In the wake of the EU audit reform, the much anticipated bill n°6969 on the audit profession (the “Law”) was passed by the Luxembourg Chambre des Députés on 14th July 2016.
1 Audit reform, why now?
Following the 2008 financial crisis, audit professionals were caught in the spotlight with the profession being fiercely criticised amid concerns over the auditors’ failure to raise the alarm well before the global markets crashed. A combination of a lack of confidence in the profession and the need to reinforce the rules regarding the statutory audit of annual and consolidated accounts triggered the European Commission to reform EU audit market legislation.
New European legislation was adopted on 16th April 2014 in the form of Directive 2014/56/UE concerning statutory audits of annual accounts and consolidated accounts (the “Directive”), and Regulation 537/2014 on the specific requirements regarding statutory audit of public interest entities (the “Regulation”, together with the Directive, the “EU Legislation”). This EU Legislation provides, along with mandatory provisions, a number of baseline measures and affords each EU member state the flexibility to make further adaptations to the legislation within their local jurisdictions prior to the EU Legislation implementation deadline on 17th June 2016. This flexibility is restricted to three principle areas namely, the duration of the audit engagement; the definition of a public interest entity and the prohibition of the provision of certain non-audit services.
Thus the Law implements the EU legislation and repeals the Luxembourg law of 18th December 2009 on the audit profession (the “Repealed Law”).
2 What’s new?
(a) Broader attributions for non-approved statutory auditors
As a reminder, the Repealed Law distinguished between two categories of auditors (i) approved statutory auditors and audit firms (“Approved Statutory Auditors”) and (ii) non-approved statutory auditors and audit firms (“Non-Approved Statutory Auditors”).
The distinction between these two categories resides in the fact that the Repealed Law specifically forbade Non-Approved Statutory Auditors from performing certain activities which are exclusively reserved for action by Approved Statutory Auditors. Thus the Repealed Law provided a much stricter regime regarding the access to the profession of Approved Statutory Auditors who are also submitted to rigorous controls by the Commission de Surveillance du Secteur Financier, the Luxembourg public financial supervision institution (the “CSSF”). However, this distinction was criticized by the Conseil d’Etat which highlighted the fact that the Repealed Law’s restrictions on the nature of the tasks that Non Statutory Auditors may perform results in there being no real difference between the permitted activities of Non-Statutory Auditors and certified accountants.
Clearly the legislator has seized on the Conseil d’Etat’s observations and has radically revised this distinction. Indeed, the Law now allows Non-Approved Statutory Auditors to exercise all audit activities except for one, the statutory audit of annual accounts, which shall remain the exclusive preserve of Approved Statutory Auditors. This is clearly in line with the Regulation, the main objective of which is the enforcement of much stricter controls on statutory audits.
Consequently, Luxembourg entities may now request the services of Non-Approved Statutory Auditors for contributions in kind, mergers / demergers, liquidations and interim dividend distribution.
(b) Prohibition of certain non-audit services
With the independence of statutory auditors and the prevention of conflicts of interest being pillars of the European reform, a number of non-audit services provided by auditors have been specifically prohibited by the Regulation. This restriction applies in the areas of bookkeeping, payroll services, internal control and risk management, certain legal services, internal audit and tax services. However, Luxembourg opted for the ability to allow certain tax services, such as preparation of tax forms, calculation of direct, indirect and deferred tax and the provision of tax advice under certain cumulative conditions prescribed by the Regulation.
(c) Luxembourg’s take on mandatory firm rotation
One of the core requirements set by the EU Regulation is a ten year audit firm rotation for all public interest entities (“PIEs”) allowing each member state the option to either (i) adopt a shorter term of rotation or (ii) extend the term once for a maximum of (a) ten years, if a tender is undertaken or (b) fourteen years, if a joint audit is chosen.
The definition of PIEs is clearly outlined in the Regulation and is also set out in the Law. By way of illustration, these include all credit institutions (whether listed or not), all insurance undertakings and any entity both governed by the law of an EU member state and listed on a regulated market.
Luxembourg opted for the option to set a 20-year maximum duration for an audit engagement by a PIE, with the obligation to perform a transparent tendering process after ten years. It should be noted that a 4-year cooling-off period follows the term of the audit engagement. It is only after such a period that the auditor may undertake the audit of the entity again.
(d) Third-party claims to be filed with the CSSF
The Law also enforces the role of the CSSF by providing the option for this institution to receive third-party complaints regarding the statutory audit of accounts and to work with such third-parties to arrive at an amicable settlement. A ‘third-party’ entity may include all natural and legal persons, including the entity itself, having a claim regarding the statutory audit of accounts of the said entity.
In the comments provided by the legislator, it is emphasized that the CSSF shall not act as a mediator. This raises questions when read with the provisions of the Law, indeed, the role of the CSSF seems somewhat limited if it can only liaise with the plaintiff in order to come to a settlement.
3 When will it apply?
As the implementation deadline for the EU Legislation passed on 17th June 2016, the clock was ticking and pressure was on to pass the Law quickly. On July 14, 2016, the Law was adopted by the Chambre des Députés and will come into force following its publication which should take place in the very near future.
