory instrument be directly applicable. It is therefore up to us to work out a reliable concept of statutory audit, of financial statements, in order to best serve the European economy.

Such is the purpose of the one day working session which I hope we'll be followed by others, and will make its contribution to the European edifice of our profession. It is my hope that our warm welcome of yesterday as well as this working session will live up to our expectations. What are they? Within our roundtables we are going to debate on four topics which are no doubt the cornerstones of the reform beginning with its scope, the nature and scope of our audit engagements and their duration, the additional services offered, and to conclude how the audit can be appropriate to the SMEs’ environment.

These four topics are those which are going to generate the national options specific to each Member States. These are the most structuring ones for our professional practices from 2016 onwards. It was therefore necessary to debate on them with the presence of speakers, who come from a wide range of Institutes, and have accepted to provide an analysis of the law currently enforced in their country, to share their understanding of the new regulations and their wish regarding the choice of options.

Thanks to the support of more than 15 institutes in Europe, which I here wish to thank once again for their presence, we are going to achieve mutual understanding as well as complete the exercise of harmonizing statutory auditors firms in Europe.


TRANSCRIPT

Opening Session Yves NICOLAS, President of CNCC, France

Bearing this working session in mind, we have also designed two tools that will allow us to keep an ongoing debate. On one hand we have worked towards the combination of key figures relevant to our profession in Europe (not all countries have answered yet but we can begin to see an overview of the conditions of statutory auditing requirements in Europe). There still remains data collection work to be done but we are going to make sure it gets completed. Such work will be added to that already achieved by FEE.

On the other hand, a second tool which will be made available to you during this session, is the development of a website that will allow us to keep track of the progress of the work of our respective governments until June 2016. Beyond that we also have to assess the consequences and the actual impact of such a reform on our profession and the perception of our clients. Such tool sharing is imperative to put into place if we wish to achieve professional unity throughout our practice.

My Dear friends, as you can see, a lot of important steps remain to be completed. I will conclude my introductory remarks to get into the main topic without further delay and I thank you once again for being with us today.

Wishing you all a good day, I shall now give the floor to Christian Schricke, as a representative of the MEDEF, the French business confederation. Thank you Christian for providing the point of view of the entrepreneurs on this audit reform.


TRANSCRIPT

Opening Session Yves NICOLAS, President of CNCC, France

TRANSCRIPT

Thank you!

Well I am very happy to be here. I've been chairing a working group at the MEDEF for the past six or seven years on the relationship between listed companies business and auditors. I also worked with auditors in my previous position when I was secretary general of Société Générale. I managed two tender offers for the auditors and I was the chairman of the jury selecting the auditors. So I have some practical experience in that respect.

I think it's clear for everyone here that it was necessary to launch a regulatory reform at the EU Level. Perhaps we wouldn’t have said so in 2000 before the Enron crisis. At that time the patchwork of national legislations and frameworks for the profession did not seem to be such a problem even for multinational companies because there were very few constraints that imposed burdens on the way companies themselves managed their relationship with auditors. But the amount of regulatory constraints that came out of the Enron crisis meant that a few years later we were confronted with a situation that had become extremely difficult to manage both for audit firms and for companies themselves. And as I had that particular experience also with Société Générale, when we started imposing some constraints even before the legislation imposed them. But we had very simple constraints.

Now we have a situation where each national legislator has approached this issue from a different perspective and it's quite natural because the businesses themselves and the profession are



organized differently. So it's not a surprise that we should face such a situation. I think probably everyone underestimated the difficulty of achieving a proper balance between the different concerns and embarking on the reform of the statutory audit framework in Europe. Certainly we had reasonably high expectations when the green book was issued in 2010 and we felt that this was an opportunity to provide a better and harmonized framework which would make it easier for companies and their auditors to work together to achieve what is ultimately the goal of both businesses and their business partners, I mean the auditors, which is trust, confidence in the published accounts.

However when we look at the outcome I must say that the business community is disappointed. Disappointed because it seems first of all that the level of harmonization achieved is limited, quite limited compared to what we had hoped for. But also it's a disappointment because of the accumulation of constraints that now are imposed on an EU-wide level. It means that the alleviation of the burden we were hoping for will not be achieved.

Another area of disappointment is that we are not convinced that the reform has achieved the right balance between the objectives of the reform. I mean on the one hand the search for a better guarantee for the independence of the statutory auditor and the quality of audit. From our perspective of course they have to go hand in hand. Of course the quality of audit is what we are all looking for because management of businesses needs to have confidence in the accounts they publish themselves and in the auditors, especially in large multinational firms. They are very critical in that respect because they will provide confidence to management in the sincerity and quality of the accounts at group level. But it's also true that independence, as shown by the Enron crisis, has been something perhaps even more critical because the Enron crisis showed that the confidence that shareholders and market can have in the accounts is critical and that there were failures in that respect.


TRANSCRIPT

Opening Session Mr. Christian SCHRICKE, Representative of MEDEF (French Business Confederation)

However how to achieve the required level of independence is a matter of much debate, and what we have seen in the regulatory reform in the EU is that instead of having two or three criteria we have 6, 7, or 8 criteria on purpose to achieve the required level. And on the top of all that, because it is so difficult to achieve the convergence of views within the EU, we have now several Member States options which will make even more difficult to achieve harmonization.

Be it as it may, we are now in a situation where we just have to move ahead, we have a regulation and for a lawyer like me it's quite extraordinary to see an EU regulation which is supposed to be directly applicable which is in fact not directly applicable because there are so many options that the Member States have to decide on. I'm part of the consultations that have started here in the French Ministry of Justice on the implementation at the French level - and I can say, while there is a certain degree of convergence of views amongst the various participants in this consultation about what we are doing, there are doubts in some cases as to exactly what the regulation itself allows and therefore what Member States are allowed to do.

So we are in a conundrum here because on the one hand, we would like to keep some of the features which we are used to, on the other hand, as a general matter, the business community would like to see as much harmonization as possible - therefore reduce as much as possible the options the Member States will effectively select to implement the reform in their own jurisdictions. This is the challenge we are now facing in the next 18 months basically, since it's about the amount of time the Member States have to implement the reform before it becomes applicable in 2016.

