New EU audit reforms impacting Public Interest Entities (PIEs), which come into effect today (17 June 2016), could open up a £10bn market for advisers, according to accountancy and business advisory firm BDO LLP.
Public Interest Entities (PIEs) – chiefly companies listed on EU regulated markets of which there are approximately 2,500 registered in the UK – will now be required to tender their statutory audit at least every ten years. Mandatory audit rotation will be enforced at 20 years.
The EU Directive also places strict limitations on the non-audit services that a group’s audit firm can provide. A breach of any of the requirements in relation to PIE audits, even an immaterial breach, could affect the auditor’s ability to issue an audit report.
The latest regulatory changes are aimed at shaking up the long-established relationships between businesses and their auditors, to increase competition in the market and improve the quality and independence of audit services.
According to BDO, which analysed 895 UK registered listed entities[1], £10bn worth of audit and non-audit services could swap hands between accountancy firms in the next ten years due to the new legislation.
The big ticket audits will be well defended by current auditors. But the separation of non-audit services is likely to require more radical change.
The non-audit fees of UK registered PIEs provide a huge opportunity for non-Big Four firms to win conflict work and build relationships and credibility with businesses.
Jo Gilbey, partner at accountancy and business advisory firm BDO LLP, says: “Today marks a turning point for the profession. EU audit reform has played a big role in the quality and independence of the audits of large companies in the last few years. With the referendum looming large, there’s never been more discussion around EU law affecting UK business.”
Sceptics say mandatory rotation will simply continue to feed the pipeline for Big Four firms. Since the audit reform of FTSE 350 firms, mandatory rotations have seen new auditors put in place, breaking up audit relationships spanning decades. However, most auditors were replaced by another Big Four firm.
Gilbey adds: “We have always believed audit reform is a long-term game. Genuine opportunities to win the larger company audits are likely to come to fruition in the second round of rotation. That said, the opportunities presented now are vast, particularly in the non-audit services market.
“The time for careful navigation of rules is over. We expect all PIEs – and many of the larger AIM companies – will seek a strict separation of the provision of audit and non-audit services.”
[1] Credit institutions and Solvency II Insurance undertakings – also defined as Public Interest Entities – are not classified in the data sets available and therefore not included in this research. AIM companies are not defined as Public Interest Entities and were also excluded.