The Statutory Auditors and Third Country Auditors Regulations 2016

Regulation 3(13)

SCHEDULE 1 U.K. Requirements for professional ethics, independence, objectivity, confidentiality, auditing standards and audit reporting

1.  In this Schedule— U.K.

“A” means a person appointed as a statutory auditor,

[F1 “key audit partner” means—

(a)

an individual who is eligible for appointment as a statutory auditor and who is designated by an audit firm for a particular audit engagement as being primarily responsible for carrying out the statutory audit on behalf of the audit firm;

(b)

in the case of a group audit, any of the following—

(i)

an individual who is eligible for appointment as a statutory auditor and who is designated by an audit firm as being primarily responsible for carrying out the statutory audit of the consolidated accounts of the group on behalf of the audit firm;

(ii)

an individual who is eligible to conduct the audit of the accounts of any material subsidiary undertaking and who is designated as being primarily responsible for that audit; or

(c)

an individual who is eligible for appointment as a statutory auditor and who signs the audit report.]

“relevant requirement” has the same meaning as in regulation 5.

Textual Amendments

F1 Words in Sch. 1 para. 1 substituted (21.2.2020) by The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/108), regs. 1(2)(b), 17(2)

2.—(1) Standards must ensure that— U.K.

(a) A is subject to principles of professional ethics, covering at least A's public-interest function, A's integrity and objectivity and A's professional competence and due care;

(b) in carrying out statutory audit work, A—

(i) maintains professional scepticism throughout the audit;

(ii) maintains professional scepticism in particular when reviewing management estimates relating to fair values, the impairment of assets, provisions and future cash flow relevant to the audited person's ability to continue as a going concern;

(iii) recognises the possibility of a material misstatement due to facts or behaviour indicating irregularities, including fraud or error,

notwithstanding A's past experience of honesty and integrity on the part of the audited person's management and of the persons charged with the governance of the audited person.

(2) In this paragraph “professional scepticism” means an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence.

(3) Standards must ensure that, during the relevant period A and any other individual in a position to influence the outcome of the statutory audit is independent of the audited person and not involved in the decision-taking of the audited person.

(4) In this paragraph “the relevant period” means—

(a) the [F2 financial year of the accounts] to be audited; and

(b) the period during which the statutory audit is carried out.

Textual Amendments

F2 Words in Sch. 1 para. 2(4)(a) substituted (21.2.2020) by The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/108), regs. 1(2)(b), 17(3)

3.—(1) Standards must ensure that A takes all reasonable steps to ensure that, in carrying out statutory audit work, A's independence is not affected by— U.K.

(a) any existing or potential conflict of interest; or

(b) any business or other direct or indirect relationship with A or a person having a relevant connection with A.

(2) For the purposes of this paragraph a person has a relevant connection with A if that person—

(a) is a member of A's network;

(b) is a manager, auditor, employee or other individual whose services are placed at A's disposal or under A's control; or

(c) is directly or indirectly linked to A by control.

(3) Standards must ensure that A records in the audit working papers all significant threats to A's independence and the safeguards applied to mitigate those threats.

(4) In this paragraph “audit working papers” means any documents which are or have been held by A and are related to the conduct of the audit.

4.—(1) Standards must ensure that A does not accept appointment as a statutory auditor (or, if already appointed, resigns from such an appointment) if there is any qualifying threat created by financial, personal business employment or other relationships between the audited person and- U.K.

(a) A,

(b) any member of A's network, or

(c) any individual in a position to influence the outcome of the statutory audit.

(2) In this paragraph “qualifying threat” means a threat of self-review, self-interest, advocacy, familiarity or intimidation which would cause an objective, reasonable and informed third party, taking into account any safeguards applied, to conclude that A's independence is compromised.

5.—(1) Standards must ensure that— U.K.

(a) none of the persons mentioned in sub-paragraph (2), and

(b) no trust whose managerial responsibilities are discharged by, or which is directly or indirectly controlled by, or which is set up for the benefit of, or whose economic interests are substantially equivalent to those of any person mentioned in paragraphs (a), (b) or (c) of that sub-paragraph,

holds or has a material and direct beneficial interest in, or engages in any transaction in any financial instrument issued, guaranteed or otherwise supported by any audited person within (in the case of a person mentioned in sub-paragraph (2)(a)) the area of statutory audit work in which that person is directly involved or (in the case of a person mentioned in sub-paragraph (2)(b), (c) or (d)) the area of statutory audit work in which the person mentioned in sub-paragraph (a) to whom they have the connection described in sub-paragraph (2)(b), (c) or (d) as the case may be is involved.

(2) This sub-paragraph applies to—

(a) A, a key audit partner of A, an employee of A or any other individual—

(i) whose services are placed at A's disposal or under A's control, and

(ii) who is directly involved in statutory audit work;

(b) a person who is the spouse, civil partner or dependent child of any person mentioned in paragraph (a);

(c) any other relative of any person mentioned in paragraph (a) who (at any time in the period from the start of the financial year in respect of which the audit is being carried out to the date on which the audit report is signed) has lived in the same household as that person for at least one year;

(d) a firm whose managerial responsibilities are discharged by, or which is directly or indirectly controlled by, any person mentioned in paragraphs (a), (b) or (c) or in which any such person has a beneficial or other substantially equivalent economic interest.

(3) Sub-paragraph (1) does not prevent the owning of interests indirectly through diversified collective investment schemes, including managed funds, such as pensions or life insurance.

(4) Standards must ensure that none of the persons mentioned in sub-paragraph (2), who—

(a) owns financial instruments (except for interests of the kind mentioned in sub-paragraph (3)) of the audited person,

(b) owns financial instruments (except for interests of the kind mentioned in sub-paragraph (3)) of any person related to the audited person, in circumstances where owning those instruments may cause, or may be generally perceived as causing, a conflict of interest, or

(c) has a business or employment relationship with the audited person within the relevant period in circumstances that may cause, or may be generally perceived as causing, a conflict of interest,

participates in or otherwise influences the outcome of the statutory audit.

(5) In sub-paragraph (4), “the relevant period” has the same meaning as in paragraph 2(4).

(6) Standards must ensure A and any person mentioned in sub-paragraph (2) does not solicit or accept pecuniary or non-pecuniary gifts or favours from the audited person or from any person related to the audited person,

(7) In sub-paragraph (6) “pecuniary or non-pecuniary gifts” does not include gifts whose value an objective, reasonable and informed person would consider trivial or inconsequential.

6.  Standards must ensure that if, during the [F3 financial year of the accounts] to be audited, the audited person is acquired by, merges with or acquires another person, A shall— U.K.

(a) identify and evaluate any current or recent interests or relationships which could compromise A's independence and ability to continue carrying out the statutory audit after the effective date of the merger or acquisition, and

(b) as soon as possible, and in any event within three months—

(i) take such steps as may be necessary to terminate any current interests or relationships which would compromise A's independence, and

(ii) where possible, adopt safeguards that minimise any threats to A's independence arising from prior and current interests and relationships.

Textual Amendments

F3 Words in Sch. 1 para. 6 substituted (21.2.2020) by The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/108), regs. 1(2)(b), 17(4)

7.—(1) Standards must ensure that— U.K.

(a) where A is an individual, A, and

(b) where A is a firm, A's key audit partner,

does not take up a relevant position with the audited person before the end of the cooling off period.

(2) Standards must also ensure that no person having a relevant connection with A takes up a relevant position with the audited person within one year of having been directly involved in the statutory audit of the audited person.

(3) In this paragraph—

“cooling off period” means—

(a)

in the case of a public interest entity, two years, and

(b)

in any other case, one year,

beginning with the day on which A ceased to be the audited person's statutory auditor or (if A is a firm), A's key audit partner ceased to be the key audit partner in connection with the statutory audit of the audited person;

“person having a relevant connection with A” means a person eligible for appointment as a statutory auditor, who is—

(a)

a partner (apart from a key audit partner) or employee of A, or

(b)

any individual whose services are placed at A's disposal or under A's control;

“relevant position” means—

(a)

any key management position,

(b)

membership of the audited person's audit committee,

(c)

membership of any body performing equivalent functions to an audit committee in relation to the audited person,

(d)

any other position as director of the audited person or, where the audited person's affairs are managed by a management body or other committee, membership of that management body or committee.

8.—(1) Standards must ensure that, before accepting an appointment as a statutory auditor, A assesses and records— U.K.

(a) whether A is complying with the requirements of paragraphs 1 to 7 of this Schedule;

(b) whether there are any threats to A's independence and the safeguards applied to mitigate those threats;

(c) whether A has such competent employees, time and resources as are needed to carry out the statutory audit in an appropriate manner;

(d) where A is a firm, whether the key audit partner is approved [F4 as eligible for appointment] as a statutory auditor F5 ...

(2) Standards ensuring the matters mentioned in this paragraph may apply simplified requirements in relation to the statutory audit of companies to which the small companies regime applies under section 381 of the Act.

Textual Amendments

F4 Words in Sch. 1 para. 8(1)(d) inserted (31.12.2020) by The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(a)(i); 2020 c. 1, Sch. 5 para. 1(1)

F5 Words in Sch. 1 para. 8(1)(d) omitted (31.12.2020) by virtue of The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(a)(ii); 2020 c. 1, Sch. 5 para. 1(1)

9.—(1) Standards must ensure adequate provision on confidentiality in relation to all information and documents to which A has access when carrying out a statutory audit, but such rules must not impede the enforcement of obligations under— U.K.

(a) these Regulations,

(b) the Audit Regulation, or

(c) Parts 16 and 42 of the Act.

(2) Standards ensuring the matters mentioned in sub-paragraph (1) must not prevent A from transferring relevant documents concerning the statutory audit to an auditor of the consolidated accounts of a parent undertaking in a third country where such documents are necessary for auditing the accounts of that undertaking.

(3) Standards must ensure that, where A ceases to hold office as statutory auditor, A provides A's successor as statutory auditor with access to all relevant information concerning the audited person, including information concerning the most recent audit.

(4) Standards ensuring the matters mentioned in sub-paragraph (1)—

(a) must apply to A in respect of an audit engagement after A has ceased that engagement, and

(b) must apply to A if he ceases to be eligible for appointment as a statutory auditor.

(5) Standards must ensure that any rule of law relating to the confidentiality of information received in the course of statutory audit work by persons appointed as statutory auditors is complied with.

(6) Standards must ensure that no firm is eligible for appointment as a statutory auditor unless the firm has arrangements to prevent any person from being able to exert any influence over the way in which a statutory audit is conducted in circumstances in which that influence would be likely to affect the independence or integrity of the audit.

10.—(1) Standards must ensure that A— U.K.

