Statutory audits should be more independent

But some rules may be harmful.

New rules should improve the quality of audits. New rules should improve the quality of audits. (Source: SME)

SLOVAKIA may soon adopt new rules for auditing that the European Union pushed through last year in order to clear any suspicions of conflict of interest in the process. Though some measures may improve the situation, others may result in several smaller firms going out of business, auditors warn.

Parliament advanced the new rules for statutory audit to the second reading at its September 22 session. The aim of the new provisions is to ensure a quality standard for audits and secure their independence. It also introduces stricter conditions for statutory auditors and new powers for the audit committee.

“It will significantly increase regulation of the auditing profession,” Ondrej Baláž, head of the Slovak Chamber of Auditors (SKAU), told The Slovak Spectator.

Furthermore it will change some practices which up until now were difficult to implement in practice. It will be, for example, less difficult to prove the good reputation of auditors, he added.

Though the Ernst & Young (EY) auditing firm agrees with the general aim of the changes, they have certain reservations pertaining to the rules with which the EU wants to achieve its goals.

“Based on our experiences and research we believe that mandatory audit rotation, restrictions on non-audit services and other new measures resulting from the EU initiative may have negative impacts on both the auditing profession and our clients,” Dalimil Draganovský, partner and head of assurance of EY in Slovakia, told The Slovak Spectator.

Stricter rules for auditors

The draft law is based on the EU directive passed in April 2014 that all member states must adopt by 2016. Its aim is to close the gaps revealed by the financial crisis, especially regarding banks and financial institutions. It should also open the audit market to more companies, not only those that are part of the so-called big four, i.e. Deloitte, EY, KPMG and PwC, the website reported.

The directive introduces, for example, the mandatory rotation of audit firms every 10 years. This means that one audit company should provide its services to the so-called public interest entities (i.e. banks, insurance companies, municipalities and self-governing regions, pension fund management companies, and selected firms like automotive and chemical companies) for not more than 10 years. This period may be prolonged by another 10 years if the auditor succeeds in a new public competition, or 14 years in case of joint auditing.

Moreover, audit companies have to submit reports with detailed information about completed audits. 

Though the rules should strengthen the independence of auditors, firms are afraid of the harmful impacts on their profession, SKAU wrote in a press release. Regarding rotation, for example, Baláž warns against prolonging and complicating the entire auditing process.

Slovak law more balanced

All in all, the EU proposed more detailed rules and stricter requirements for those providing the statutory audits in public interest entities. 

“A common regulatory approach should enhance the integrity, independence, objectivity, accountability, transparency, and reliability of statutory auditors and audit firms carrying out statutory audits of public interest entities,” the Finance Ministry claimed in the explanatory statement. 

It is however possible to modify the rules in the national legislation, especially in regard to caps on fees for non-audit services and total fees for one client, the type of provided non-audit services, the content of an audit report, or the length of statutory audit and mandatory rotation.

The Slovak law focuses on changes to the provisions on public interest entities and their duties, the increase in independence and guarantees of audit quality, and the internal organisation of statutory auditors, the TASR newswire wrote.

It also changes the composition and powers of the audit committee which public interest entities must establish.

It also pursues the introduction of more effective mechanisms for reporting violations of the EU directive within audit companies. Furthermore it proposes moving some powers from SKAU to the Office for Audit Supervision, TASR wrote.

Compared to EU legislation, the Slovak version is written in a rather balanced way as it does not use the utmost restrictions available within the EU legislation framework, Draganovský said.

Some provisions in focus

On the other hand, they criticise the broad definition of what the public interest entities are, as well as the restrictions in provision of tax services for audit clients.

Also Baláž criticises the definition of public interest entities in the Slovak draft law, saying it should not include more subjects than the EU requires. Moreover, the term will be defined in three laws, which may be chaotic, he added.

Bart Waterloos, partner of VGD – AVOS Bratislava says that the rules for public interest entities will be much stricter than the EU requirements.

SKAU also disagrees with changes to financing the Office for Audit Supervision. Under the new rules, it will be financed by auditors and audit companies which is, according to Baláž, at odds with the European legislation requiring independent financing.

“We also do not think that a significant increase in the office’s powers when it comes to checking the education of auditors is required by the changes to the European legislation,” Baláž said.

Moreover, there will be an increased administrative burden in documenting the statutory audit process and work performed, which will require more time and resources, Waterloos added. 

The black list

The EU directive also introduced a kind of black list of non-audit services provided by auditors. They will, for example, have limited possibilities for providing clients, whom they already audit, with tax consulting or accounting. The separation of these activities should prevent potential conflicts of interest, according to

Though SKAU accepts the EU intention to strengthen the independence of auditors, it warns against some negative impacts.

“Mostly the medium-sized and small companies can survive only thanks to offering non-audit, and their clients expect this kind of help,” Baláž said, as quoted in the press release.

The auditors addressed by The Slovak Spectator in a previous interview supported the initiative. Several EU member states have even introduced the lists in their national legislations, said Ján Bobocký, director of audit at Deloitte in Slovakia, adding that also most audit networks serving multinational companies have already introduced and implemented similar lists internally.

The impact on Slovak clients would be limited, he added.

“On the other hand, introduction of blacklists by each EU country would make it even more difficult for audit firms to monitor all the different rules for every group audit and every country,” Bobocký continued.

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