The Statutory Auditors and Third Country Auditors Regulations 2016

Made: 15th June 2016

Coming into force in accordance with regulation 1(1)

The Secretary of State is a Minister designated for the purposes of section 2(2) of the European Communities Act 1972 in relation to auditors and the audit of accounts.

The Secretary of State makes these Regulations in exercise of the powers conferred by section 2(2) of the European Communities Act 1972, section 18A(1) and (3) and (6) of the Companies (Audit, Investigations and Community Enterprise) Act 2004 and by sections 494(1), (2)(b) and (4)(a), 519A(5), 1241(2)(c), 1252(1) and (8) and 1292(1)(a), (2) and (4) of, and paragraph 11(2) of Schedule 13 to, the Companies Act 2006 .

In accordance with paragraph 2 of Schedule 2 to the European Communities Act 1972, sections 1252(11), 1290 and 1292(4) of the Companies Act 2006 and section 18A(8) of the Companies (Audit, Investigations and Community Enterprise) Act 2004, a draft of these Regulations has been laid before Parliament and approved by resolution of each House of Parliament.

PART 1 — Introduction

Citation, commencement and application

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• (1) These Regulations may be cited as the Statutory Auditors and Third Country Auditors Regulations 2016 and come into force—

• (a) on 17th June 2016, if the Regulations are made on or before 16th June 2016;

• (b) on the day after the day on which the Regulations are made, if they are made on or after 17th June 2016.

• (2) The following provisions of Schedule 3 to these Regulations apply in relation to financial years beginning on or after 17th June 2016—

• (a) Part 3;

• (b) paragraphs 43 to 49;

• (c) in paragraph 51—

• (i) sub-paragraph (2)(a), in so far as it relates to the insertion of the definition of “audit working papers and investigation reports”;

• (ii) sub-paragraphs (2)(c) and (e);

• (d) in paragraph 52—

• (i) sub-paragraph (2), in so far as it relates to the insertion of the entry relating to “audit working papers and investigations reports”;

• (ii) sub-paragraph (3);

• (e) paragraphs 68 to 69;

• (f) paragraph 73(3).

• (3) Paragraph 72 of Schedule 3, in so far as it relates to paragraphs 21 to 22B of Schedule 10 to the Act, does not apply in relation to financial years beginning before 17th June 2016.

• (4) In regulation 18—

• (a) paragraph (2)(a) applies in relation to financial years beginning on or after 1st January 2016; and

• (b) paragraph (3) applies in relation to financial years beginning on or after the day on which these Regulations come into force.

• (5) Standards set by the competent authority in accordance with Schedule 1 to these Regulations apply in relation to financial years beginning on or after 17th June 2016.

• (6) Schedule 4 to these Regulations applies in relation to financial years beginning on or after 17th June 2016.

• (7) Regulations 5 to 8 do not apply to decisions made by the competent authority following an investigation which commences before the day on which these Regulations come into force or occurs as a result of a complaint or referral made before that day.

• (8) The amendments made by paragraphs 67 and 72 (in so far as it relates to paragraph 24 of Schedule 10) of Schedule 3 to these Regulations do not apply to investigations under arrangements mentioned in those paragraphs which occur as a result of a complaint or referral made before the day on which these Regulations come into force.

• (9) The amendments made by paragraph 65 (in so far as it relates to paragraph 13 of Schedule 10) and by paragraph 72 (in so far as it relates to paragraphs 23 and 23A of that Schedule) of Schedule 3 do not apply to enforcement action which is taken following an inspection under arrangements mentioned in those paragraphs and which begins before the day on which these Regulations come into force.

• (10) The amendment made by paragraph 3 of Schedule 3 to these Regulations does not apply where paragraph 23 of Schedule 10 to the Act continues to apply by virtue of paragraph (9) of this regulation.

• (11) The amendment made by paragraph 1(2)(a) of Schedule 5 to these Regulations does not apply where paragraph 23 and 23A of Schedule 10 to the Act continue to apply by virtue of paragraph (9) of this regulation.

• (12) The amendments made by these Regulations to Part 16 of the Companies Act 2006 do not have effect in relation to the application of any provision of that Part to limited liability partnerships by the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 .