(a) has appropriate policies and procedures to ensure that no partner, director, member or shareholder of A or partner, director, member or shareholder of any affiliate of A intervenes in the carrying out of statutory audit work in any way which jeopardises A's independence and objectivity in carrying out such work;

(b) has sound administrative and accounting procedures, internal quality control mechanisms (which are designed to secure compliance with decisions and procedures at all levels of A's working structure), effective procedures for risk assessment and effective control and safeguard arrangements for information processing systems;

(c) has appropriate policies and procedures to ensure that A's employees and any other individuals, whose services are placed at A's disposal or under A's control and who are directly involved in statutory audit activities, have appropriate knowledge and experience for the duties assigned;

(d) has appropriate policies and procedures to ensure that outsourcing of important audit functions is not undertaken in such a way as to impair the quality of A's internal quality control and the ability of the competent authority to supervise A's compliance with relevant requirements;

(e) has appropriate and effective organisational and administrative arrangements to prevent, identify, eliminate or manage and disclose any threats to their independence as referred to in paragraphs 2(3) and 3 to 8;

(f) has appropriate policies and procedures for carrying out statutory audits, coaching, supervising and reviewing the activities of A's employees and organising the structure of the audit file as referred to in paragraph 12(1)(f);

(g) establishes an internal quality control system to ensure the quality of a statutory audit, which—

(i) covers at least the policies and procedures mentioned in paragraph (f); and

(ii) in the case of a firm, ensures that responsibility for the system lies with an individual who F6 ... holds an appropriate qualification F7 ...

(h) uses appropriate systems, resources and procedures to ensure continuity and regularity in carrying out A's statutory audit work;

(i) has appropriate and effective organisational and administrative arrangements for dealing with and recording incidents which have, or may have, serious consequences, for integrity of A's statutory audit work;

(j) has in place adequate remuneration policies, including profit-sharing policies, providing sufficient performance incentives to secure audit quality (including provision that the amount of revenue that A derives from services other than statutory audit services must not form part of the performance evaluation and remuneration of any person involved in, or able to influence the carrying out of, the audit);

(k) monitors and evaluates the adequacy and effectiveness of A's systems, internal quality control mechanisms and arrangements established in accordance with these Regulations, the Audit Regulation or Parts 16 or 42 of the Act and takes appropriate measures to address any deficiencies;

(l) carries out an annual evaluation of the internal quality control system referred to in sub-paragraph (1)(g), keeps records of the findings of that evaluation and any proposed measure to modify the internal quality control system;

(m) documents and communicates to A's employees (and where A is a firm, communicates to A's partners or members) the policies and procedures referred to in this sub-paragraph;

(n) takes into consideration the scale and complexity of A's activities when complying with the requirements mentioned in this paragraph and is able to demonstrate to the competent authority that its policies and procedures are appropriate given the scale and complexity of those activities.

(2) The requirements of standards mentioned in sub-paragraph (1) may be simplified in relation to the statutory audit of companies which are exempt from the requirements of the Act relating to audit by virtue of section 477 of the Act.

(3) In this paragraph “affiliate”, in relation to A, means any undertaking, regardless of its legal form, which is connected to A by means of common ownership, control or management.

Textual Amendments

F6 Word in Sch. 1 para. 10(1)(g)(ii) omitted (31.12.2020) by virtue of The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(b)(i); 2020 c. 1, Sch. 5 para. 1(1)

F7 Words in Sch. 1 para. 10(1)(g)(ii) omitted (31.12.2020) by virtue of The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(b)(ii); 2020 c. 1, Sch. 5 para. 1(1)

11.—(1) Standards must ensure that, when A is a firm, A— U.K.

(a) designates at least one key audit partner, and

(b) applies as its main criteria in selecting a key audit partner—

(i) the need to secure the quality of the audit,

(ii) the need to secure A's independence and competence in carrying out the audit,

(c) ensures the key audit partner is actively involved in carrying out the audit,

(d) provides any key audit partner with sufficient resources and with personnel that have the necessary competence and capabilities to carry out their duties appropriately.

(2) Standards must ensure that A devotes sufficient time to the engagement and assigns sufficient resources to enable A to carry out A's duties appropriately.

12.—(1) Standards must ensure that A— U.K.

(a) keeps records of any breaches (other than breaches which A reasonably considers to be minor breaches) of any relevant requirement;

(b) keeps records of any consequences of any breach recorded in accordance with paragraph 12(1)(a), the measures taken to address such a breach and to modify A's internal quality control system;

(c) prepares an annual report containing an overview of any measures taken under paragraph (b) and communicates that report internally;

(d) documents any request for advice from an external expert, together with the advice received;

(e) maintains a client account record, which includes in respect of every statutory audit—

(i) the audited person's name, address and place of business,

(ii) when the statutory auditor is a firm, the name of the key audit partner or, where there is more than one key audit partner, the names of all the key audit partners,

(iii) the fees charged for carrying out the statutory audit and for other services in any financial year;

(f) creates an audit file for each statutory audit, which meets the requirements of sub-paragraph (2).

(g) keeps records of any complaints made in writing about the performance of any statutory audit that A has carried out

(2) The requirements for an audit file are that—

(a) it documents at least the matters recorded in accordance with paragraph 8;

(b) in relation to a statutory audit of a public interest entity, it documents the matters recorded in accordance with Articles 6, 7 and 8 of the Audit Regulation;

(c) it contains any other data and documents that are important in supporting the audit report;

(d) in relation to a statutory audit of a public interest entity, it contains any other data and documents that are important in supporting the report to the audit committee required under Article 11 of the Audit Regulation;

(e) it contains any other data and documents that are important for monitoring compliance with relevant requirements and other applicable legal requirements;

(f) it is closed not more than sixty days after the date the audit report is signed in accordance with section 503 of the Act.

(3) The requirements of standards mentioned in sub-paragraph (1)(a) to (c) and (g) may be simplified in relation to the statutory audit of companies exempt from the requirements of the Act relating to audit by virtue of section 477 of the Act.

13.  Standards must ensure that remuneration received or receivable by a statutory auditor in respect of statutory audit work— U.K.

(a) is not influenced or determined by the statutory auditor providing other services to the audited person, or

(b) cannot be based on any form of contingency.

14.  Standards must ensure that the scope of statutory audit work does not include, save to the extent required by the audit reporting requirements, assurance on the future viability of the audited person or on the efficiency or effectiveness with which the directors or those concerned in the management of the audited person have conducted or will conduct its affairs. U.K.

15.—(1) Standards must ensure that, in the case of a statutory audit of the consolidated accounts of a group of undertakings— U.K.

(a) the group auditor bears full responsibility for the audit report,

(b) where applicable, the group auditor bears full responsibility for ensuring the requirements of Articles 10 and 11 of the Audit Regulation are met,

(c) the group auditor—

(i) evaluates and reviews the audit work carried out by any statutory auditorsF8 ... or third country auditors for the purpose of the group audit, and

(ii) documents the nature, timing and extent of the work so carried out, including, where applicable, the group auditor's review of the relevant parts of the audit documentation,

(d) any documentation retained by the group auditor is such as to enable the competent authority (or, where appropriate, the recognised supervisory body of which the group auditor is a member) to review the work of the group auditor,

(e) for the purposes of the group auditor's review mentioned in sub-paragraph (1)(c)(i), the group auditor—

(i) requests the agreement of the statutory auditor F9 ... or third country auditor to the transfer of relevant documentation during the conduct of the audit of consolidated [F10 accounts] as a condition of the group auditor relying on the work of the statutory auditor F9 ... or third country auditor, and

(ii) if unable to request or secure the agreement mentioned in sub-paragraph (1)(e)(i), takes appropriate measures (including carrying out additional statutory audit work directly or outsourcing such work) and informs the competent authority (or where appropriate, the recognised supervisory body of which the group auditor is a member),

(2) Standards must ensure that a group auditor, who is subject to a quality assurance review or an investigation concerning the statutory audit of the consolidated [F11 accounts] of a group of undertakings—

(a) complies with any request by the competent authority for relevant documentation retained by the group auditor and concerning the audit work performed by the respective statutory auditors F12 ... or third country auditors for the purposes of the group audit (including any working papers relevant to the group audit);

(b) in cases where the competent authority is unable to obtain documentation from the relevant competent authorities of a third country, complies with any request for additional documentation relating to audit work performed by third country auditors for the purposes of the group audit (including working papers relevant to the group audit);

(c) in order to comply with any request under sub-paragraph (2)(b), the group auditor—

(i) retains copies of such documentation,

(ii) obtains the agreement of third country auditors to the group auditor having unrestricted access to such documentation on request,

(iii) retains documentation to show that the group auditor has undertaken the appropriate procedures in order to gain access to the audit documentation and evidence supporting the existence of any impediments to access, or

(iv) takes any other appropriate action.

Textual Amendments

F8 Words in Sch. 1 para. 15(1)(c)(i) omitted (31.12.2020) by virtue of The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(c)(i); 2020 c. 1, Sch. 5 para. 1(1)

F9 Words in Sch. 1 para. 15(1)(e)(i) omitted (31.12.2020) by virtue of The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(c)(ii); 2020 c. 1, Sch. 5 para. 1(1)

F10 Word in Sch. 1 para. 15(1)(e)(i) substituted (21.2.2020) by The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/108), regs. 1(2)(b), 17(5)

F11 Word in Sch. 1 para. 15(2) substituted (21.2.2020) by The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/108), regs. 1(2)(b), 17(5)

F12 Words in Sch. 1 para. 15(2)(a) omitted (31.12.2020) by virtue of The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(c)(iii); 2020 c. 1, Sch. 5 para. 1(1)

16.—(1) In relation to the audit of public interest entities, standards must ensure that A keeps key audit documents and information for at least five years following the creation of such documents and information. U.K.

(2) In this paragraph, “key audit documents and information” means—

[F13 (a) the documents and information referred to, as appropriate, in—

(i) articles 4(3), 6, 7, 8(4) to (7), 10, 11, 14 and 16(3) of the Audit Regulation,

(ii) any rules made under section 340 of the Financial Services and Markets Act 2000,

(iii) the Financial Services and Markets Act 2000 (Communications by Auditors) Regulations 2001,

(iv) sections 485A to 485C, 489A to 489C and 494ZA of the Companies Act 2006,

(v) paragraphs 3B to 3E of Schedule 11 to the Building Societies Act 1986,

(vi) paragraphs 2 to 5 of Schedule 14A to the Friendly Societies Act 1992,

(vii) sections 485A to 485C and 494ZA of the Companies Act, as applied to—

(aa) limited liability partnerships by the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 (see in particular regulation 36 and 38A), or

(bb) insurance undertakings by the Insurance Accounts Directive (Miscellaneous Insurance Undertakings) Regulations 2008 (see in particular regulation 6(1A)) (“insurance undertaking” has the meaning given by regulation 2 of those Regulations),]

(b) information recorded in accordance with the requirements of paragraphs 8, 10, 12 and 15 of this Schedule, and

(c) the audit report.

