Interesting article recently in the Economia publication discusses new EU audit regulatory changes and whether UK companies are prepared for these changes to the audit rotation.
Nearly 20% of UK companies are “woefully unprepared” for new EU audit regulatory changes, a study has found
A survey of FTSE 350 business leaders by EY has revealed that the majority of businesses are still underprepared for the changes and face significant cost implications.
The reforms proposed by the European Parliament mean listed companies will have to tender their audit contract every 10 years and rotate their auditor every 20 years.
There is also a list of non-audit services that the external auditor will not be able to carry out. These reforms will come into force in the UK in June.
The survey found 19% of the 100 chief financial officers, tax directors and audit committee chairs surveyed did not know when their company needed to tender or rotate its audit, and 28% said they did not fully understand the restrictions on non-audit services.
It also found 58% of companies still do not have a full strategic plan in place.
Businesses said they worry about transition costs, the general disruption and the possible changes to accounting judgments. More than half (57%) expect the transition costs to be 10-20% of their annual audit fee, while 21% believe it could cost 20-50% of their audit fee.
Hywel Ball, EY’s managing partner of assurance, welcomed the news that more than half of the FTSE 100 companies have tendered their audit since the new regulations were announced.
“But we haven’t seen the same level of preparation among the rest of the FTSE 350, with less than a quarter having tendered so far,” Ball warned.
Jason Lester, EY's managing partner for tax in the UK, also warned that the new audit rules would bring implications for the procurement of other professional services across their companies, as many would have to review their non-audit professional services providers.
A large number of businesses (61%) said they plan to invite tenders from at least one non-Big Four firm.
However, in the last six months, there have been 25 audit tenders completed by FTSE 350 companies, and none have been awarded to a non Big Four firm.
Ball said, “We remain sceptical as to whether the reforms will create greater choice in the audit tender market.
“In fact the planned restrictions to non-audit services may mean that some companies may actually have less choice, if they decide to keep one of the audit firms as their tax or corporate finance advisor.”