Interpretation

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In these Regulations—

• “the Act” means the Companies Act 2006 ;

• “appropriate qualification”, “audited person”, “equivalent third country”, ... ... “firm”, “group”, “parent undertaking”, “regulated market”, “statutory audit”, “statutory auditor”, “statutory audit work”, “third country”, “third country auditor”, “transferable securities”, “transitional third country” and “UK regulated market” have the same meaning as in Part 42 of the Act;

• “audit committee” has the same meaning as in Chapter 2 of Part 16 of the Act;

• “Audit Directive” means Directive 2006/43/EC of the European Parliament and of the Council on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC ;

• “Audit Regulation” means Regulation (EU) 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC ;

• “audit report” means the report required in accordance with the audit reporting requirements;

• “audit reporting requirements” means the requirements of—sections 495 to 498A and 503 to 506 of the Act,sections 495, 496, 498 and 503 to 506 of the Act as applied to an LLP by the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 (and “LLP” has the meaning given by regulation 3 of those Regulations),sections 495, 496 and 498 of the Act as applied to the auditor of a qualifying partnership, and sections 503 to 506 of that Act as applied in relation to the auditors' report for a qualifying partnership, by the Partnerships (Accounts) Regulations 2008 (“qualifying partnership” has the meaning given by regulation 3 of those Regulations),sections 495 to 498A and 503 to 506 of the Act as applied to an unregistered company by the Unregistered Companies Regulations 2009 (“unregistered company” has the meaning given by regulation 2 of those Regulations),...sections 495 , 496 and 498 of the Act as applied to an auditor of an insurance undertaking and sections 503 to 506 of the Act as applied in relation to the auditor's report for an insurance undertaking, by the Insurance Accounts Directive (Miscellaneous Insurance Undertakings) Regulations 2008 (“insurance undertaking” has the meaning given by regulation 2 of those Regulations),sections 78 to 79 of the Building Societies Act 1986 ,sections 73 to 74C of the Friendly Societies Act 1992 , in relation to the audit of a friendly society which is subject to special requirements under that Act (see section 78A(3) of that Act),regulations 3, 10 to 14 and 22 to 26 of the Insurance Accounts Directive (Lloyd's Syndicate and Aggregate Accounts) Regulations 2008 ,Articles 10 and 11 of the Audit Regulation;

• “competent authority” means the Financial Reporting Council Limited ;

• “financial year” has the same meaning as in section 390 of the Act;

• “group auditor” means the statutory auditor appointed to audit the consolidated accounts of a group and “group audit” shall be construed accordingly;

• “international auditing standards” means International Standards on Auditing, International Standard on Quality Control and other related Standards issued from time to time by the International Federation of Accountants through the International Auditing and Assurance Standards Board, in so far as they are relevant to the statutory audit;

• “network” means an association of persons other than a firm co-operating in audit work by way of—profit-sharing,cost-sharing,common ownership, control or management,common quality control policies and procedures,common business strategy, oruse of a common name;

• “personal data” has the same meaning as in section 1(1) of the Data Protection Act 1998 ;

• “public interest entity” means—an issuer whose transferable securities are admitted to trading on a UK regulated market,a credit institution within the meaning given by Article 4(1)(1) of Regulation (EU) No. 575/2013 of the European Parliament and of the Council , which is a CRR firm within the meaning of Article 4(1)(2A) of that Regulation , or a person who would be an insurance undertaking as defined in Article 2(1) of Council Directive 91/674/EEC of 19 December 1991 of the European Parliament and of the Council on the annual accounts of insurance undertakings as that Article had effect immediately before IP completion day, were the United Kingdom a member State; ;

• “issuer” ... has the same meaning as in Part 6 of the Financial Services and Markets Act 2000 ;

• “recognised supervisory body” means a supervisory body, within the meaning in section 1217(1) of the Act, recognised in accordance with Schedule 10 of that Act (and “member”, in relation to a recognised supervisory body, has the meaning given by section 1217(2) of that Act);

• “sanction” means any measure taken by the competent authority under regulation 5;

• “third country competent authority” means a body established in a third country exercising functions related to the regulation or oversight of auditors;

• “UK-adopted international standards” means the international auditing standards adopted by the competent authority in accordance with regulation 4(3)(za).

• ...

PART 2 — The Competent Authority

The competent authority

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• (1) The competent authority is responsible for—

• (a) the public oversight of statutory auditors under these Regulations;

• (b) carrying out the tasks provided for in the Audit Regulation and for ensuring that the provisions of that Regulation are applied;

• (c) the determination of technical standards (which must meet the requirements of Schedule 1) and of other standards (which must meet the requirements of regulation 4(3) and that Schedule) on professional ethics and internal quality control of statutory auditors and statutory audit work;

• (d) the determination of the manner in which the standards determined under sub-paragraph (c) are to be applied in practice;

• (e) the imposition of the standards determined under sub-paragraph (c) (including provision for securing compliance with those standards);

• (f) the determination of criteria for the purpose of determining whether persons are eligible for appointment as statutory auditors;

• (g) the application of the criteria determined under sub-paragraph (f) to determine whether persons are eligible for appointment as statutory auditors;

• (h) registration of persons approved as eligible for appointment as statutory auditors under sub-paragraph (g);

• (i) keeping the register and making it available for inspection;

• (j) ensuring persons eligible for appointment as statutory auditors take part in appropriate programmes of continuing education in order to maintain their theoretical knowledge, professional skills and values at a sufficiently high level;

• (k) monitoring (by means of inspections) of statutory auditors and audit work;

• (l) investigations of statutory auditors and audit work; and

• (m) imposing and enforcing sanctions.

