New legislation of the European Parliament and of the Council on specific requirements regarding statutory audit of public interest entities

Transcription

1 New legislation of the European Parliament and of the Council on specific requirements regarding statutory audit of public interest entities Alfi position paper Recommendations for Luxembourg implementation Version 19 December

2 Version 19 December

3 Contents I. Introduction... 3 II. Scope of the Regulation... 3 III. Recommendations for Member State options... 4 IV. Other considerations / interpretations Version 19 December

4 I. Introduction This document has been prepared to provide views on the EU audit legislation adopted in April 2014 by the EU institutions. The legislation entered into force on 16 June 2014 and its provisions will be applicable to the first financial year starting on or after 17 June 2016, with the exception of mandatory firm rotation which is subject to transitional arrangements. The legislation comprises two legislative instruments. The Directive 1, which needs to be transposed into national law, applies to all entities required to have a statutory audit. The Regulation 2, which is binding on all EU member states, introduces further requirements for Public Interest Entities (PIEs) in the EU. This document focuses on the Regulation as it will significantly impact the governance of Luxembourg investment funds. Although the Regulation does not need to be transposed into national law, member states will need to legislate with regard to the implementation of their chosen options. In the sections hereafter, Alfi provides its views and recommendations with regard to the various options. II. Scope of the Regulation As indicated above the Regulation applies to EU PIEs. The definition of EU PIEs is provided in the Directive which includes a specific list of EU entities. Each Member State may also designate other entities as PIE, for instance undertakings that are of significant public relevance because of the nature of their business, their size or the number of their employees. Alfi would not be in favour of broadening the definition further as we believe it would add complexity and cost. Although investment funds (including UCITS and AIF) are not included in the list of PIEs as per the definition, they are in the scope when they are admitted to trading on a regulated market of any Member State within the meaning of point 14 of article 4 (1) of Directive 2004/39/EC ( EU Regulated market ). Many Luxembourg investment funds are currently listed on the main market of the Luxembourg Stock Exchange: an EU Regulated market. Although investment funds are not traded through the Luxembourg Stock Exchange, listing on the Luxembourg Stock Exchange implies this possibility (admission to trading) and as consequence these funds are potentially falling under the scope of the Regulation. Among the 57,210 share classes of Luxembourg funds as at 31 December 2013, 6,293 share classes were listed on the Luxembourg Stock Exchange main market (11%). 1 Directive 2014/56/EU amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts. 2 Regulation 537/2014/EU on specific requirements regarding statutory audit of public interest entities Version 19 December

5 Furthermore Luxembourg Exchange Traded Funds (ETFs) are listed and actively traded on different EU Regulated markets across the EU. Alfi is concerned about the inclusion of AIF and UCITS in the definition of PIEs as it will imply disproportionate costs for the Luxembourg fund industry while the expected added benefits on the audit quality and reliability of the financial reporting over and above current arrangements is neither clear, nor proven. AIF, UCITS and their related Management Companies operate in a strictly defined regulatory environment and are subject to specific governance mechanisms, including controls exercised by their depositary. Furthermore, because Luxembourg funds listed on Stock Exchanges (with the exception of Exchange Traded Funds) are not traded on the market, Alfi recommends to exclude from the list of PIEs, AIF and UCITS not listed on any Stock Exchange as well as AIF and UCITS not actively traded on a Stock Exchange. Version 19 December

6 1 2 3 III. Recommendations for Member State options Article Member states may: Alfi views Alfi recommendations This option provides greater flexibility for investors and the funds to address specific situations such as contribution/ redemption in kind, merger, reporting reviews, etc 4.2 Audit fees (cap) Provide that a competent authority may, upon a request by the statutory auditor or audit firm, on an exceptional basis, allow that statutory auditor or audit firm to be exempted from the requirements in subparagraph 1 in respect of an entity for a period of no 4.3 When the total fees received from a PIE.are representing more than 15% of the total fees received by the audit firm.the audit firm shall disclose that fact to the audit committee.and the safeguard applied to mitigate those threats more than two financial years. Apply more stringent requirements than provided in article 4.3 (max 15%) Alfi considers the threshold of 15% sufficient to ensure the independence of the audit firm. option should be transposed. option should not be transposed Version 19 December