Textual Amendments

F13 Sch. 1 para. 16(2)(a) substituted (31.12.2020) by The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/177), regs. 2, 74(d); 2020 c. 1, Sch. 5 para. 1(1)

Regulation 10

SCHEDULE 2 U.K. Investigation Powers

1.—(1) The competent authority may for any purpose related to inspecting or investigating statutory audit work give notice to any statutory auditor (“A”) requiring A to provide information specified in the notice. U.K.

(2) Information may be specified in a notice under sub-paragraph (1) only if it is information relating to the statutory audit of the annual accounts or the consolidated accounts of any audited person.

(3) The competent authority may give notice to any person mentioned in sub-paragraph (4) requiring that person to provide information relating to the statutory audit of the annual accounts or the consolidated accounts of any public interest entity.

(4) The persons to whom notice may be given under sub-paragraph (3) are—

(a) any person involved in the activities of a statutory auditor (including any person to whom a statutory auditor has outsourced such activities),

(b) any public interest entity,

(c) any subsidiary or parent of a public interest entity or any other subsidiary of a company of which a public interest entity is a subsidiary,

(d) any person otherwise having a connection to a statutory auditor carrying out the statutory audit of the annual accounts or consolidated accounts of a public interest entity.

(5) A notice under sub-paragraph (1) or (3) must be in writing and specify the purposes for which the information is required.

(6) A notice under sub-paragraph (1) or (3) may—

(a) specify the time within which and the manner in which the person to whom it is given must comply with it,

(b) require the creation of documents, or documents of a description, specified in the notice, and

(c) require the provision of those documents to the competent authority.

(7) A requirement to provide information or create a document is a requirement to do so in a legible form.

(8) A notice under sub-paragraph (1) or (3) does not require a person to provide any information or create any documents which the person would be entitled to refuse to provide or produce—

(a) in proceedings in the High Court on the grounds of legal professional privilege, or

(b) in proceedings in the Court of Session on the grounds of confidentiality of communications.

(9) In sub-paragraph (8) “communications” means—

(a) communications between a professional legal adviser and his client, or

(b) communications made in connection with or in contemplation of legal proceedings or for the purposes of those proceedings.

2.—(1) If a person fails to comply with a notice under paragraph 1, the competent authority may make an application to the court. U.K.

(2) If it appears to the court that the person has failed to comply with the notice, it may make an order requiring the person to do anything that the court thinks it is reasonable for the person to do, for any of the purposes for which the notice was given, to ensure that the notice is complied with.

(3) Where the court makes an order under sub-paragraph (2)—

(a) it may require the person to meet the costs or expenses of the competent authority's application, or

(b) if the person is a company, partnership or unincorporated association, the court may require an officer who is responsible for the failure to meet those costs or expenses.

(4) In this paragraph—

“the court” means—

(a)

the High Court,

(b)

in relation to England and Wales, the county court,

(c)

in relation to Northern Ireland, a county court,

(d)

the Court of Session, or

(e)

the sheriff;

“officer” means—

(a)

in the case of a company, a director, manager, secretary or other similar officer,

(b)

in the case of a limited liability partnership, a member,

(c)

in the case of a partnership other than a limited liability partnership, a partner, and

(d)

in the case of an unincorporated association, a person who is concerned in the management or control of its affairs.

3.—(1) This paragraph applies if a person provides information (including information contained in a document created by the person) in response to a notice under paragraph 1. U.K.

(2) In any criminal proceedings against the person—

(a) no evidence relating to the information may be adduced by or on behalf of the prosecution, and

(b) no question relating to the information may be asked by or on behalf of the prosecution.

(3) Sub-paragraph (2) does not apply if, in the proceedings—

(a) evidence relating to the information is adduced by or on behalf of the person providing it, or

(b) a question relating to the information is asked by or on behalf of that person.

(4) Sub-paragraph (2) does not apply if the proceedings are for—

(a) an offence under paragraph 5 (obstruction),

(b) an offence under section 5 of the Perjury Act 1911 M1 (false statutory declarations and other false statements without oath),

(c) an offence under section 44(2) of the Criminal Law (Consolidation)(Scotland) Act 1995 M2 (false statements or declarations),

(d) an offence under Article 10 of the Perjury (Northern Ireland) Order 1979 M3 (false statutory declarations and other false unsworn statements).

Marginal Citations

M1 1911 c. 6.

M2 1995 c. 39.

M3 S.I. 1979/1714 (N.I. 19).

4.—(1) An officer of the competent authority may, for the purposes of inspecting or investigating the statutory audit of a public interest entity, enter relevant premises at any reasonable time if— U.K.

(a) the requirements of sub-paragraph (3) are satisfied, or

(b) the occupier of the premises has waived those requirements.

(2) In this paragraph “relevant premises” means premises—

(a) in which a statutory auditor is carrying out a statutory audit, or

(b) where documents related to a statutory audit are kept,

and does not include premises used wholly or mainly as a dwelling.

(3) The requirements of this sub-paragraph are that—

(a) a notice in writing is given to the occupier of the premises by an officer of the competent authority,

(b) the notice sets out why entry is necessary and gives details of the statutory audit work subject to inspection (including the name of the audited person and the accounting years in question) and indicates the nature of the offence under paragraph 5, and

(c) there are at least two working days between the date the occupier of the premises receives the notice and the date of entry.

(4) An officer of the competent authority who enters premises under this paragraph must produce evidence of the officer's identity and authority to the occupier of the premises.

(5) An officer of the competent authority entering premises under this paragraph may—

(a) be accompanied by such persons and may take onto the premises such equipment as the officer thinks necessary,

(b) require a statutory auditor or any person acting on behalf of a statutory auditor to produce any documents relating to the statutory audit of the annual or consolidated accounts of a public interest entity to which the statutory auditor has access,

(c) require a statutory auditor or any person acting on behalf of a statutory auditor to give an explanation of any document produced under paragraph (b).

(6) Where a document required to be produced under sub-paragraph (5)(b) contains information recorded electronically, the power in that sub-paragraph includes power to require the production of a copy of the document in a form in which it can easily be taken away and in which it is visible and legible.

(7) This paragraph does not permit an officer of the competent authority to require a person to produce any document which the person would be entitled to refuse to produce—

(a) in proceedings in the High Court on the grounds of legal professional privilege, or

(b) in proceedings in the Court of Session on grounds of confidentiality of communications.

(8) In this paragraph—

“communications” means—

(a)

communications between a professional legal adviser and the adviser's client, or

(b)

communications made in connection with or in contemplation of legal proceedings or for the purposes of those proceedings.

“give”, in relation to the giving of a notice to the occupier of premises, includes delivering it or leaving it at the premises or sending it there by post;

“working day” means a day other than—

(a)

Saturday or Sunday,

(b)

Christmas Day or Good Friday, or

(c)

a day which is a bank holiday under the Banking and Financial Dealings Act 1971 M4 in that part of the United Kingdom in which the premises are situated.

Marginal Citations

M4 1971 c. 80.

5.—(1) A person commits an offence if the person— U.K.

(a) intentionally obstructs the competent authority or an officer of the competent authority in exercising or seeking to exercise a power under and in accordance with this Schedule,

(b) intentionally fails to comply with a requirement properly imposed by the competent authority or an officer of the competent authority under this Schedule,

(c) without reasonable excuse fails to give the competent authority or an officer of the competent authority any other assistance or information which the competent authority or officer may reasonably require for a purpose for which the competent authority or officer may exercise a power under this Schedule.

(2) A person commits an offence if, in giving information of a kind mentioned in sub-paragraph (1)(c), the person—

(a) makes a statement which the person knows is false or misleading in a material respect, or

(b) recklessly makes a statement which is false or misleading in a material respect.

(3) A person who is guilty of an offence under sub-paragraph (1) or (2) is liable on summary conviction to a fine not exceeding level 3 on the standard scale.

(4) Nothing in this paragraph requires a person to answer any question or give any information if to do so might incriminate that person.

Regulation 15

SCHEDULE 3 U.K. Amendments to the Companies Act 2006

PART 1 U.K. Introductory

1.  The Act is amended as set out in Parts 2 to 5 of this Schedule. U.K.

2.  In this Schedule— U.K.

(a) a reference to a numbered section is a reference to that section of the Act; and

(b) a reference to a numbered Schedule is a reference to that Schedule to the Act.

PART 2 U.K. Amendment to Part 15 of the Companies Act 2006

3.—(1) Section 461 (permitted disclosure of information obtained under compulsory powers) M5 is amended as follows. U.K.

(2) In subsection (4), for paragraph (aa) M6 substitute—

“(aa) for the purpose of assisting the competent authority to exercise its functions under the Statutory Auditors and Third Country Auditors Regulations 2016 M7 and under the Audit Regulation;”.

Marginal Citations

M5 Section 461 was amended by S.I. 2012/1439.

M6 Paragraph (aa) was inserted by S.I. 2012/1439.

M7 S.I. 2016/649.

PART 3 U.K. Amendments to Chapters 2 to 4 of Part 16 of the Companies Act 2006

4.  After section 485 (appointment of auditors of private company: general) insert— U.K.

“485A    Appointment of auditors of private company: additional requirements for public interest entities with audit committees

(1) This section applies to the appointment under section 485(4) of an auditor or auditors of a private company—

(a) which is also a public interest entity; and

(b) which has an audit committee.

(2) But it does not apply to the appointment of an Auditor General as auditor or one of the auditors of the company.

(3) Before an appointment to which this section applies is made—

(a) the audit committee of the company must make a recommendation to the directors in connection with the appointment, and

(b) the directors must propose an auditor or auditors for appointment, including the following information in the proposal—

(i) the recommendation made by the audit committee in connection with the appointment, or

(ii) if the directors' proposal departs from the preference of the audit committee, the reasons for not following the recommendation.

(4) Before the audit committee makes a recommendation or the directors make a proposal under subsection (3), the committee or directors must carry out a selection procedure in accordance with Article 16(3) of the Audit Regulation, unless the company is a small or medium sized enterprise within the meaning in Article 2(1)(f) of Directive 2003/71/EC M8 .

(5) The audit committee must in its recommendation—

(a) identify its first and second choice candidates for appointment,

(b) give reasons for the choices so identified,

(c) state that—

(i) the recommendation is free from influence by a third party, and

(ii) no contractual term of the kind mentioned in Article 16(6) of the Audit Regulation has been imposed on the company.

