New rules are about to restrict the scope of tax and legal advice that auditors can give to certain of their audit clients.
More particularly, those EU-incorporated banks, insurance companies and listed companies (Public Interest Entities) which rely heavily on their auditors for the provision of non-audit consultancy services such as tax and legal advice ("NAC Services") may want to confirm that their auditor will still be able to provide all those NAC Services for financial years commencing on or after 17 June 2016. The rules are EU-wide, though there is some scope for Member States to amend them so local details may vary.
The details are complex, but broadly:
- the provision of certain NAC Services by an auditor (or members of the auditor's network) to Public Interest Entity audit clients or certain of their parent or subsidiary undertakings will be entirely prohibited ("Prohibited NAC Services"); and
- there is a cap on the amount of other NAC Services that an auditor may provide to Public Interest Entity audit clients or certain of their parent or subsidiary undertakings (the "NAC Services Cap").
When do these rules start?
The rules on Prohibited NAC Services will apply to financial years commencing on or after 17 June 2016. So, for a Public Interest Entity with a calendar year end, the provision of Prohibited NAC Services will be prohibited from 1 January 2017.
It is generally thought that the NAC Services Cap will only apply to accounting years beginning on or after 17 June 2019. On that basis, for a UK Public Interest Entity with a calendar year end, the NAC Services Cap will apply as from 1 January 2020.
What are public interest entities?
Credit institutions, insurance undertakings and any entities which have listed any of their shares, debt or other securities on a MiFID regulated market. However, in each case it is only such entities which are also incorporated in an EU member state which constitute Public Interest Entities.
What are Prohibited NAC Services in the UK?
The following are some of the Prohibited NAC Services being implemented in the UK:
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a wide range of services in relation to tax, including the provision of most tax advice or calculations unless the balance sheet impact is immaterial;
- certain corporate finance functions;
- services that involve playing any part in the management or decision-making of the audited entity; and
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legal services with respect to the provision of general counsel, negotiating on behalf of the audited entity and acting in an advocacy role in the resolution of litigation.
The NAC Services Cap
Auditors may continue to provide non-Prohibited NAC Services to Public Interest Entity clients provided that the provision of those services does not create a threat towards the integrity, objectivity or independence of an audit. When the NAC Service Cap comes into force, the auditor's total fees in respect of those non-prohibited NAC Services must not exceed 70% of the average of a particular measure of the auditor's audit fees over the previous three years.
What impact have we seen so far?
We have already taken on a number of tax litigation and tax advisory mandates as a result of the above changes. Clients are considering the impact of these rules before embarking on any extended mandates to avoid the disruption of having to change advisers on 1 January 2017.
Can we help?
If there are any areas with which we could assist you, contentious or otherwise, please either speak to your usual contact or one of the contacts below.
If you want to look at these rules further, then the starting point is EU regulation 537/2014 on the auditing of PIEs. In a UK context, further details can be found in paragraph 5.167R of the UK Financial Reporting Council's Revised Ethical Standard dated April 2016 together with an SI entitled, "The Statutory Auditors and Third Country Auditors Regulations" (currently in draft).