When we look at how the regulatory audit framework is organized in Europe we see an extraordinary variety of situations. It is not surprising to see it has been difficult to move forward to agree on what should be done, I think it's critical that each party- I mean here the profession itself, but also


TRANSCRIPT


the business community - try to better understand where they're starting from and what their views are because it's critical to achieve an as large as possible consensus on what should be done in the implementation phase.

I have to confess that the business community, even in France, is not as one on every single issue. There are issues on which people disagree as to exactly what should be done. And that will require some discussion and debate, and of course that is based on the experience people have had on these issues. The size of the businesses, clearly a problem for a SME is not the same as the problem of a large multinational group, and their relationship with their auditors and their past experiences will shape their views as to exactly what should be done.

So it's quite a challenge now we are embarked upon, but I think my view has always been business managers and auditors of listed business companies are business partners. They are business partners who need to respect the responsibilities of each partner but they need to move together with the aim of providing financial markets, shareholders and the economy at large with a confidence that the performance and the financial statements of the companies are what they look like.

Thank you very much.


TRANSCRIPT


TRANSCRIPT

Presidents, Dears Colleagues, Ladies and Gentlemen,

It's a pleasure to be with you today in Paris on behalf of the Federation of European Accountants. First of all, let me express my thanks to Yves, Didier and Patrick, who are responsible for the organization of this event. This event is very welcome to reflect on how to consider implementation of the audit reform in the coming months and years.

At FEE, you - our French colleagues - are at home. You were one of the main driving forces behind the construction of the Federation. You are also the only member that had three presidents: Hélène Bon, le regrété Edouard Salustro and Jacques Potdevin some years ago. You have always been very committed to FEE, thank you for that.

I will now say some words about the accountants in Europe. I think Didier and Patrick will give a review on how the audit profession is structured in Europe. I would like to point out that FEE not only represents auditors, but also accountants in public practice, in businesses, tax advisers, colleagues in the public sector. As our main role is to convey the expectations and interests of our profession to the European community composed of the European Commission, but also of two co-legislators the European Parliament and the Council. We are in close contacts with all these actors.

How important is the European scene for the concrete impact in each country? I can confirm after two years of presidency that EU


Mr André KILESSE, President of FEE

policy makers in Brussels very much appreciate to be in contact with a Federation which is entitled and able to summarize the voice and the opinion of the profession. And it is not only true for the audit profession, but it is the same for the lawyers, for the notaries… That's the same for the business community. If you want to be seen and heard in Brussels, you need to have a strong federation able to convey the message of the European profession; that's what we do at FEE, of course with the strong support of our members in each country, and we try to align our views to convey coherent messages to EU policy makers.

Not surprisingly, the topic of audit is one of our strategic priorities. When the debate started 3 years ago, the European profession was strongly against many proposals made by the European Commission (in 2011) and for instance at that time the mandatory rotation of audit firms was a topic where it was difficult to find a common position. The same is valid for joint audit. I personally regret that we were not able as a European profession to have the same view on these two important topics: external rotation and joint audit. Therefore, what FEE did was to list the pros and cons of each position in Europe regarding these topics, but except for those two topics, on all the other topics addressed in the reform, the European profession had a common position conveyed in letters and publications. I will try to give some examples on how it was important in the past years to have meetings with policy makers, and influence the evolution of some provisions.

The first example I would like to address is the public audit report: in the original proposal, the provisions regarding the audit report was very detailed and it was also proposed to report in details about the audit methodology; this was widely questionable. You remember how the proposal addressed the necessity of having a maximum of 10.000 characters, a 4-page audit report, etc. We tried to influence the debate and instead, the final text is much more meaningful and globally in line with the current developments taking place at an international level with the IAASB.


TRANSCRIPT

Opening Session Mr André KILESSE, President of FEE

The second example in which we tried to be influential (with the support of our Member Bodies) is the mandatory audit firm rotation: remember that the proposal in 2011 as put forward by the EC was a mandatory length of 6 years without any possibility for extension. After some discussion with the different actors, the text was amended and now we have a solution where the audit engagement of PIE could be to a maximum of 20 years with a tendering and when the option available to Member States is taken up and 24 years in case of joint audit. If consistently applied across Member States, this increase in duration will provide more flexibility to European businesses than the period of 6 years originally proposed.

The last example I would like to raise is the proposal regarding the role of ESMA originally responsible for the coordination of the European audit oversight. We demonstrated that a great measure to improve the coordination of audit oversight on the European level would be better achieved via the strengthening of the so-called EGAOB now called CEAOB. This is another example in which we tried to influence the debate in this respect.

If I may, I also wish now to consider the implementation of the European audit reform. At FEE we first and foremost focus on informing the discussion in the public interest because we are convinced that this is going in the same direction as the collective interest of our profession in the long term. For your information, we at FEE have already made some analysis and published a few papers that are at your disposal today, and also available on our website. As soon as the texts were available, we published two factsheets to inform our members about the final texts: one on the main provisions included in the directive and regulation, and a specific fact sheet regarding the main provisions affecting SMEs. We also set up a webpage of frequently asked questions on the audit reform. This webpage is accessible to the public and features more than 50 different questions linked to the reform.


TRANSCRIPT


More recently, we have published three briefing papers on the most sensitive topics:

• oversight of the audit profession, • provision on non-audit services • the appointment of the auditor and the duration of the audit

engagement

These areas are definitely the most sensitive ones because the options available to Member States could create regulatory divergence and fragmentation across the single market. As already raised by my colleagues here on stage before me, there are a lot of options available in the regulation, which is quite odd for a regulation but it is a fact. In this context we are committed to informing the debate with the objective to enhance consistency in scope and in meaning as far as possible. It's probably not realistic to expect that all Member States could adopt the same approach. We acknowledge that there are different cultures across Europe, but it is strategic to try to align the views in order to reach a consistent approach to implementation as much as possible. And it will be an important role for FEE in the coming months and years.

We are working very actively with all our Members and the entire profession in Europe as well as with the European Commission in order to achieve a coherent level playing field in this implementation phase.

We at FEE very much hope that events like this one today will contribute to achieve this common level playing field. We very much thank our French members for their cooperation and the organization of this event. I would also like to stress in my conclusion that we also issued recently a paper called "the future of audit and assurance" that is broader and larger in focus than the audit reform.