(6) Subsections (4) and (5) do not apply in relation to a recommendation or proposal for appointment of an auditor or auditors for a financial year (“the relevant financial year”)—

(a) if the relevant financial year begins during a transitional period mentioned in subsection (7); or

(b) if—

(i) a selection procedure mentioned in subsection (8) has been carried out in respect of the appointment of the auditor or auditors in relation to a financial year beginning less than ten years before the first day of the relevant financial year; and

(ii) the auditor or auditors were appointed for the financial year before the relevant financial year.

(7) The transitional periods are—

(a) in the case of an auditor who was first appointed for a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17th June 2020;

(b) in the case of an auditor who was first appointed for a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17th June 2023.

(8) The selection procedures are—

(a) a selection procedure which is in accordance with subsections (4) and (5);

(b) a selection procedure which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the company had an audit committee), which was carried out in relation to a financial year which began before 17th June 2016.

485B    Appointment of auditors of private company: additional requirements for public interest entities without audit committees

(1) This section applies to the appointment under section 485(4) of an auditor or auditors of a private company—

(a) which is also a public interest entity; and

(b) which does not have an audit committee.

(2) But it does not apply to the appointment of an Auditor General as auditor or one of the auditors of the company.

(3) Before an appointment to which this section applies is made the directors must propose an auditor or auditors for appointment.

(4) Before the directors make a proposal under subsection (3), they must carry out a selection procedure in accordance with Article 16(3) of the Audit Regulation, unless the company is a small or medium sized enterprise within the meaning in Article 2(1)(f) of Directive 2003/71/EC.

(5) Subsection (4) does not apply in relation to a proposal for appointment of an auditor or auditors for a financial year (“the relevant financial year”)—

(a) if the relevant financial year begins during a transitional period mentioned in subsection (6); or

(b) if—

(i) a selection procedure mentioned in subsection (7) has been carried out in respect of the appointment of the auditor or auditors in relation to a financial year beginning less than ten years before the first day of the relevant financial year; and

(ii) the auditor or auditors were appointed for the financial year before the relevant financial year.

(6) The transitional periods are—

(a) in the case of an auditor who was first appointed in respect of a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17th June 2020;

(b) in the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17th June 2023.

(7) The selection procedures are—

(a) a selection procedure which is in accordance with subsection (4);

(b) a selection procedure which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the company had an audit committee), which was carried out in relation to a financial year which began before 17th June 2016.”.

Marginal Citations

M8 OJ No. L 345, 31.12.2003, p.64.

5.—(1) Section 486 (appointment of auditors or private company: default power of Secretary of State) is amended as follows. U.K.

(2) In subsection (1), after “section 485,” insert “ 485A or 485B ”.

6.—(1) Section 487 (term of office of auditors of private company) is amended as follows. U.K.

(2) After subsection (1) insert—

“(1A) The terms of appointment of an auditor or auditors of a private company which is also a public interest entity are subject to the additional requirement that the auditor or auditors cease to hold office on the expiry of the period for appointing auditors in respect of the first complete financial year that follows the expiry of the maximum engagement period.

(1B) But subsection (1A) does not apply to an Auditor General.

(1C) In this section—

“the maximum engagement period” means, subject to subsection (1D) and section 487A (which makes transitional provision in relation to auditors appointed before 17th June 2016), whichever of the following periods is longest—

(a)

the period of ten years beginning with the first day of the first financial year in respect of which the auditor was appointed,

(b)

the period of twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed, if the selection requirements are satisfied for at least one financial year which begins every ten years in that period, or

(c)

such other period of no more than twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed and ending on the last day of the relevant ten year period;

“the relevant ten year period” means the period of ten years beginning with the first day of the last financial year—

(a)

which begins within ten years of the first day of the first financial year in respect of which the auditor was appointed, and

(b)

in respect of which the auditor was reappointed following the carrying out of a selection procedure in accordance with the selection requirements; and

“the selection requirements” means—

(a)

the requirements of section 485A(4) and (5) if the company has an audit committee, or

(b)

the requirements of section 485B(4) if the company does not have an audit committee.

(1D) The maximum engagement period may be extended by a period of up to two years with the approval of the competent authority, provided that—

(a) in a case where the period within paragraph (a) of the definition of “the maximum engagement period” is being extended, the appointment of the auditor for the first complete financial year following the end of that period is made following the carrying out of a selection procedure in accordance with the selection requirements; and

(b) in all cases, the competent authority is satisfied that exceptional circumstances exist.

(1E) An auditor is ineligible for appointment as auditor of a private company which is also a public interest entity if—

(a) within the four years preceding the start of the financial year to which that appointment relates the auditor has ceased by virtue of subsection (1A) to hold office as auditor of that company, or

(b) the auditor is a member of the same network as an auditor who within the four years preceding the start of the financial year to which that appointment relates has ceased by virtue of that subsection to hold office as auditor of that company.”

(3) In subsection (2), at the end of paragraph (e) insert—

“, or

(f) the auditor has ceased to hold office by virtue of subsection (1A).”.

7.  After section 487 insert— U.K.

“487A    Maximum engagement period: transitional arrangements

(1) In the case of an auditor who was first appointed in respect of a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, “the maximum engagement period” means the period ending on the day before the first day of the first financial year of the company that begins on or after 17th June 2020.

(2) In the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, “the maximum engagement period” means the period ending on the day before the first day of the first financial year of the company that begins on or after 17th June 2023.

(3) In the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 2003 and before 17th June 2016 and who continues to hold office on 17th June 2016, “the maximum engagement period” means whichever of the following periods is longest—

(a) the period ending on whichever is the later of—

(i) the day before the first day of the first financial year of the company that begins on or after 17th June 2016;

(ii) the last day of the period of ten years beginning with the first day of the first financial year of the company in respect of which the auditor was appointed,

(b) the period of twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed, if the selection requirements are satisfied for at least one financial year which begins every ten years in the period beginning on 17th June 2007, or

(c) such other period of no more than twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed and ending on the last day of the relevant ten year period.

(4) In this section—

“the relevant ten year period” means the period of ten years beginning with the first day of the last financial year—

(a)

which begins either within ten years of the first day of the first financial year in respect of which the auditor was appointed or, if later, on or before 16th June 2017, and

(b)

in respect of which the auditor was reappointed following the carrying out of a selection procedure in accordance with the selection requirements;

“the selection requirements” means—

(a)

in relation to an accounting year beginning on or after 17th June 2016—

(i)

the requirements of section 485A(4) and (5), if the company has an audit committee,

(ii)

the requirements of section 485B(4) if the company does not have an audit committee,

(b)

in relation to an accounting year beginning before 17th June 2016, the requirement that the company carries out a tender process which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the company had an audit committee).

(5) The maximum engagement period may be extended by a period of up to two years with the approval of the competent authority, provided that—

(a) in a case where the period under subsection (3)(a) is being extended, the appointment of the auditor for the first complete financial year following the end of that period is made following the carrying out of a selection procedure in accordance with the selection requirements; and

(b) in all cases, the competent authority is satisfied that exceptional circumstances exist.”.

8.  After section 489 (appointment of auditors of public company: general) insert— U.K.

“489A    Appointment of auditors of public company: additional requirements for public interest entities with audit committees

(1) This section applies to the appointment under section 489(4) of an auditor or auditors of a public company—

(a) which is also a public interest entity; and

(b) which has an audit committee.

(2) But it does not apply to the appointment of an Auditor General as auditor or one of the auditors of the company.

(3) Before an appointment to which this section applies is made—

(a) the audit committee of the company must make a recommendation to the directors in connection with the appointment, and

(b) the directors must propose an auditor or auditors for appointment, including the following information in the proposal—

(i) the recommendation made by the audit committee in connection with the appointment, or

(ii) if the directors' proposal does not accord with that recommendation, the reasons for not following the recommendation.

(4) Before the audit committee makes a recommendation or the directors make a proposal under subsection (3), the committee or directors must carry out a selection procedure in accordance with Article 16(3) of the Audit Regulation, unless the company is—

(a) a small or medium sized enterprise within the meaning in Article 2(1)(f) of Directive 2003/71/EC; or

(b) a company with reduced market capitalisation within the meaning in Article 2(1)(t) of that Directive M9 .

(5) The audit committee must in its recommendation—

(a) identify its first and second choice candidates for appointment,

(b) give reasons for the choices so identified,

(c) state that—

(i) the recommendation is free from influence by a third party, and

(ii) no contractual term of the kind mentioned in Article 16(6) of the Audit Regulation has been imposed on the company.

(6) Subsections (4) and (5) do not apply in relation to a recommendation or proposal for appointment of an auditor or auditors for a financial year (“the relevant financial year”)—

(a) if the relevant financial year begins during a transitional period mentioned in subsection (7); or

(b) if—

(i) a selection procedure mentioned in subsection (8) has been carried out in respect of the appointment of the auditor or auditors in relation to a financial year beginning less than ten years before the first day of the relevant financial year ; and

(ii) the auditor or auditors were appointed for the financial year before the relevant financial year.

(7) The transitional periods are—

(a) in the case of an auditor who was first appointed in respect of a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17 June 2020;

(b) in the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17th June 2023.

(8) The selection procedures are—

(a) a selection procedure which is in accordance with subsections (4) and (5);

(b) a selection procedure which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the company had an audit committee), which was carried out in relation to a financial year which began before 17th June 2016.

489B    Appointment of auditors of public company: additional requirements for public interest entities without audit committees

(1) This section applies to the appointment under section 489(4) of an auditor or auditors of a public company—

(a) which is also a public interest entity; and

(b) which does not have an audit committee.

(2) But it does not apply to the appointment of an Auditor General as auditor or one of the auditors of the company.

(3) Before an appointment to which this section applies is made the directors must propose an auditor or auditors for appointment.

(4) Before the directors make a proposal under subsection (3), the directors must carry out a selection procedure in accordance with Article 16(3) of the Audit Regulation, unless the company is—

(a) a small or medium sized enterprise within the meaning in Article 2(1)(f) of Directive 2003/71/EU M10 ; or

(b) a company with reduced market capitalisation within the meaning in Article 2(1)(t) of that Directive.

(5) Subsection (4) does not apply in relation to a recommendation or proposal for appointment of an auditor or auditors for a financial year (“the relevant financial year”)—

(a) if the relevant financial year begins during a transitional period mentioned in subsection (6); or

(b) if—

(i) a selection procedure mentioned in subsection (7) has been carried out in respect of the appointment of the auditor or auditors in relation to a financial year beginning less than ten years before the first day of the relevant financial year ; and

(ii) the auditor or auditors were appointed for the financial year before the relevant financial year.