• (2) The competent authority—

• (a) must consider whether and how tasks arising from its responsibility for the matters listed in sub-paragraphs (e) to (m) of paragraph (1) may be delegated to any recognised supervisory body; and

• (b) subject to paragraphs (5), (5A) and (5B), may delegate such tasks to any recognised supervisory body.

• (3) In exercising its duty under paragraph (2)(a), the competent authority—

• (a) must consult the recognised supervisory bodies, and

• (b) may consider the requirements of Schedule 10 to the Act (including the way in which recognised supervisory bodies discharge those requirements).

• (4) The competent authority may delegate tasks to any recognised supervisory body in accordance with paragraphs (6) and (7).

• (5) The competent authority may not delegate tasks related to any of the matters listed in Article 24(1)(a) to (c) of the Audit Regulation.

• (5A) Any delegation under paragraph (2) of the competent authority’s responsibilities under sub-paragraphs (k), (l) or (m) of paragraph (1) must not prejudice the competent authority’s ability to initiate and conduct an inspection or investigation of audit work by a statutory auditor itself, where necessary, and to take appropriate action.

• (5B) In determining the delegation of tasks, the competent authority must ensure that conflicts of interest are avoided.

• (6) The competent authority must specify the tasks delegated (and may specify those tasks by reference to particular descriptions of activity for which the competent authority is responsible, particular descriptions of statutory auditor or particular descriptions of audited person) and any conditions under which those tasks are to be carried out (and may vary those conditions).

• (7) The competent authority may specify (including by reference to particular descriptions of activity for which the competent authority is responsible, particular descriptions of statutory auditor or particular descriptions of audited person) exceptions to any delegation.

• (8) The competent authority may reclaim tasks it has delegated, including those which relate to a particular description of activity for which the competent authority is responsible, particular description of statutory auditor or particular description of audited person.

• (9) When the competent authority has reclaimed a task from a recognised supervisory body (‘A’) and delegated that task to another recognised supervisory body (‘B’), section 1224ZA of the Act (as inserted by paragraph 33 of Schedule 3 to these Regulations) has effect so that the competent authority's power to call for information from A applies so that the competent authority may require A to provide such information as the competent authority considers that B reasonably requires for the performance of the task.

• (10) The competent authority must make such arrangements as it considers necessary in relation to any of the matters for which it is responsible under this regulation, including arrangements for the performance by the competent authority of any task arising from its responsibility for those matters in the following circumstances—

• (a) where the competent authority does not delegate a task to a recognised supervisory body;

• (b) where the competent authority reclaims a task from a recognised supervisory body;

• (c) where the recognition order in relation to a recognised supervisory body is revoked under paragraph 3 of Schedule 10 to the Act.

• (11) An obligation which a statutory auditor has by virtue of any rules which a recognised supervisory body is required to have under Part 2 of Schedule 10 to the Act is an obligation which the statutory auditor owes to the competent authority including—

• (a) where the competent authority reclaims a task from that recognised supervisory body, to the extent that the obligation arises from the competent authority having delegated that task to the body; or

• (b) where the recognition order in relation to that recognised supervisory body is revoked under paragraph 3 of Schedule 10 to the Act, to any extent.

• (12) The Secretary of State may give directions to the competent authority in connection with the delegation of tasks to the recognised supervisory bodies.

• (13) Schedule 1 (which prescribes requirements for the standards the competent authority must determine in relation to the obligations of statutory auditors in relation to professional ethics, independence, objectivity and confidentiality) has effect.

• (14) The members of the management body of the competent authority must be individuals who—

• (a) are knowledgeable in the areas relevant to statutory audit;

• (b) are selected in accordance with an independent and transparent nomination procedure;

• (c) during their period in office are non-practitioners, and in the three years preceding their appointment were non-practitioners.

• (15) In paragraph (14), a “non-practitioner” is a person who is not—

• (a) carrying out statutory audit work;

• (b) a member of the ownership or management body of a firm that is eligible for appointment as a statutory auditor;

• (c) employed by or otherwise associated with a firm that is eligible for appointment as a statutory auditor.

General requirements of auditors

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• (1) A person appointed to conduct a statutory audit must conduct that audit in accordance with the relevant standards for the conduct of statutory audits.

• (2) The relevant standards are—

• (a) the standards of integrity, objectivity, professional competence, due care and professional scepticism as determined by the competent authority in accordance with Schedule 1;