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If I may, I would like to give a solemn conclusion, because that's probably a remit for a President at the end of his term. I think that the main challenge ahead of us in the coming months is to try to speak, I would not say with one voice, but with a coordinated voice. As earlier emphasized, there are many options in the text: for example, the rotation period, the length of the engagement - by default it's one year but in some Member States, the length of the engagement is 6 years or 3 years, and we think that it will be very important for the harmonization of the market to have the same length of engagement that could impact the length of the rotation period. And I really think it will be important for the profession in Europe to have a harmonized view, to be able to efficiently lead the discussion with policy makers. A harmonized market is also a necessity for companies, for the business community. It was highlighted here just before me.

Let's work together to achieve this target. I know that I can count on your support and you can count on my commitment.

I thank you.


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The definition and scope related to the definition of PIEs is one of the most important parts of the reform. There is a growing debate in a significant number of countries.In the Czech Republic this is considered pragmatically as a technical term related on one side to a set of requirements and on the other side to a set of companies that should be attached to these requirements. It’s a pragmatic approach.

‣ Daniel KROES, President of IRE, Belgium

A small definition exists in Belgium in the sense that PIEs are listed entities, credit institutions and insurance companies. Pension funds, local public sector entities are not included in the scope of PIEs. This is a limited scope.

Today there is no will to extend the definition.The reasons are as following:

1. An audit is an audit. In this respect: - ISAs should be applied to all entities- The rules in place are deemed sufficient- As for quality control, there is one system for PIEs and one for non-PIE's under supervision of external oversight.


Chair : Petr KRIZDeputy president of the FEE, PWC audit partner in Prague, PWC Central & eastern Europe Leader for Public policy & Regulation, Czech Republic


Supposed impact of the extension (to public sector entities for example):Public tendering is already mandatory for the public sector entities, so in practice external rotation is already in place in this very competitive market

2. For many entities there is a joint audit with the Court of auditors / obligation to meet the best standards and keep an eye on the independence

3. There is concern about the cost if the number of PIEs increase in terms of cost of public supervision

4. Only positive aspect, subjecting more entities to a mandatory audit will enhance the reliability of financial statements especially in regard to public debt.

Belgium thinks the scope should remain limited to the current definition

Discussions with public authorities on the subject are just beginning; detailed discussion will come in November and December.

‣ Adela VILA, Director of the International Department, Licensed Auditor, ICJCE, Spain

More than 8000 PIE's in Spain (highest number in Europe). The consequences for the Spanish profession in areas as such as quality control, independence requirement or compliance costs are clear. This affects 260 professionals auditing PIEs.

The transposition of the 2006 audit directive was delayed until 2010, so current Spanish law aligned itself on the European definition of PIEs


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(listed companies, included any entities issuing any kind of securities, credit institutions under the supervision of the bank of Spain and insurance companies. The law allows the extension of the definition by the way of a regulation. Using that provision the regulator added other entities to the list (final definition on 2011 which is very similar to the one in the European commission proposal).

Among the 8.200 PIEs under Spanish definition only 20% were strictly required by the directive. 78 % represent collective investment funds, electronic money entities, etc. The current EU legislation represents the best chance for change.

There is a hope that the regulator will keep to the strict definition of PIEs (to the nature of the entities, the activity and size).

The Spanish profession asked for the reduction of the scope of the definition of PIEs.

What we hope about what can be achieved through the transposition• the regulator may leave in a stand-by provision in the regulation

referred to the size of the audited entities (1800 engagements in 2013)

• the President of the Spanish oversight has publicly confirmed that it is not the regulator’s intention to damage the competitiveness of Spanish auditors.

So we think that a review of a definition is possible.

A fast transposition process is foreseen so far because the term of parliaments ends in 2015 so a first draft of law will be available to the public before the end of the year.


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‣ Gilles HENGOAT, President of the Financial Market Department at CNCC, France

In France the current situation is close to the 2006 directive but there is no comprehensive definition of PIEs

The definition of PIEs can be only inferred from part of other regulations (commercial law, quality control of the audit).

PIEs include listed entities, banking institutions, contingency funds, mutual insurance companies and also not-for-profit organizations that call for public donations.

The consequences of being considered as a PIE differ according to the nature of the PIEs:

• Listed entities, non for profit organization: partners’ rotation• All PIEs: quality control every 3 years instead of 6 years• Auditors are required to publish a transparency report • Companies must establish committees like audit committees except

for not-for-profit entities

This is close from the directive definition with the exception of the not-for-profit organization

We started discussions in France that are organized by the Ministry of Justice which has set up several working groups on the main items of the reform (PIEs, duration of the assignment rotation, non-audit services, audit reform, audit committees).

A representative of the profession participates in each group, the MEDEF and the AFEP on the business side, H3C the audit oversight authority, the market securities regulator AMF, and the Ministry of Finance.


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The current common position agrees not to extend the definition of PIEs beyond the list provided by the directive / not-for-profit could be excluded from the scope. Questions arose about some financial institutions as investment enterprises, payment establishments, electronic currency establishments and financing companies which are not considered by the European definition as PIEs.

A divergence of views comes from the prudential regulator and to some extent from the Ministry of Finance who would like these institutions to be included in the scope of the definition in order to protect their prerogatives in terms of supervision and control.This problem could be solved through special requirements, for prudential purposes or in organizing some appropriate inspections by H3C, so we could separate the notion of PIEs from other relevant considerations. The CNCC’s proposal is to have a definition of PIEs as close as possible to the directive,without adding other entities as allowed by point d) of the definition.

Thus we could achieve consistency of the PIE definition throughout Member States and avoid the application of the directive in areas of the market where it is not relevant. Consistency is important especially for transnational groups with subsidiaries in different European countries.

Being considered as a PIE would be a huge burden for non-relevant entities (mandatory firm rotation, partners rotation, audit committees, requirements regarding audit report, restrictions for fees, for non-audit services, quality control every 3 years, transparency report...)

This position is backed by the Ministry of Justice and H3C.


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‣ Jens POLL, CPA, Tax Advisor, Lawyer and specialized Lawyer for Tax Law, IDW, Germany

Only listed entities are PIEs (800) now in Germany. As there is no option about the scope in the directive, banks and insurances will become PIEs.