(6) The transitional periods are—

(a) in the case of an auditor who was first appointed in respect of a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17th June 2020;

(b) in the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the company that begins on or after 17th June 2023.

(7) The selection procedures are—

(a) a selection procedure which is in accordance with subsection (4);

(b) a selection procedure which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the company had an audit committee), which was carried out in relation to a financial year which began before 17th June 2016.”.

Marginal Citations

M9 Article 2(1)(t) was inserted by Directive 2010/73/EU of the European Parliament and of the Council (OJ No L 327, 11.12.2010, p1).

M10 OJ No L 345, 31.12.2003, p.64-89.

9.—(1) Section 490 (appointment of auditors of public company: default power of Secretary of State) is amended as follows. U.K.

(2) In subsection (1), after “section 489,” insert “ 489A or 489B ”.

10.—(1) Section 491 (term of office of auditors of public company) is amended as follows. U.K.

(2) After subsection (1) insert—

“(1A) The terms of appointment of an auditor or auditors of a public company which is also a public interest entity are subject to the additional requirement that the auditor or auditors cease to hold office at the end of the accounts meeting in respect of the first financial year which ends after the expiry of the maximum engagement period.

(1B) But subsection (1) does not apply to an Auditor General.

(1C) In this section—

“the maximum engagement period” means, subject to subsection (1D) and section 491A (which makes transitional provision in relation to auditors appointed before 17th June 2016) whichever of the following periods is longest—

(a)

the period of ten years beginning with the first day of the first financial year in respect of which the auditor was appointed, or

(b)

the period of twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed if the selection requirements are satisfied for at least one financial year which begins every ten years in that period, or

(c)

such other period of no more than twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed and ending on the last day of the relevant ten year period,

“the relevant ten year period” means the period of ten years beginning with the first day of the last financial year—

(a)

which begins within ten years of the first day of the first financial year in respect of which the auditor was appointed, and

(b)

in respect of which the auditor was reappointed following the carrying out of a selection procedure in accordance with the selection requirements; and

“the selection requirements” means—

(a)

the requirements of section 489A(4) and (5) if the company has an audit committee, or

(b)

the requirements of section 489B(4) if the company does not have an audit committee.

(1D) The maximum engagement period may be extended by a period of up to two years with the approval of the competent authority, provided that—

(a) in a case where the period within paragraph (a) of the definition of “the maximum engagement period” is being extended, the appointment of the auditor for the first complete financial year following the end of that period is made following the carrying out of a selection procedure in accordance with the selection requirements; and

(b) in all cases, the competent authority is satisfied that exceptional circumstances exist.

(1E) An auditor is ineligible for appointment as auditor of a public company which is also a public interest entity if—

(a) within the four years preceding the start of the financial year to which that appointment relates the auditor has ceased by virtue of subsection (1A) to hold office as auditor of that company, or

(b) the auditor is a member of the same network as an auditor who within the four years preceding the start of the financial year to which that appointment relates has ceased by virtue of that subsection to hold office as auditor of that company.”.

11.  After section 491 insert— U.K.

“491A    Maximum engagement period: transitional arrangements

(1) In the case of an auditor who was first appointed in respect of a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, “the maximum engagement period” means the period ending on the day before the first day of the first financial year of the company that begins on or after 17th June 2020.

(2) In the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, “the maximum engagement period” means the period ending on the day before the first day of the first financial year of the company that begins on or after 17th June 2023.

(3) In the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 2003 and before 17th June 2016 and who continues to hold office on 17th June 2016, “the maximum engagement period” means whichever of the following periods is longest—

(a) the period ending on whichever is the later of—

(i) the day before the first day of the first financial year of the company that begins on or after 17th June 2016; or

(ii) the last day of the period of ten years beginning with the first day of the first financial year of the company in respect of which the auditor was appointed,

(b) the period of twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed if the selection requirements are satisfied for at least one financial year which begins every ten years in the period beginning on 17th June 2007,

(c) such other period of no more than twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed and ending on the last day of the relevant ten year period.

(4) In this section—

“the relevant ten year period” means the period of ten years beginning with the first day of the last financial year—

(a)

which begins either within ten years of the first day of the first financial year in respect of which the auditor was appointed or, if later, on or before 16th June 2017, and

(b)

in respect of which the auditor was reappointed following the carrying out of a selection procedure in accordance with the selection requirements; and

“the selection requirements” means—

(a)

in relation to an accounting year beginning on or after 17th June 2016—

(i)

the requirements of section 489A(4) and (5), if the company has an audit committee,

(ii)

the requirements of section 489B(4) if the company does not have an audit committee,

(b)

in relation to an accounting year beginning before 17th June 2016, the requirement that the company carries out a tender process which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the company had an audit committee).

(5) The maximum engagement period may be extended by a period of up to two years with the approval of the competent authority, provided that—

(a) in a case where the period under subsection (3)(a) is being extended, the appointment of the auditor for the first complete financial year following the end of that period is made following the carrying out of a selection procedure in accordance with the selection requirements; and

(b) in all cases, the competent authority is satisfied that exceptional circumstances exist.”

12.  After section 494 (disclosure of services provided by auditor or associates and related remuneration) insert— U.K.

“494A    Interpretation

In this Chapter—

“audit committee” means a body which performs the functions referred to in Article 39(6) of the Audit Directive or equivalent functions;

“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 M11 ;

“Auditor General” means—

(a)

the Comptroller and Auditor General,

(b)

the Auditor General for Scotland,

(c)

the Auditor General for Wales, or

(d)

the Comptroller and Auditor General for Northern Ireland;

“issuer” has the same meaning as in Part 6 of the Financial Services and Markets Act 2000 M12 (see section 102A(6) M13 );

“network” means an association of persons other than a firm co-operating in audit work by way of—

(a)

profit-sharing;

(b)

cost sharing;

(c)

common ownership, control or management;

(d)

common quality control policies and procedures;

(e)

common business strategy; or

(f)

use of a common name;

“public interest company” means—

(a)

an issuer whose transferable securities are admitted to trading on a regulated market;

(b)

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 M14 , other than one listed in Article 2 of Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and investment firms M15 ;

(c)

an insurance undertaking within the meaning given by Article 2(1) of Council Directive 1991/674/EEC of the European Parliament and of the Council on the annual accounts and consolidated accounts of insurance undertakings M16 ;

“regulated market” has the same meaning as in Part 6 of the Financial Services and Markets Act 2000 (see section 103(1) M17 );

“transferable securities” means anything which is a transferable security for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments M18 .”.

Marginal Citations

M11 OJ L 157/87 09.06.06. This Directive was amended by Directives 2008/30/EC, 2013/34/EU and 2014/56/EU.

M12 2000 c. 8.

M13 Section 102A was inserted by S.I. 2005/1433 and amended by S.I. 2015/1755.

M14 O.J. L176 27.06.2013, p.1-337.

M15 O.J. L176 27.06.2013, p. 338-436.

M16 O.J. L374 31.12.1991 p. 7-31.

M17 Section 103 was substituted by S.I. 2005/1433 and amended by paragraphs 1 and 11 of Schedule 15 to the Companies Act 2006 (c. 46). There are other amendments but none is relevant.

M18 O.J. L145 30.04.2004, p. 1-44.

13.—(1) Section 495 (auditor's report on company's annual accounts) M19 is amended as follows. U.K.

(2) For subsection (2) substitute—

“(2) The auditor's report must include—

(a) the identity of the company whose annual accounts are the subject of the audit,

(b) a description of the annual accounts that are the subject of the audit (including the period covered by those accounts),

(c) a description of the financial reporting framework that has been applied in the preparation of those accounts, and

(d) a description of the scope of the audit identifying the auditing standards in accordance with which the audit was conducted.”

(3) For subsection (4) substitute—

“(4) The auditor's report—

(a) must be either unqualified or qualified,

(b) must include a reference to any matters to which the auditor wishes to draw attention by way of emphasis without qualifying the report,

(c) must include a statement on any material uncertainty relating to events that may cast significant doubt about the company's ability to continue to adopt the going concern basis of accounting, and

(d) must identify the auditor's place of establishment.”.

(4) After subsection (4) insert—

“(5) Where more than one person is appointed as an auditor—

(a) all the persons appointed must jointly make a report under this section and the report must include a statement as to whether all the persons appointed agree on the matters contained in the report, and

(b) if all the persons appointed cannot agree on the matters contained in the report, the report must include the opinions of each person appointed and give reasons for the disagreement.”.

Marginal Citations

M19 Section 495 was amended by S.I. 2013/3008.

14.—(1) Section 496 (auditor's report on strategic report and director's report) M20 is amended as follows. U.K.

(2) The existing words become subsection (1) and after that subsection, insert—

“(2) Where more than one person is appointed as auditor, the report must include a statement as to whether all the persons appointed agree on the statements and indications given under subsection (1) and, if they cannot agree on those statements and indications, the report must include the opinions of each person appointed and give reasons for the disagreement.”.

Marginal Citations

M20 Section 496 was substituted by S.I. 2015/980.

15.—(1) Section 497A (auditor's report on separate corporate governance statement) M21 is amended as follows. U.K.

(2) The existing words become subsection (1) and after that subsection, insert—

“(2) Where more than one person is appointed as auditor, the report must include a statement as to whether all the persons appointed agree on the statements and indications given under subsection (1) and, if they cannot agree on those statements and indications, the report must include the opinions of each person appointed and give reasons for the disagreement.”.

Marginal Citations

M21 Section 497A was inserted by S.I. 2009/1581 and substituted by S.I. 2015/980.

16.—(1) Section 498 (duties of auditor) M22 is amended as follows. U.K.

(2) After subsection (5) insert—

“(6) Where more than one person is appointed as auditor, the report must include a statement as to whether all the persons appointed agree on the statements given under subsections (2) to (5) and, if they cannot agree on those statements, the report must include the opinions of each person appointed and give reasons for the disagreement.”.

Marginal Citations

M22 Section 498 was amended by S.I. 2008/393 and S.I. 2013/1970.

17.—(1) Section 503 (signature of auditor's report) is amended as follows. U.K.

(2) After subsection (3) insert—

“(4) Where more than one person is appointed as auditor, the report must be signed by all those appointed.”.

18.—(1) Section 505 (names to be stated in published copies of auditor's report) is amended as follows. U.K.

(2) After subsection (1) insert—

“(1A) If more than one person is appointed as auditor, the reference in subsection (1)(a) to the name of the auditor is to be read as a reference to the names of all the auditors.”.

19.—(1) Section 508 (guidance for regulatory and prosecuting authorities: England, Wales and Northern Ireland) is amended as follows. U.K.