7 4 Article Member states may: Alfi views Alfi recommendations 4.4 Audit fees (cap) Apply more stringent requirements Alfi considers the limit of 70% than provided in Article 4 (max 70%). sufficient to ensure the independence of the auditor. Decreasing this threshold would lead to undue constraints in particular when considering the type of non-audit services usually rendered to audited funds (Contribution and Redemption in Kind, merger, etc ) and considering other services generally rendered by the auditor for cost efficiency (for instance German tax preparation/certification). Furthermore, Alfi believes it is important to keep level playing field and consistency with other EU Funds financial centres and to avoid costly patchwork of rules for fund s promoters having operations in multiple EU domiciles. option should transposed. not be Version 19 December

8 5 Article Member states may: Alfi views Alfi recommendations 5.2 Non-Audit services Prohibit services other than those Alfi believes that the current listed in article 5.1 which could limitations of services are sufficient to option should not be represent a threat to independence. ensure the independence of auditors. transposed. The Board of Directors is best placed 5.3 Non-Audit services Allow the services referred to in Article 5.1 (a) (i), (a) (iv) (vii) and (f), provided that they satisfy the following requirements: (i) They have no direct or have immaterial effect separately or in aggregate on the audited financial statements, (ii) The estimation of the effect on the audited financial statements is comprehensively documented and explained in the additional report to the audit committee referred to in Article 11, and (iii) The principles of independence laid down in Directive 2006/43/EC are complied with the statutory auditor or audit firm. to assess the independence of auditor and to select the best firm from a quality and efficiency point of view. Many investment funds are required to prepare tax reporting in certain jurisdictions where they are distributed. In addition, since tax figures are derived primarily from audited financial information, many investment funds mandate their auditors to prepare this tax reporting leading to significant synergies. As such, Alfi believes such tax reporting to be an allowable Non-Audit service. Alfi also believes that it is important to maintain flexibility and considers that the fee cap introduced by Article 4 is sufficient to guarantee auditor independence. option should be transposed. Version 19 December

9 6 Article Member states may: Alfi views Alfi recommendations option should not be transposed. 5.4 Non-Audit services Establish stricter rules setting out the conditions under which a statutory auditor, an audit firm or a member of a network to which the auditor or audit firm belongs may provide to the audited entity, to its parent undertaking or its controlled undertakings non audit services other than the prohibited non-audit services referred to in paragraph Audit Report Set additional requirements in relation to the content of the audit report. Alfi considers this option could create a patchwork of rules within EU. Current rules are comprehensive and sufficient to ensure independence of the auditors. Alfi recommends that the content of the audit report be aligned with International Standards on Auditing the new IAASB standard on audit reports. Such alignment promotes greater consistency within the EU as well as with the rest of the world. option should not be transposed. Version 19 December

10 Article Member states may: Alfi views Alfi recommendations 11.1 Additional report to Member States may additionally According to Article 39.3 (b) of the Alfi is of the opinion that the the audit committee require that this additional report be Directive, Member States may derogation of Audit Committee (addressee) submitted to the administrative or decide that UCITS and AIFs are not foreseen in Article 39.3 (b) of the supervisory body of the audited required to have an audit committee. Directive should be transposed. entity. Alfi considers that this option should be transposed. The implementation of an audit committee would unnecessarily and unduly increase the operational costs of the fund, knowing that UCITS and AIF are already subject to strict rules with regard to corporate governance and conflicts of interest Additional report to the Audit Committee (disclosure of third party) Member States may allow the audit committee to disclose that additional Furthermore article 74 (6) of the law dated 18 December 2009 relating to the audit profession exempts the Luxembourg investment funds to set up an audit committee. When a fund has voluntarily set up an Audit Committee, Alfi considers that it should be left at the Audit Committee s discretion to require that additional report, if any, be submitted to the administrative or supervisory body. Alfi considers that it would be inappropriate to disclose to third parties the content of such additional Alfi is of the opinion that the option foreseen in Article 11.1 of the Regulation transposed. should not be option should not be transposed. Version 19 December

11 7 report to such third parties as are provided for in their national law. report since it could violate the principle of equal treatment of shareholders of the fund. It would also create inconsistency with investment funds not listed and therefore not subject to the Regulation. Version 19 December