200 audit firms were doing PIE audits 6 years ago, now only 90: there is a huge market concentration. The reform will increase the number of PIEs’ auditors by changing the definition of PIEs as their number will double (1600).There is no discussion in Germany about enlarging further the definition but the PIE is just a regulatory definition.

The fact is that non-PIE entities are asking for PIE-like audits because of the stricter requirements. Many public sector institutions, not-for-profit, ask for stricter rules.

There will be a dramatic impact on the profession (inspection by public oversight: each audit firm that has more than 25 PIE audits will be inspected every year). Now only 6/8 firms are under close oversight. This number would definitely increase with the scope of the new definition.

The Ministry of Justice will be in charge of the scope of the definition, but this question is not in the focus right now.

A first drafting is foreseen early summer 2015.


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For many, the introduction of MAFR will have been the most controversial aspect of the EU Audit Regulation. It has given rise to division both within the audit profession and between Member States. Undoubtedly there are both pros and cons to MAFR.

But the critical question has to be whether its introduction will promote audit quality.

What is worrying is that such are the MS options regarding MAFR that inconsistent implementation by MS will result in a very fragmented and burdensome regime throughout the Union.

Initially, also, problems may well arise with the transitional provisions of Article 41.

Mandatory audit firm rotation is a new concept in Ireland. There are few indications so far on final policy decisions on this issue.

The Irish profession would prefer the most flexible solution, so it would favor the 10+10 and even 10+14 options. But we must also take into account the influence of the UK position as Ireland has a tendency to align itself with the UK on these issues. Indeed, Ireland’s auditing standards and ethical standards are those published by the FRC.


Chair : Aidan LAMBEDirector, technical Policy, ICAI, Ireland


This week the Irish government published its consultation on how to implement the options in the regulation and directive. But the consultation does not give any indication on the Irish government position on the many possible options.

This morning, we have asked the panel to address three key questions:

• what are the current provisions regarding firm rotations in their country?

• what are the expectations regarding EU provisions and options?• is there a dialogue on implementation between the profession and

public authorities?

‣ Roberto FRANCHINI, Member of ASSIREVI, Italy

Italy is the country with the most experience with mandatory firm rotation (almost 40 years now).The audit profession tried without success for 30 years to persuade the public authorities that it was not a good solution. And now the practice is spread across Europe in favor of the new legislation

Mandatory rotation was established in Italy in 1975 along with the audit requirement for listed companies and some other entities. At the time it was mainly state owned companies and large assurance companies. Banks and asset management companies were added in 2010.

Independence was obviously the fundamental reason behind setting up mandatory rotation but also maybe for political reasons. After a transitional period, the first audits were commenced in 1981 and the first rotation took place at the end of the 80's, the second took place at the turn of the century and the 3rd rotation during the last 4 or 5 years. Each cycle saw an increase in the concentration of audit appointments with the major firms.


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In 2005, the government introduced mandatory partner rotation with a 7-year on, 2-year off cycle. The initial idea was 5 on and 4 off but there was an alignment to the 8th directive.

Italy has a relatively small number of listed companies (between 200 and 300) so mandatory firm rotation has never been that disruptive as it may be on a market the size of the UK or the US.

Supporters of firm rotation in Italy cite “appearance” as being the key reason for having rotation. They argue that it helps build trust in the auditing profession. In fact, these supporters admit that there is no proof of improvement in audit quality. On the other hand, there is no clear evidence of deterioration in audit quality. Another reason that has been cited by supporters is the relatively low turnover in management of Italian companies due to most of the listed companies being controlled by families rather than being widely-held public companies. Slow turnover of management increases the familiarity threat.

The lessons learned from mandatory rotation:• Each rotation cycle brings a reduction in audit fees. Drops of 25-30%

of the fees have been seen and this increases risk of deterioration in audit quality. The regulator is aware of the situation but possible solutions to halt “low-balling” tend to conflict with competition law. So there has been hesitation by regulators to interfere with the fee process.

• Channel switching: we are seeing an increase in separation of roles with the new auditor doing only audit and the predecessor becoming preferred supplier of non-audit services

• Rotation requires planning and preparation for the tender• Rotation creates uncertainty and instability for professionals

especially in very specialized business sectors like banking and insurance and, in the long-term, could reduce the attractiveness of the profession


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• Rotation has created concentration with each rotation period. In 1980’s as much as 25% of listed entities were audited by smaller firms now it’s under 10% and close to 5 %

Team jumping has not been seen between firms in Italy firms after rotation.

Study by Bocconi University confirmed that firm rotation:• Increases fee pressure• Increases concentration, and• There is no evidence of improving audit quality

Regarding the implementation of the reform, the Ministry of Economics and Finance Is expected to maintain the existing 9 years, no extension is foreseen and partner cycle rotation will be maintained.

‣ Stéphane MARIE, French auditor

There was no mandatory firm rotation in place in France but statistically there is rotation under a 20-year period. We also experienced mandatory partner rotation under a 6-year period started in 2003.The engagement period is set at 6 years instead of 1 or 3 years in most of the other countries.

Mandatory rotation is mostly felt as a threat. While obviously seeking reinforcement of audit quality the European reform will lead to a more concentrated market. So how can we moderate these risks and the possible side effects of the reform?

As a matter of fact joint audit may be the only way to moderate the effects of the reform and our European colleagues should be interested in the French joint audit experience as:


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• Joint audit improves quality and professional skepticism;• There is an improvement in the quality of technical positions as the

two auditors challenge one another’s views;• It gives auditors more authority on their opinion / more value for

money;• Joint audit helps with the overlap period during mandatory rotation; • Joint audit improves independence with less familiarity, rotation of

task between auditors and cross review work;• Joint audit reduces concentration of the market.

Our opinion so far is that mandatory rotation may create concentration on the market and threaten audit quality.

The current debate about the tendering option shows no clear benefit compared to joint audit.

‣ Edelfried SCHNEIDER, CEO & Partner at HLB, Dr. Dienst & Partner GmBH & Co. KG, WPG-StBG, Koblenz-Frankfurt-Köln, IDW, Germany

There are two issues: external quality control / audit regulation. The German profession was reluctant especially in IDW: a common position was hard to find.

Part of the profession fought until the end against rotation, and was not fond of joint audit but ultimately took no position against it. So Germany ended up pushing forward the same position we had before the regulation.

