Financial Services Ireland

The practicalities of audit rotation

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The practicalities of audit rotation

The new EU audit legislation means that a lot more Public Interest Entities are going to be organizing audit tenders over the coming years. Having participated in a significant number of tenders over the years, we’ve got strong views on how they can be managed most effectively

Public Interest Entities (PIEs) are getting to grips with the practicalities of EU reform on audit rotation and the limits on non-audit services, working out their transition plans and strategies for the procurement of professional services and making the critical decision on when and how they should tender. The scale of the reform means there are huge practical implications on planning and managing the process of audit rotation.

While some companies are getting on with the job — accelerating the tender process and picking the best teams — others are taking advantage of the transition rules to delay the tender for as long as possible. However, some entities have very little time for transition, and that in itself creates significant risks.

Whichever route is taken, PIEs need to focus strongly on transition risk. Boards, audit committees and investors alike should take a cold, hard look at the strategic issues the tendering process raises. How, for example, can you maximize your choice of auditor? How do you manage independence — for instance, how will you source non-audit services (NAS)? Independence can’t be achieved in a day. Making sure that the auditor is independent can be a major challenge for PIEs, as well as being at the core of auditor objectivity. Many PIEs underestimate how difficult it can be to ensure that all services provided are fully compliant with the terms of the EU legislation.

Experience on recent tenders suggests that, if they can, PIEs should allow at least 18 months before the formal audit tender begins, in order to manage independence properly. This window enables everyone to plan the transition properly. The new EU rules have specific prohibitions for the year in advance of appointment. They provide for a “coolingin” period, i.e., the prospective audit firm cannot provide statutory audit services to 3/7 “It’s critical for organizations to decide their key buying criteria well in advance.”

The future of assurance a client if it has been involved in specific activities in the prior year: designing and implementing internal control or risk management procedures related to the preparation and/or control of financial information, or designing and implementing financial information technology systems. In those countries where mandatory periodic audit rotation has already been introduced, companies have, over time, become increasingly acquainted with the process and conditions. More and more are building data rooms and helping to share information between audit firms to allow the tender to proceed.

Eoin MacManus

Managing Partner, EY Financial Services
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