(2) For subsection (1)(b), substitute—

“(b) has been, is being or may be investigated—

(i) pursuant to arrangements under paragraph 15 of Schedule 10 (investigation of complaints against auditors and supervisory bodies), or

(ii) by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016.”.

20.—(1) Section 509 (guidance for regulatory authorities: Scotland) is amended as follows. U.K.

(2) For subsection (1)(b), substitute—

“(b) has been, is being or may be investigated—

(i) pursuant to arrangements under paragraph 15 of Schedule 10 (investigation of complaints against auditors and supervisory bodies), or

(ii) by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016.”

21.—(1) Section 510 (resolution removing auditors from office) is amended as follows. U.K.

(2) For subsection (4) substitute—

“(4) An auditor may not be removed from office before the expiration of his term of office except—

(a) by resolution under this section, or

(b) in accordance with section 511A.”.

22.—(1) After section 511 (special notice required for resolution removing auditor from office) insert— U.K.

“511A    Public interest companies: application to court to remove auditor from office

(1) This section applies only to a public interest company.

(2) The competent authority may apply to the court for an order removing an auditor of a company from office if the authority considers that there are proper grounds for removing the auditor from office.

(3) The members of a company may apply to the court for an order removing an auditor of the company from office if the applicant or applicants consider that there are proper grounds for removing the auditor from office.

(4) If the court is satisfied, on hearing an application under subsection (2), that there are proper grounds for removing the auditor from office, it may make an order removing the auditor from office.

(5) If the court is satisfied, on hearing an application under subsection (3), that—

(a) the applicants represent in total—

(i) not less than 5% of the voting rights of all the members having a right to vote at a general meeting of the company, or

(ii) not less than 5% in nominal value of the company's share capital, and

(b) there are proper grounds for removing the auditor from office,

the court may make an order removing the auditor from office.

(6) For the purposes of this section, divergence of opinions on accounting treatments or audit procedures are not to be taken to be proper grounds for removing an auditor from office.

(7) In this section the competent authority means the body designated under section 1252 of this Act.”.

23.—(1) Section 513 (rights of auditor who has been removed from office) is amended as follows. U.K.

(2) In subsection (1), after the words “under section 510” insert “ or by order of the court under section 511A ”.

24.—(1) Section 514 (failure to re-appoint auditor: special procedure required for written resolution) M23 is amended as follows. U.K.

(2) In subsections (1) and (2A)(b) after the words “section 510”, insert “ , 511A ”.

Marginal Citations

M23 Section 514 was amended by section 18 of, and paragraphs 13 and 14 of Schedule 5 to, the Deregulation Act 2015 (c. 20).

25.—(1) Section 515 (failure to re-appoint auditor: special notice required for resolution at general meeting) M24 is amended as follows. U.K.

(2) In subsections (1), (1A) and (2A)(b), after “section 510” insert “ , 511A ”.

Marginal Citations

M24 Section 515 was amended by section of, and paragraphs 13 and 15 of Schedule 5 to, the Deregulation Act 2015.

26.—(1) Section 519A (meaning of “public interest company”, “non-public interest company” and “exempt reasons”) M25 is amended as follows. U.K.

(2) In subsection (1) for the definition of “public interest company” substitute—

““public interest company” means a company which is—

(a) an issuer whose transferable securities are admitted to trading on a regulated market;

(b) 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 M26 , other than one listed in Article 2 of Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and investment firms M27 ; or

(c) an insurance undertaking within the meaning given by Article 2(1) of Council Directive 1991/674/EEC of the European Parliament and of the Council on the annual accounts and consolidated accounts of insurance undertakings M28 ;”.

(3) For subsection (2) substitute—

“(2) For the purposes of the definition of “public interest company”—

“issuer” has the same meaning as in Part 6 of the Financial Services and Markets Act 2000 (see section 102A(6) M29 );

“regulated market” has the same meaning as in Part 6 of the Financial Services and Markets Act 2000 (see section 103(1) M30 );

“transferable securities” means anything which is a transferable security for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments M31 .”.

Marginal Citations

M25 Section 519A was inserted by section 18 of the Deregulation Act 2015.

M26 OJ No L 176, 27.6.2013, p.1-337.

M27 OJ No L 176, 27.6.2013, p. 338- 436.

M28 OJ No L 374, 31.12.1991, p.7- 31.

M29 Section 102A was substituted by S.I. 2005/1433 and amended by S.I. 2015/1755.

M30 Section 103 was substituted for section 103 by S.I. 2005/1433 and amended by paragraph 11(2) of Schedule 15(1) to the Companies Act 2006 (c.46).

M31 OJ No L 145, 30.4.2004, p.1- 44.

PART 4 U.K. Amendments to Part 38 of the Companies Act 2006

27.—(1) Section 1173 (minor definitions: general) is amended as follows. U.K.

(2) In subsection (1) at the appropriate places insert—

““the Audit Regulation” means Regulation 537/2014 of the European Parliament and of the Council on specific requirements regarding statutory audit of public interest entities M32 ;”; and

““the competent authority” means the Financial Reporting Council Limited M33 ;”.

Marginal Citations

M32 OJ No L 158, 27.5.2014, p.77-112.

M33 A company registered in England and Wales with number 02486368.

28.—(1) Schedule 8 (index of defined expressions) is amended as follows. U.K.

(2) At the appropriate places insert—

“the Audit Regulation

section 1173(1)”

“the competent authority

section 1173(1)”

PART 5 U.K. Amendments to Part 42 of the Companies Act 2006

29.—(1) Section 1217 (supervisory bodies) M34 is amended as follows. U.K.

(2) In subsection (1A), for the words from “paragraphs 9(3)(b)” to “other officer)” substitute “ paragraphs 9(1A) and 10C(3) (bar on appointment as director or other officer) and paragraph 9(3)(b) (confidentiality of information) ”.

(3) In subsection (3), after “which the body” insert, “ or the competent authority ”.

Marginal Citations

M34 Section 1217 was amended by S.I.2007/3494.

30.—(1) Section 1218 (exemption from liability for damages) is amended as follows. U.K.

(2) In subsection (3)—

(a) in paragraph (d), after “this Part” insert “ or by or by virtue of the Statutory Auditors and Third Country Auditors Regulations 2016; ”;

(b) after paragraph (d) insert—

“(e) the obligations imposed on the body by or by virtue of the Audit Regulation.”.

(3) In subsection (4)—

(a) in paragraph (b), after “this Part” insert “ , the Statutory Auditors and Third Country Auditors Regulations 2016 or the Audit Regulation ”;

(b) in the closing words, after “this Part” insert “ , the Statutory Auditors and Third Country Auditors Regulations 2016 or the Audit Regulation ”.

31.  After section 1223 (matters to be notified to the Secretary of State), insert— U.K.

“1223ZA.    Matters to be notified to the competent authority

(1) The competent authority may require a recognised supervisory body—

(a) to notify the competent authority immediately of the occurrence of such events as the competent authority may specify in writing and to give the competent authority such information in respect of those events as is so specified;

(b) to give the competent authority, at such times or in respect of such periods as the competent authority may specify in writing, such information as is so specified.

(2) The notices and information required to be given must be such as the competent authority may reasonably require for the exercise of its functions under this Part, the Statutory Auditors and Third Country Auditors Regulations 2016 or the Audit Regulation.

(3) The competent authority may require information given under this section to be given in a specified form or verified in a specified manner.

(4) Any notice or information required to be given under this section must be given in writing unless the competent authority specifies or approves some other manner.”.

32.—(1) Section 1223A (notification of matters relevant to other EEA states) M35 is amended as follows. U.K.

(2) For subsection (1), substitute—

“(1) A recognised supervisory body must notify the Secretary of State—

(a) if a notifiable person becomes eligible for appointment as a statutory auditor, unless the notifiable person is an individual;

(b) if a notifiable person's eligibility for appointment as a statutory auditor is withdrawn;

(c) of the reasons for any such withdrawal.”.

Marginal Citations

M35 Section 1223A was inserted by S.I. 2007/3494.

33.  After section 1224 (Secretary of State's power to call for information), insert— U.K.

“1224ZA.    The competent authority's power to call for information

(1) The competent authority may by notice in writing require any recognised supervisory body to give the competent authority such information as it may reasonably require for the exercise of its functions under this Part, the Statutory Auditors and Third Country Auditors Regulations 2016 or the Audit Regulation.

(2) The competent authority may require that any information which it requires under this section is to be given within such reasonable time and verified in such manner as it may specify.”.

34.—(1) Section 1224A (restrictions on disclosure) M36 is amended as follows. U.K.

(2) In subsection (1), for the words from “or sections 522 to 524” to the end substitute “ sections 522 to 524 (notification to appropriate audit authority of resignation or removal of auditor), the Statutory Auditors and Third Country Auditors Regulations 2016 or the Audit Regulation. ”.

(3) In subsection (2), for paragraph (c) substitute—

“(c) the competent authority,”.

Marginal Citations

M36 Section 1224A was inserted by S.I. 2007/3494 and amended by S.I. 2011/1856.

35.—(1) Section 1225 (enforcement: general) M37 is amended as follows. U.K.

(2) In subsection (1)—

(a) in paragraph (b) omit “or”;

(b) at the end of paragraph (c) insert “ or ” and after that paragraph insert—

“(d) that a recognised supervisory body has not complied with an obligation imposed on it by or by virtue of the Statutory Auditors and Third Country Auditors Regulations 2016.”.

(3) In subsection (3), after “Schedule 11 (revocation of recognition orders)” insert “ or the powers of the competent authority under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016. ”.

Marginal Citations

M37 Section 1225, 1225A-1225G was substituted for section 1225 by S.I. 2012/1741.

36.—(1) Section 1229 (supervision of Auditors General by the Independent Supervisor) M38 is amended as follows. U.K.

(2) In subsection (2)(b), for “bodies” substitute “ recognised supervisory bodies ”.

(3) In subsection (3A), for “paragraphs 9 to 10A and 12 to 15” substitute “ paragraphs 9 to 10C and 12 to 16 ”.

Marginal Citations

M38 Sections 1229(2), 1229(2A) and 1229(3A) were inserted by S.I. 2007/3494.

37.—(1) Section 1239 (register of auditors) M39 is amended as follows. U.K.

(2) In subsection (5), omit paragraph (e) and after paragraph (f) insert—

“(g) the competent authority”.

Marginal Citations

M39 Section 1239 was amended by S.I. 2007/3494.

38.—(1) Section 1251A (duty of Secretary of State to report on inspections) M40 is amended as follows. U.K.

(2) In paragraph (b) for “paragraph 13(9)”, substitute “ paragraph 13(12) ”.

Marginal Citations

M40 Section 1251A was inserted by S.I. 2007/3494.

39.—(1) Section 1252 (delegation of Secretary of State's functions) is amended as follows. U.K.