As for the initial discussion regarding the rotation, the real trend now in Germany will be with a mainstream 10+10 although the profession in general is not in favor of tendering. The tendering process in Germany is not considered to guarantee enough transparency. Because of its cost, tendering would be only affordable with full transparency of process.


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Jumping team is considered to be a risk especially in very concentrated markets. For example, the Assurance market in Germany is very concentrated, with 1 firm covering 80 % of the market. Because of the expertise needed, mandatory rotation will cause the team in place to jump to the successor.

‣ Henry IRVING, member of ICAEW, United Kingdom

We all like status quo. It's good we should test and challenge public policy and change with 'what if' questions. We need to be true to our beliefs. MAFR is about perception. It cannot be right that at the time of the financial crisis the average auditor tenure in the FTSE 100 was 48 years! This has led to the CMA inquiry in the UK which concluded with an order for 10 year mandatory tendering, with equivalent implementation and transitional rules to the EU regulation and directive last month. This is a remedy to the apparent lack of competition in the audit market evidenced by lack of switching. It's not about independence, though, if successful it enhances perceived independence by decreasing average tenure. FTSE companies recognise this: the top 350 companies tendered 18 audits in 2012, 30 in 2013 and are expected to tender 56 in 2014 - before any requirement comes into force. This suggests a degree of pre-emptiveness, which may be driven by a need to demonstrate standards of governance above the legal minimum. Are there any bad effects from this increased level of tendering? It’s a competitive market anyway: over a recent 10 year period the 350


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switched 131 audits and also had 346 exits/entrants. Only 30% had no change. B4 Market shares were much the same at the beginning and end of the period. This level of activity indicates it's not much of a burden on business. MAFR will address the 30%, but it will possibly not impact much on the overall long term level of switching in the UK. Societal and market norms have changed. The public policy debate in the wake of the financial crisis has led this. In the past, if something went wrong it commonly sent a bad signal to change your auditor. It's not so much the case now.So, the profession should focus on making public policy work, for that is surely in the public interest. Clarity is good, progress towards a workable single market is good: this does mean challenging gold-plating, but also national protectionist policies to achieve a change that is in the public interest and not in the professions self-interest. We could focus on anti-avoidance: single tenders, walking teams, regulatory arbitrage. We could usefully address the measurement of tenure and concentration in the market (too big to fail - how does that impact on the audit?) and the management of quality under MAFR. The profession is expert in handling complexity. Let's use these skills in the public interest to make the change and a workable single market. As one Frenchman said «the status quo is not an option»!

‣ Jan Thijs DRUPSTEEN, member of NBA, Netherlands

Netherlands became a supporter of mandatory firm rotation though it is not yet in application in the Netherlands. We opted for a partner rotation for a 7-year period with a cool down period of 2 years, and in 2016 firm rotation. This position came through a strong stakeholder debate (issues raised about audit quality, loss of trust).


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Mandatory rotation is just one part of the process, other issues are considered as important in the Netherlands.We have to adapt and we think it will improve trust.

There are more than 1000 PIEs, more are expected in the future, and they will have to rotate. Most of the listed entities are subsidiaries from larger foreign entities,

We think that it is important to set up best practices for the transition between the audit firms so as to guarantee audit quality.

In the Netherlands 30 firms are licensed to audit PIEs, this is a small number considering the number of PIEs. It is unclear if mandatory rotation constitutes a competitive advantage in the market (90 % of the market held by the big 4) the outcome could even be more concentration.

On the trust issues, stakeholders argued about the governance of audit firms, remuneration of partners, and every issue related to the independence of the firms even in appearance. This was the opportunity for the profession to look inside itself to improve audit firm governance, remuneration rules, to make sure that the firms are working for public interest.

Expectations for the future:• Rotation cycle will increase from 8 years to 10 years, with a cooling

down period of 4 years, and partner rotation set at 5 years. Netherlands would not raise any options or an extension through tendering or joint audit.

• implementation of the regulation is expected before the end of the year.


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Unlike precedent items it is less controversial. What's new with the EU legislation? We will find out during this panel what the issues are. Are they related to quality? Is this a mean to put the auditors back on focus on their audit mission? Is it related to independence or the appearance? Is this an issue related to market concentration?

Questions:• What is the current situation in your country?• What would change through the implementation process?

Situation in the Netherlands: there is a white list along with a general prohibition of NAS for auditors of PIES.

When the law was discussed, NAS which are a benefit for the external users or the supervisory board can be performed. This white list had interpretation issues since 2013, so the Dutch institute has issued an interpretation. How to move from a white list to a black list (deemed as a technical issue by the government).

No views on cap yet except maybe related to cross border issues.

The Ministry in charge of implementation is in line with what the EU wants but is not willing to go one step further.


Chair : Jos VAN HUUTMember of NBA, Netherlands


‣ Jens RODER, Secretary General and CEO of NRF (Nordic Federation of Public Accountants)

4 of the 5 Nordic countries are in a situation where the IESBA code of ethics is the ruling guideline. There are stricter rules in Norway. The position of the profession is that, while we understand the need for having non audit services part of the regulation, the general point of view is that we would not like to see the end result moving far away from the code. We can accept the black list but we don't want any extension of the list.

About the adoption process, after the implementation of the regulation, we consider the extensive involvement of audit committees as a benefit. It creates closer involvement, dialogue and relationship between the supervisory boards of the companies audited and the profession itself. Previously non-audit services weren't really reviewed or pre-approved. It was only managed between the company’s management and the auditors. The involvement of the audit committee tended to take place after the event.Where this is going to lead us now?

There will be an impact on the structure of audit committees in the region. We are characterized by having a large number of small PIEs, with a large number not having provisions for an audit committee (not a direct requirement for an audit committee as the board can act as the audit committee itself). Smaller listed entities have elected to take that option. It has not been a problem until now.

The additional requirements that the regulation is imposing on audit committees will certainly lead to an increase in the number of audit committees set up by these companies, because the amount of work that has to be done and the relationship between the audit committee and the auditor will intensify.

As for the relationship with regulators: it should be possible to comply with the regulation, subject to some transition arrangements, but


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this raises the question of the options. Government officials have to start making choices on non-audit services provisions and other options as well.