12 8 Article Member states may: Alfi views Alfi recommendations 11.2 Additional report to the Member States may lay down Alfi considers it is not useful to audit committee additional requirements in relation to add further requirements in option should not be transposed. the content of the additional report to the audit committee. relation with the content of the additional report to be prepared by the auditor since the content foreseen in Article 11.2 is sufficiently comprehensive to fulfil the needs of the Governance of the fund Appointment of statutory auditors or audit firms (joint audit) Decide that a minimum number of statutory auditors or audit firms shall be appointed by public-interest entities in certain circumstances and establish the conditions governing the relations between appointed. the auditors or firms Alfi considers that joint audit is not necessary for audit of investment funds considering the existing regulatory framework applicable to funds. Mandatory joint audits run counter to the principle of empowerment of shareholders and those in charge of governance to choose the solutions that are deemed most appropriate. Furthermore a joint audit might increase the costs and complexity of the audit. option should not be transposed. Version 19 December

13 Article Member states may: Alfi views Alfi recommendations 17.2 (a) Auditor s rotation Member States may require that the initial engagement referred to in paragraph 1 A public-interest entity shall appoint a statutory auditor or audit firm for an initial engagement of at least one year be for a longer period than one year (b) Auditor s rotation Set a maximum duration of less than ten years Auditor s rotation Extend the period to maximum 20 years if a tender has been held after 10 years or extend the period to Current market practice is to appoint the auditor for a period of one financial year with a renewal annually at the annual shareholders meeting. Alfi considers that a mandate of one year with the possibility to renew annually provides the maximum flexibility for the Governance of the Fund to decide when to launch a tender process for one fund or a family of funds. Alfi recommends to maintain the maximum flexibility offered by the Regulation. It should be the prerogative of those in charge of the Governance of the fund to assess the quality of audit services rendered. Furthermore, a change of auditor usually leads to additional costs for the fund (amendments of the prospectus, publications) that are ultimately borne by investors. Increasing the frequency of mandatory rotation would negatively impact investors. Alfi recommends to maintain the maximum flexibility offered by the Regulation on the basis of the option should not be transposed. option should not be transposed. Alfi isof the opinion that this option should be transposed. Version 19 December

14 9 maximum 24 years if joint auditors are appointed (note: it is possible to have a sole auditor during the first ten years). arguments detailed in point 17.2 (b) above. Article Member states may: Alfi views Alfi recommendations 17.7 Auditor s rotation Require key audit partner(s) rotation of less than 7 years. Alfi considers that a rotation of the key audit partner(s) after 7 years is an appropriate duration to maintain objectivity in the audit process. option should not be transposed. Version 19 December

15 IV. Other considerations / interpretations Besides Member States options that Luxembourg needs to decide as detailed in section 2 above, there are also certain interpretation specifically relating to the investment fund industry that CSSF as competent authority will have to make. This section details key matters affecting Luxembourg investment funds and provides Alfi s views. Art 4.2 Audit fees (cap) As per this Article for the purpose of the limits specified in the first subparagraph, non-audit services other than those referred to in Article 5(1), required by Union or national legislation shall be excluded. For UCITS and investment funds under Part II of the Luxembourg law, the scope of the audit includes the preparation of a report on the activities of the funds (Long Form Report) in addition to the audit of the annual report. The audit fees for the Long Form Report are therefore excluded from the application of the fee cap for non-audit services. Alfi believes that the fees paid to the auditor for the preparation of the Long Form Report are to be considered audit fees and therefore are to be included for the calculation of the 70% cap. In addition since auditor of the Fund is also usually involved in the review of Transactions in kind and Mergers in such cases, Alfi recommends to consider to add also the related fees for the calculation of the 70% cap. This position also provides greater flexibility for those in charge of the Governance of the fund to select the best firm, from a quality and efficiency point of view, to provide (authorised) nonaudit services. Agreement of other EU auditors According to the Directive, auditors located in other EU member states can carry out audits of Luxembourg entities subject to a registration with the CSSF as competent authority. According to Article 10.1 of the Directive, the CSSF shall establish procedures for the approval of statutory auditors who have been approved in other Member States. Those procedures shall not go beyond the requirements to complete an adaptation period or to pass an aptitude test. Alfi recommends to choose the aptitude test and to foresee specific questions in relation to the Luxembourg regulatory and reporting framework applicable to investment funds. Indeed this will provide greater comfort that third-country auditors will have sufficient knowledge on Luxembourg investment funds specificities in order to ensure the quality of their audits. Version 19 December

16 Additional audit procedures or requirements to the International Auditing Standards According to Article 21 of the Directive Member States may impose audit procedures or requirements in addition to the international auditing standards adopted by the Commission. International Auditing Standards have been used for the audit of Luxembourg investment funds since many years and Alfi does not believe there is any need to further impose audit procedures or requirements in the context of statutory audit of annual reports of Luxembourg investment funds. Version 19 December