(2) In subsection (2)(b), for “(whether” substitute “ (including the competent authority, and whether ”.

40.—(1) Section 1253 (delegation of functions to an existing body) M41 is amended as follows. U.K.

(2) In subsection (5) omit the words “paragraph 21 to 22B, 23(1) M42 , 23A(1) M43 or 24(1) M44 of Schedule 10 or”.

Marginal Citations

M41 Section 1253 was amended by S.I. 2013/1672.

M42 Paragraph 23(1) was substituted for paragraph 23(1) by S.I. 2012/1741.

M43 Paragraph 23A was inserted by S.I. 2011/1856 and amended by S.I. 2013/1672.

M44 Paragraph 24(1) and (1A) were substituted for paragraph 24(1) by S.I. 2012/1741.

41.—(1) Section 1253B (requests from EEA competent authorities) M45 is amended as follows. U.K.

(2) For subsection (1) substitute—

“(1) The Secretary of State must take all necessary steps to—

(a) ensure that an investigation is carried out, or

(b) provide any other assistance or information,

if requested to do so by an EEA competent authority or a European supervisory authority (“the requesting authority”), in accordance with Article 36 of the Audit Directive (regulatory co-operation between Member States) or Article 31, 32 or 33 of the Audit Regulation.”.

(3) In subsection (2)—

(a) in paragraph (a), for “the EEA competent authority” substitute “ the requesting authority ”, and

(b) in paragraph (b), for “the EEA competent authority which made the request” substitute “ the requesting authority ”.

(4) After subsection (3) insert—

“(4) In this section “European supervisory authority” means—

(a) the European Securities and Markets Authority;

(b) the European Banking Authority;

(c) the European Insurance and Occupational Pensions Authority.”.

Marginal Citations

M45 Section 1253B was inserted by S.I. 2007/3494.

42.—(1) Section 1253C (notification to competent authorities of other EEA states) M46 is amended as follows. U.K.

(2) For subsection (1) substitute—

“(1) If the Secretary of State receives notice from a recognised supervisory body under section 1223A(1) (notification of matters relevant to other EEA States) that—

(a) a person has become eligible for appointment as a statutory auditor, or

(b) a person's eligibility for appointment as a statutory auditor has been withdrawn,

the Secretary of State must notify the relevant EEA competent authority.”.

(3) In subsection (3), for the words from “the reasons” to the end substitute, “, in a case where a person's eligibility for appointment as a statutory auditor has been withdrawn, the reasons for the withdrawal”.

Marginal Citations

M46 Section 1253C was inserted by S.I. 2007/3494 and amended by S.I. 2011/1043.

43.—(1) Section 1253D (restriction on transfer of audit working papers to third countries) M47 is amended as follows. U.K.

(2) In subsection (1), for “Audit working papers” substitute “ Audit working papers and investigation reports ”.

Marginal Citations

M47 Sections 1253D-1253DE were substituted for section 1253D by S.I. 2010/2537.

44.—(1) Section 1253DA (transfer by Secretary of State) is amended as follows. U.K.

(2) For the words “audit working papers” wherever they appear substitute “ audit working papers and investigation reports ”.

45.—(1) Section 1253DB (transfer by statutory auditor with approval of Secretary of State) is amended as follows. U.K.

(2) For the words “audit working papers” wherever they appear substitute “ audit working papers and investigation reports ”.

46.  In section 1253DC (transfer by statutory auditor for purposes of investigation of auditor), for “audit working papers” substitute “ audit working papers and investigation reports ”. U.K.

47.—(1) Section 1253DD (agreement of EEA competent authority) is amended as follows. U.K.

(2) For the words “audit working papers” wherever they appear substitute “ audit working papers and investigation reports ”.

48.—(1) Section 1253DE (transfer by means of inspection) is amended as follows. U.K.

(2) In subsection (1) M48 for “audit working papers” substitute “ audit working papers and investigation reports ”.

Marginal Citations

M48 Section 1253DE(1) was amended by S.I. 2010/2537.

49.—(1) Section 1253E (working arrangements for transfer of papers) is amended as follows. U.K.

(2) For the words “audit working papers” wherever they appear, substitute “ audit working papers and investigation reports ”.

(3) In subsection (5)—

(a) omit the word “and” at the end of paragraph (a);

(b) at the end of paragraph (b), insert “ and ” and after that paragraph, insert—

“(c) ensure that the protection of the commercial interests of any audited person, including its industrial and intellectual property, is not undermined.”.

(4) After subsection (7) insert—

“(7A) The arrangements must—

(a) provide that the Secretary of State may only disclose confidential information received from the third country competent authority—

(i) with the agreement of that authority or for purposes for which that authority has given its agreement,

(ii) where disclosure is required by law, or

(iii) where disclosure is necessary in connection with legal proceedings, and

(b) provide that the third country competent authority may only disclose confidential information received from the Secretary of State—

(i) with the Secretary of State's agreement or for purposes for which the Secretary of State has given agreement,

(ii) where disclosure is required by law, or

(iii) where disclosure is necessary in connection with legal proceedings.”.

50.—(1) Section 1254 (directions to comply with international obligations) M49 is amended as follows. U.K.

(2) In subsection (1)(a), after “the Independent Supervisor” insert “ , the competent authority ”.

(3) In subsection (3), after “the Independent Supervisor” insert “ , the competent authority ”.

Marginal Citations

M49 Section 1254 was amended by S.I. 2007/3494 and 2011/1043.

51.—(1) Section 1261 (minor definitions) is amended as follows. U.K.

(2) In subsection (1)—

(a) at the appropriate places, insert the following definitions—

““audit working papers and investigation reports” means—

(a)

any documents which are or have been held by a statutory auditor, an EEA auditor or a third country auditor and which are related to the conduct of an audit conducted by that auditor;

(b)

any report of an inspection of the conduct of an audit by a statutory auditor, an EEA auditor or a third country auditor, or

(c)

any report of an investigation into the conduct of a statutory auditor, an EEA auditor or a third country auditor,”;

““the Audit Regulation” means Regulation 537/2014 of the European Parliament and of the Council on specific requirements regarding statutory audit of public interest entities;”;

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

(b) in the definition of “the Audit Directive” omit the words “ as amended at any time before 1st January 2009”;

(c) omit the definition of “audit working papers”;

(d) in the definition of “third country auditor” after “other than” insert “ an EEA auditor or ”;

(e) in the definition of “transfer” after “audit working papers” insert “ and investigation reports ”.

52.—(1) Section 1262 (index of defined expressions) M50 is amended as follows. U.K.

(2) At the appropriate places insert the following entries in the Table—

“Audit Regulation

section 1261(1)”

“audit working papers and investigation reports

section 1261(1)”

“competent authority

section 1261(1)”

(3) Omit the entry relating to “audit working papers”.

Marginal Citations

M50 Section 1262 was amended by S.I. 2007/3494.

53.  Schedule 10 (recognised supervisory bodies) is amended as follows. U.K.

54.—(1) Paragraph 2 is amended as follows. U.K.

(2) For sub-paragraph (2) substitute—

“(2) The Secretary of State may make a recognition order only if it appears to him, from the information furnished by the body and having regard to other information in his possession, that—

(a) the requirements of Part 2 of this Schedule are satisfied in the case of that body,

(b) the body is able to perform all of the tasks which can be delegated by the competent authority under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016, and

(c) the body is organised in such a way that conflicts of interest are avoided.”.

55.—(1) Paragraph 3 is amended as follows. U.K.

(2) For sub-paragraph (1) substitute—

“(1) A recognition order in respect of a body may be revoked by a further order made by the Secretary of State if at any time it appears to him—

(a) that any requirement of Part 2 of this Schedule, other than a requirement relating to a task delegated to the body under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016, is not satisfied in the case of the body,

(b) that the body has failed to comply with any obligation imposed on it by or by virtue of this Part of this Act, other than an obligation relating to a task delegated to the body under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016, or

(c) that the continued recognition of the body is undesirable having regard to the existence of one or more other bodies which have been or are to be recognised.”.

(3) After subparagraph (1), insert—

“(1A) A recognition order in respect of a body may be revoked by a further order made by the Secretary of State if at any time—

(a) one or more tasks delegated to the body under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016 has been reclaimed by the competent authority, and

(b) it appears to the Secretary of State that the continued recognition of the body is undesirable having regard to the circumstances in which the task or tasks were reclaimed.”.

(4) In sub-paragraph (10)(a), after “(1)” insert “ , (1A) ”.

56.  In Part 2, before paragraph 6, insert— U.K.

“Delegation etc. of tasks by competent authority

5A.   The body (“B”) must have rules providing that—

(a) in circumstances where and to the extent that a task delegated to B is reclaimed by the competent authority under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016, the competent authority may apply rules (and may vary the rules it applies) made by B in accordance with the requirements of this Part of this Schedule,

(b) in circumstances where and to the extent that a task delegated to B is reclaimed by the competent authority under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016 and is delegated to another recognised supervisory body, the other recognised supervisory body may apply rules (and may vary the rules it applies) made by B in accordance with the requirements of this Part of the Schedule, and

(c) in circumstances where and to the extent that a task is not delegated to B by the competent authority under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016, the competent authority may apply rules (and may vary the rules it applies) made by B in accordance with the requirements of paragraphs 12 to 16 of this Schedule.

Consultation

5B.   The body must consult with the competent authority and with other recognised supervisory bodies in making or varying rules in accordance with the requirements of this Schedule.”.

57.—(1) Paragraph 6 is amended as follows. U.K.

(2) In sub-paragraph (1) for paragraph (aa)(iii), substitute—

“(iii) he meets the requirements of sub-paragraph (1A).”.

(3) In sub-paragraph (1)(b), after “case of a firm” insert “ which is not an EEA auditor ”.

(4) After sub-paragraph (1)(b) insert—

“(c) in the case of a firm which is an EEA auditor—

(i) each individual responsible for statutory audit work on behalf of the firm is eligible for appointment as a statutory auditor,

(ii) the firm would be eligible for appointment as a statutory auditor if it were not an EEA auditor or is eligible for a corresponding appointment as an auditor under the law of an EEA State or part of an EEA State, other than the United Kingdom, and

(iii) if the firm is eligible for a corresponding appointment as an auditor under the law of an EEA State or part of an EEA State other than the United Kingdom, the firm provides proof of its eligibility in the form of a certificate, dated not more than three months before it is provided by the firm, from the competent authority of the EEA State concerned.”.

(5) After sub-paragraph (1) insert—

“(1A) The requirements of this sub-paragraph are that the individual—

(a) already holds a professional qualification which covers all the subjects which are covered by a recognised professional qualification and which are subjects of which knowledge is essential for the pursuit of the profession of statutory auditor, or

(b) holds a professional qualification which does not cover all those subjects and has met whichever of the requirements of sub-paragraph (1B) is specified in the body's rules.