We don't want additional gold plating on the regulation, essentially because it is difficult to assess the impact of the options. Adding further requirements and burdens seems unhelpful. There is also the opinion that the appearance of independence will be strengthened on non-audit services, but we don’t have any hard evidence that this makes a real difference. The firms may have made some choices as there is no doubt that the revenue stream from advisory and non-audit services is increasing rapidly, whereas the revenue on audit services is stagnating.

There will be an impact on the major firms’ business model, based on the value proposition when the regulation comes into force, especially taking into account the very restrictive provisions on non-audit services.

The main issues for us are: audit committee involvement in the pre-approval process, audit committee relationship, and maintaining a liberal approach to the provision of non-audit services, especially related to taxation.

‣ Gerhard Ziegler, resident of WPK, Public Auditor & Tax Advisor, Managing Partner of BANSBACH GmBH, Germany

Current situation is ruled under commercial code, public account act, etc. The black list approach can be found in these provisions. Article 5 of the regulation is directly applicable in Member States from June 2016 and the extent of additional entrustments to the national legislation depends on the exercise of options by the German legislator.

If the German legislator makes extensive use of the exit option of art 5 section 3, we expect no material changes for tax services for example.


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In certain areas such regulation does not provide Member States options, a more restrictive approach will apply (human resources services, etc.)

What are the expectations from the Profession? : the management board and advisory board of the Institute are currently in the process of forming an opinion.

• The German legislator should allow prohibited non-audit services of art 5 section 1 regulation as far as section 3 provide for this possibility

• Provision of tax services, evaluation services by the auditor should be maintained as far as possible

• There is an opposition to the 70 % cap

State of the discussion with regulator:The first official statement of the profession should be transmitted to the federal Ministry of Economics before Christmas 2014First draft of the implementation act is expected in May 2015

‣ Mireille BERTHELOT, French Auditor, Vice-President of CNCC, France

In France there is a black list quite close to the list of prohibitions in the European regulation, and a white list of permitted non-audit services. This comes from the audit regulation enforced in 2003 which stated a principle of global ban on non-audit services. An exception was subsequently introduced by the Parliament in order to grant exceptions to the ban of non-audit services but assorted with 2 conditions:

• the service has to be closely related to the audit work and financial information

• a professional standard (called NEP) which defines the way the permitted service can be provided has been enforced.

In France you cannot provide non-audit services until you are authorized by a specific standard.


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9 standards (NEP) have been issued and published covering different areas of services such as:

• Due diligence relating to acquisitions and sales of companies;• Consultation• Internal control in relation to accounting and financial information

processes• Services related to sustainability area

This approach put in place 10 years ago has proven to have some drawbacks:

• the setting process of standards is very long (1.5 to 3 years- the restrictions imposing that these services have to be directly related to the financial information does not take into account the increasing proportion of non-financial information in the corporate communication and the need to secure some or all the data provided to the market.

• as a consequence of this long and burdensome process a significant gap can exist between the need expressed by many companies and the authorized standards

Our main expectations:

• No gold plating: keep the list of prohibitions and the 70 % cap (no decrease of cap) as it is defined in the regulation

• Remove from the French legislation the current white list approach as it is no longer compatible with the European legislation based on a prohibition list. That means that subject to monitoring measures making sure the non-audit services respect the general principles of independence from the directive and from the national regulation (as receiving prior authorization by the audit committee and the related fees do not exceed the cap of 70% by a 3-year period), there is no longer ground for restricting NAS asked by issuers.

As we expect from these provisions: what is not prohibited should be allowed.


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We could then promote a professional tool based on ethical principles so as to assess the compliance of non-prohibited non-audit services with our professional standards (no management role, no advocacy role, no self-review situation). It could be used as a common tool between auditors, companies and oversight and of course understood by the market. This will also help audit committees to perform their duties.

We also wish that the same rules or principle based rules apply for PIEs and non-PIEs.

‣ Sue ALMOND, External Affairs Director, ACCA, United Kingdom

We think that these issues have a broader impact on cross border activity.ACCA has tried to keep as close as possible to the international standards and the IESBA code specifically in this area. Many firms are already committed to the code as a minimum set of standards for their work. We also have a consistent support for the role of the audit committee because they have a critical role in shepherding much of the work that happens in that area.

In the UK, ethical standards are not imbedded in the law. They adopt a threats and safeguards approach very similar to the IESBA code in contrast with the black list / white list approach. There are very specific restrictions for listed companies such as evaluation, litigation support, accounting support…

In practice when we look at the change that is needed / for listed companies little change expected.

Biggest issue focused on listed companies and PIES.


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Implementation: two levels of consultation and implementation • The government department for business innovations and skills which

is responsible for this implementation and the financial reporting council (ethical rules). The political calendar could impact the process with general elections occurring in 2015

• We expect a consultation before Christmas / with a more flexible approach

• FRC consultation could be more exciting (status quo or tightening rules) as FRC were looking at adding restrictions on non-audit services back in 2011. So they could take the opportunity to consult on that

Expectations We wish to avoid the nightmare that would occur if too many differences between the Member States were caused through gold plating and choice of different options.

•


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The directive leaves the possibility for Member States to submit SMEs to an audit and requires a high level statutory audit within the Union for all entities (same audit level). Audit appears so in coherence with the same references to ISAs for all assignments. It is an important point especially toward European harmonization

The directive introduce two new concepts• Proportionate audit• Proportionate quality control

But this is not new in our professional environment. Audit in SMEs is already required in some countries and it should be recalled that IFAC has offered guidance on the use of ISAs as part of the audit of SMEs. The booklet gives us much information regarding the countries situations. We note that audit requirements regarding SMEs are very different between countries. Thresholds are different as well as the numbers of entities concerned.

This round table is the opportunity to assess the implications of these novelties through a few questions regarding:

• The current state of the regulation• Market needs• The meaning of proportionate audit and proportionate quality

control• The possible consequences on the nature of audit insurance


Chair : Didier-Yves RACAPEPresident of CRCC Paris, France


• The state of mind of local institutions and governments on these issues

• The way to achieve European harmonization on this issue

‣ José Maria BOVE, Vice President of ICJCE, Spain

The question of proportionate audit is something necessary and logical. You don't have to fall into excessive requirements to do only administrative work, and in the end the company expects you to identify all the major problems in the balance sheet and in the profit and loss account

In Spain we understand the rules are well defined in the auditing standards allowing for you to select these procedures that are not necessary in performing the audit of a small entity and which would take time, take hours and thus could be eliminated.

The question is how a regulator in a situation of problem will identify your options and decisions. That's why in Spain we are working closely with the regulator in order to identify these matters which will not create conflict of interest in the future.

You also mentioned the possibility of identifying another insurance problem: the value of an audit whatever the size of the company it is applied should be. There cannot be audits of different quality. The ISAs already have a definition of a review, a compilation, and these products are used when the market needs them but we felt in Spain that we do not favor another form of audit that would be a review. This would create confusion in the market. This will be negative for the profession and have an impact on the small and medium practitioners.


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‣ Brendan Murtagh, member of ACCA, Ireland

My views on proportionality come from the fact I am a SMEs practitioner and a member of IAASB so responsible for these standards we are talking about. Inherently the issue around proportionality is to understand the standards themselves. We're talking about proportional application and not proportional understanding. It's important because an audit is an audit and whether its public policy, public confidence, the market requires an audit to be an audit. And it really doesn't matter if the company has 10 euros of turnover: if it is an audit it has to have the same level of integrity.

The issue then comes as to whether the standards make that a more onerous process for smaller entities. As of the moment we have 37 standards with 500 requirements in them (including the standards on quality control). If you look through those standards you can immediately eliminate a number of them. SMEs don't have to look at the considerations for group audits for example. If you go through the standards you can see those which actually don't apply.

Taking the example of the standard related to the terms of engagements (ISA 210 /16 requirements); from an SME/SMP perspective you will have to deal only with 3 of the requirements of that standard. You need to look at the standard, understand the standard so as to know what is really applicable. This is an education challenge as opposed to a change in the standards.

The other thing to recognize is that when the standards are drafted in the first instance there is always the equivalent of a stand back to say are there specific SME/SMP considerations that need to be brought into play. There are already in the standard considerable amounts of consideration on how they would impact on the audit of SMES.

On the broader issue of the audit of SMEs in Europe, 25 out of 28 Member States have already adopted ISAs. And if you adopt ISAs you take


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with that ISQC 1 and the IESBA code. And the standards and the code are all dynamic in their nature. If these standards are widely implemented throughout the European Union it's difficult to see, if we accept the proportionality aspect, how the transposition and implementation will pose much a challenge to the SME community.

In fact that is required by the directive is already being done except in 3 Member States.

‣ Michele Casò, Member of CNDCEC, Italy

Current situation in Italy Currently in Italy the audit exemption thresholds are the same as the upper limits in the 2006 Accounting Directive. Furthermore, an audit is required even for smaller companies if that company controls one subject to mandatory audit and then if that company must prepare consolidated financial statements.

Market needs Among the users of SME's financial statements for sure there are banks. Therefore, to discuss market needs a good starting point is to look at the policies that banks use to assign ratings to their clients. According to the policy of one of the largest banks in Europe the existence of an unqualified audit report leads to a better rating. However the existence and the content of an audit report must be taken into consideration only for customers whose turnover exceeds 50 million euros which is way above the threshold in the accounting directive.

For companies whose turnover is below 50 million euro, a rating is assigned without taking into account the existence and content of the audit report. However the policy states that any rating can be manually adjusted by up to two notches (up or down). For smaller customers the existence and content of the audit report could potentially be one of the reasons leading to a “manual” adjustment (and, thus, assuming the audit report is not qualified, to a better rating).


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So the audit report can still be relevant, even for SMEs, because it can lead to better credit ratings, lower cost of capital and to a better allocation of capital.

Adoption of the audit directive in Italy The debate in Italy has not started yet. It is not even sure whether it will happen. This is because there is a major constraint in Italy. A law approved in 2011 allows the Italian Parliament to introduce in the Italian legislation only the requirements that are mandated by any piece of European Union legislation; the Italian Parliament cannot introduce additional requirements unless they do not create additional costs. This law applies in any field, not only accounting and audit.

Therefore, when a Directive includes an opt-in mechanism (such as the one on the audit of small undertakings where a purely national approach is envisaged) the option (in Italy) does not really exist. The only solution would be to demonstrate that with the additional costs come benefits that are far superior.

Evolution of audit in SMEs The discussions are at a very early stage. The Italian institute in its dialogue with the Government during the public consultation on the adoption of the Accounting Directive reminded the Government:

• the outcome of a study published in 2008, which concluded that companies with audited financial statements are 30 % less likely to go bankruptcy;

• that the audit is not an administrative burden, but it is part of the accountability process that is required to companies which have the benefit of the limited liability regime;

• that the cost of an audit could be potentially recovered through the assignment of a better rating and the resulting lower cost of capital;

• that there are a number of instances where the size of a company does not matter and it would be in the public interest to have an audit, such as for companies which receive government grants;


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• that financial statements are the basis upon which income tax is calculated; an audit would therefore provide a shield against tax inspections as it would be more difficult to challenge the tax calculation on the basis of improper accounting.

Poor regulation has a cost to society. But lack of regulation also has a cost to society.

‣ Krzysztof BURNOS, KIBR Council member, Chair of the SMP Committee

Proportionality is a magic word which can save SMEs from the overregulation.

Proportionality in the current European law is much more than just proportionality of the auditing process. The proportionality is seen in every aspects of the system. We see that there are quite different institutional solutions for the statutory audit system of non-PIEs and for PIEs. Within the regulation we can see also proportionality on PIE external quality insurance control (small and medium size PIEs: minimum cycle of quality control is 6 years, for big companies 3 years).

Referring to proportionality of audit relating to SMEs, I don't think that the intention of European policy makers was to define something like simplified audit or proportionate audit. The wording came from the minds of politicians and was reshaping the call of SMPs which wanted to have regulation that will be used to implement in a proportional way. In case of ISAs we as SMPs insisted that external inspectors should remember that ISAs are proportionate, that small audit firm is not big audit firm. This proportionality we can see in the European regulation should be that way.

When we saw the first draft of the directive there was a recommendation about implementing a review for SMEs, review that provides a lower level of assurance. So we tried to anticipate a black


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scenario in which the audit threshold would go up. Then what can we do? We would like to have ready made products, regulatory products. We try to educate our regulator that apart from the audit there are other global standards on review. This review is still difficult to understand not by the regulator but by SMEs and auditors. It is the main issue on promoting and developing these instruments on the market.

But fortunately the audit threshold would remain the same it was before the audit reform in Poland. So no necessity to push the review forward but we know that in the long term the debate on alternative to audit will be back.

‣ Florent BURTIN, French Auditor

In France an entrepreneur has the choice of the form of its company and only one form out of seven will lead you to have a compulsory audit. However when your business is growing, even if you do not choose the type of company that does require an audit, when you cross specific thresholds (regarding total assets, turnover, number of employees) you would have to perform an audit anyway. On top of this we have the specificity of joint audit. When legally you need a consolidation you need two auditors in the company (thresholds are as following: total assets of 15 million €, turnover 30 million €, number of employees 250)

We are currently auditing only 3.2% of the SME market. The market in France is very specific. We have 3.5 million companies in France and 3.4 million have less than 20 employees. We audit 68 % of the 100 000 biggest companies. When we talk about increasing the threshold in France it will dramatically reduce the number of companies we audit in the SME market.

This would have a dramatic impact on the profession because when we audit companies we also perform other tasks like inform the company if there is an issue on ongoing concerns, inform justice authorities in case of presumed criminal offence. Our involvement gives confidence to the market,


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and we also have a role to train entrepreneurs about the state of the legislation in France.

SMEs is not a large market but it is also a training ground for small and medium audit firms that will be able to audit PIEs later on.

We don't agree with the point of view, shared by public authorities, that an audit can be a burden. But we already anticipated the fact that we have to work differently for small PIEs and SMEs. For them we can decrease the time spent to perform an audit when the conditions are met (accounting is very simple, chartered accountant in the company, CEO is directly works on internal control procedures, and there are only a few partners in the SME). The opinion will be based on the same kind of work, have the same value but you work on different types of information. It has an impact on the cost which is also reduced.

We think it is a good way to not have a “proportionate audit” but an audit dedicated to SMEs. And we should not make a difference between PIEs and SME regarding the audit report and opinion.


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‣ Didier-Yves Racapé : En cette fin ce journée qu'est-ce que l'on peut retenir des propos tenus ?

‣ Olivier Boutellis-Taft : C'est une question difficile, mais avant d’y répondre je vais quand même prendre l'occasion de dire un mot en Français puisque nous sommes à Paris. Donc je voudrais remercier les CRCC de Paris, de Versailles, la compagnie nationale - la France - de nous avoir accueilli aujourd'hui. Je pense que nous avons eu une conversation intéressante. But now I'm gonna switch to English so that everybody can understand whatever I have to say. That's a difficult question, because it means in fact what do you remember of this day? And I think a lot has been said today. But to be honest with you, a lot of things that I think we have already heard in the past 5 years. I'm not saying that we are repeating ourselves necessarily but I think that we should focus on the fact after 5 years of debate we are still more or less saying the same things again. It seems to me, and we had some indications of that in the different panel discussions, that the world has moved on and we have to take notice of that. So I think the key is that there are two possible answers to your question: either we are not listened to - or we are not listening. In both instances this is very good food for thought for us when we go home after this meeting: we


Olivier BOUTELLIS-TAFTCEO of FEE Didier-Yves RACAPEPresident of CRCC Paris

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need to think about why this is. It is important for the future of the profession.

I think there was also a very interesting session this morning. With the representative of the business association, because that actually may be part of the answer to the question I just raised. It is important that we do not only speak to the outside world but also listen to what the outside world has to tell us. Then if we start listening to the expectations, trying to understand why policy makers have certain views and certain approaches we will be able to come up with better answers and be more convincing in what we have to say. I think this is something we should actively think about. Another important thing I found striking today was that it is clear that we now have to make this reform work, whether we like it or not. That's where we stand.

So I think we had a very good conversation today. It seems we need to continue, but to continue taking into account the lessons that we've learned today. We have to move on. That's really important.

‣ Didier-Yves Racapé:

We are at the end at this first European audit meeting. For a few of us it was the first time we could share a moment and talk together. I think it was easier and friendlier to be just between us. We think that all the stakeholders, everyone, was able to speak freely. The exchanges were dense and rich. Olivier made a first synthesis, the CNCC will prepare in the coming weeks a synthesis of all the event and it will be sent to all institutions and it will also be available on the website. We know that we are at the beginning of this process with our respective national authorities. There are still a lot of subjects that have not been addressed today like the role of the supervisory authorities, the free movement of professionals in Europe and some other issues. We are still a long way from the European harmonization. We still have lots of work to do and we would be happy if we could repeat this experience. I don't know where it will take place. But if there is a candidate for organizing a second European meeting, we will be able to speak about a European tour on Audit after the second one. And after we could maybe meet if Brussels in June 2015 at FEE.


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‣ Olivier Boutellis-Taft:

You are right. This FEE conference will be an important meeting organized on two days. On day one, we will be looking at the short term future of the profession: one year before the deadline for implementation of the reform. On day two, we will be looking at the longer term future: the future of the audit, to follow up an important discussion paper published by FEE earlier this year. If in 5 years’ time we don't want to be exactly in the same situation as today: complaining about how regulators are looking at us and imposing heavy-handed regulation on us. Moving forward, the real debate we need to have is what is the societal role of the audit profession. How do we look beyond the next 3 or 4 years.

You mentioned the word harmonization and I can't refrain reacting to that. What we've seen today is what we always see when we talk about harmonization. Everybody is happy to harmonize but in reality we are talking about 28 different approaches to harmonization. The French want to implement the French solution in the other 27 EU member states; but the Germans want the same thing for the rest of Europe and so do the British and everybody else. That is the mindset of governments when they are coming to the negotiation table and that is the reason why today we have a regulation with 17 options. And now the same people have to make this work and the word harmonization comes back. But when, you bring professionals from around Europe to speak about these matters, we see that everyone is speaking from their own perspective. We may blame regulators and legislators for missing the harmonization objective, but to be honest we are not much better and are often narrowly focused on our own territory. That’s also why as a profession we need to look forward if we want to have a European market. And today was a good step forward.


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