(1B) The body's rules must specify that the condition in sub-paragraph (1A)(b) is satisfied in one of the following ways—

(a) only by passing an aptitude test in accordance with sub-paragraph (2),

(b) only by completing an adaptation period in accordance with sub-paragraphs (2B) and (2C), or

(c) either by passing an aptitude test in accordance with sub-paragraph (2) or by completing an adaptation period in accordance with sub-paragraphs (2B) and (2C), according to the choice of the individual.”.

(6) Omit sub-paragraph (2A).

(7) Before sub-paragraph (3) insert—

“(2B) An adaptation period is a period, not exceeding three years, in which the individual (“the applicant”) pursues the profession of statutory auditor under the supervision of an individual who holds an appropriate qualification, subject to an assessment (“the ability assessment”) of the applicant's ability to pursue the profession of statutory auditor in the United Kingdom.

(2C) Where the body's rules specify that the condition in sub-paragraph (1B)(b) can be satisfied by completing an adaptation period—

(a) the body must have rules governing the adaptation period and the ability assessment, having regard to the circumstances of each applicant and, in particular, to the fact that each applicant is a qualified professional in another EEA State,

(b) the applicant may be required to undergo further training during the adaptation period,

(c) the applicant's performance during the adaptation period must be assessed by the body, and

(d) the body must determine the applicant's professional status during the adaptation period.”.

58.—(1) Paragraph 9 is amended as follows. U.K.

(2) In sub-paragraph (1)(c) for “from any significant threats to it” substitute “ in accordance with the standards mentioned in sub-paragraph (3A) ”.

(3) In sub-paragraph (1)(d), for the words after “record” substitute “ the matters required to be recorded in accordance with those standards. ”

(4) Omit sub-paragraph (1)(e).

(5) After sub-paragraph (1) insert—

“(1A) The body must have adequate rules and practices designed to ensure that, except where the audited person is a public interest entity—

(a) an individual who has been appointed as statutory auditor may not be appointed as a director or other officer of the audited person or be concerned in the management of the audited person during a period of not less than one year determined in standards set by the competent authority and commencing on the date on which the individual's appointment as a statutory auditor ended;

(b) a key audit partner of a firm which has been appointed as statutory auditor may not be appointed as a director or other officer of the audited person or be concerned in the management of the audited person during a period of not less than one year to be determined in standards set by the competent authority and commencing on the date on which the firm's appointment as a statutory auditor ended.”.

(6) Omit sub-paragraph (2).

(7) In sub-paragraph (3), omit paragraphs (a) and (c) and the “and” at the end of paragraph (b).

(8) After sub-paragraph (3) insert—

“(3A) The rules and practices mentioned in sub-paragraphs (1) and (3) must include provision requiring compliance with standards for the time being determined by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016.”.

(9) In sub-paragraph (4), for “sub-paragraph (3)(b) (confidentiality of information)” substitute “ sub-paragraphs (1A) and (3)(b) ”.

(10) After sub-paragraph (4) insert—

“(5) An auditor is not to be regarded as an officer of the audited person for the purposes of sub-paragraph (1A) (a) and (b).”.

59.—(1) Paragraph 10 is amended as follows. U.K.

(2) For sub-paragraph (2) substitute—

“(2) The rules and practices mentioned in sub-paragraph (1) must include provision requiring compliance with any standards for the time being determined by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016.”.

60.—(1) Paragraph 10A is amended as follows. U.K.

(2) For sub-paragraph (2) substitute—

“(2) The rules and practices mentioned in sub-paragraph (1) must include provision requiring compliance with any standards for the time being determined by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016.”.

(3) For sub-paragraph (3) substitute—

“(3) The body must have rules and practices ensuring that group auditors retain copies of any documents necessary for the purposes of any review in accordance with those standards.”.

(4) Omit sub-paragraphs (4) to (6).

61.  Omit paragraph 10B. U.K.

62.—(1) Paragraph 10C is amended as follows. U.K.

(2) Omit sub-paragraphs (1) and (2).

(3) For sub-paragraph (3) substitute—

“(3) The body must have adequate rules and practices designed to ensure that—

(a) an individual who has been appointed as statutory auditor of a public interest entity may not be appointed as a director or other officer of the entity or be concerned in the management of the entity during a period of not less than two years to be determined in standards set by the competent authority and commencing on the date on which the individual's appointment as statutory auditor ended;

(b) a key audit partner of a firm which has been appointed as statutory auditor of a public interest entity may not be appointed as a director or other officer or be concerned in the management of the entity during a period of not less than two years to be determined in standards set by the competent authority and commencing on the date on which the firm's appointment as statutory auditor ended.”.

(4) Omit sub-paragraph (6).

63.  For paragraph 11 substitute— U.K.

“11.   The body must have rules and practices designed to ensure that 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.”.

64.—(1) Paragraph 12 is amended as follows. U.K.

(2) For sub-paragraph (2) substitute—

“(2) The arrangements for monitoring must make provision for that function to be performed by the competent authority or any body to whom that authority has delegated tasks in accordance with regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016.”.

(3) For sub-paragraph (3) substitute—

“(3) The arrangements for enforcement must—

(a) make provision for that function to be performed by the competent authority or any body to whom that authority has delegated tasks in accordance with regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016;

(b) include provision for sanctions which include—

(i) the withdrawal of eligibility for appointment as a statutory auditor;

(ii) a notice requiring the person responsible for any breach to cease the conduct amounting to a breach and to abstain from repeating such conduct;

(iii) a public statement identifying the person responsible for any breach and the nature of the breach (which may take the form of a reprimand or a severe reprimand);

(iv) a temporary prohibition preventing a person responsible for any breach from carrying out statutory audits or signing audit reports;

(v) a temporary prohibition of up to three years preventing a person responsible for any breach from exercising specified functions in a firm that is eligible for appointment as a statutory auditor or in a public interest entity;

(vi) a declaration that the audit report does not satisfy the audit reporting requirements and, where appropriate, a declaration as to the proportion of the audit fee that is not payable as a result;

(vii) an appropriate financial penalty;

(viii) a requirement to take action to mitigate the effect or prevent the recurrence of the contravention;

(ix) exclusion from membership of the body; and

(c) include provision for the body to make available to the public information relating to the steps it has taken to ensure the effective enforcement of its rules.”.

(4) After sub-paragraph (3) insert—

“(4) The sanctions referred to in sub-paragraph (3)(b)(v) must apply to persons who are no longer members of the body as they apply to members.

(5) The information to be made available to the public under sub-paragraph (3)(c) must include the following information (which the body must continue to make available in accordance with sub-paragraph (7)) in relation to sanctions the body imposes—

(a) information concerning the type of contravention and its nature;

(b) the identity of the person sanctioned, unless any of the circumstances mentioned in sub-paragraph (6) applies; and

(c) where a sanction is subject to appeal, information concerning the status and outcome of any appeal.

(6) The circumstances in which the identity of the person sanctioned must not be made available to the public are—

(a) where that person is an individual and the body considers the publication of personal data would be disproportionate;

(b) where publication would jeopardise the stability of financial markets;

(c) where publication would jeopardise an ongoing criminal investigation; and

(d) where publication would cause disproportionate damage to any institution or individual involved.

(7) Information in relation to sanctions mentioned in sub-paragraph (3) must continue to be made available for a proportionate period and must be published on the body's website for at least five years after the relevant date.

(8) In sub-paragraph (7), “the relevant date” means—

(a) where the body imposes a sanction and that decision is appealed, the date on which the appeal is determined;

(b) where the body imposes a sanction and that decision is not appealed, the date by which any appeal was required to be lodged.”.

65.  For paragraphs 13 and 14 substitute— U.K.

“Monitoring of audits

13.— (1) The body must—

(a) have adequate arrangements for enabling the performance by its members of statutory audit functions to be monitored by means of inspections, where functions relating to the monitoring of the audits are the subject of a delegation of tasks to the body under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016;

(b) in the case of members of the body who perform any statutory audit functions in respect of audits where functions relating to the monitoring of the audits are not the subject of such a delegation—

(i) have arrangements for the monitoring of those audits by the competent authority in accordance with those Regulations and, in respect of public interest entities, Article 26 of the EU Audit Regulation; and

(ii) have rules and practices designed to ensure that a sanction imposed by the competent authority in accordance with those Regulations is to be treated as if it were a sanction which the body had determined under arrangements for enforcement within paragraph 12;

(c) in the case of members of the body who perform any third country audit functions—

(i) have arrangements for the monitoring of those audits by the competent authority in accordance with the Statutory Auditors and Third Country Auditors Regulations 2016; and

(ii) have rules and practices designed to ensure that a sanction imposed by the competent authority in accordance with those Regulations is to be treated as if it were a sanction which the body had determined under arrangements for enforcement within paragraph 12; and

(d) have rules designed to ensure that members of the body take such steps as may reasonably be required of them to enable their performance of any statutory audit functions or third country audit functions to be monitored by means of inspections.

(2) Any monitoring of members of the body under the Statutory Auditors and Third Country Auditors Regulations 2016 or Article 26 of the EU Audit Regulation is to be regarded (so far as their performance of statutory audit functions, or of third country audit functions, is concerned) as monitoring of compliance with the body's rules for the purposes of paragraph 12(1) and (1A).

(3) The arrangements referred to in sub-paragraph (1)(a) must—

(a) make provision for inspections to be conducted by the competent authority or any recognised supervisory body to whom that authority has delegated tasks in accordance with regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016; and

(b) include an inspection which is conducted in relation to each person eligible for appointment as a statutory auditor—

(i) at such frequency as the body considers appropriate given the risks arising from the statutory audit work undertaken by the person eligible for appointment as a statutory auditor; and

(ii) at least once every six years in the case of a person who, during any of the previous five years, has carried out a statutory audit of an entity not subject to the small companies regime (see section 381).

(4) The arrangements must provide that the determination by the body of the frequency of inspections under sub-paragraph (3)(b)(i) is subject to any direction by the competent authority.

(5) The inspection must be conducted by persons who—

(a) have an appropriate professional education;

(b) have experience of—

(i) statutory audit work, or

(ii) equivalent work on the audit of accounts under the law of an EEA State, or part of an EEA State, other than the United Kingdom;

(c) have received adequate training in the conduct of inspections;

(d) have declared that they do not have any interests likely to conflict with the proper conduct of the inspection;

(e) have not been an employee or partner or member of the management body of the person subject to inspection and have not been otherwise associated with that person for at least three years before the inspection.

(6) The inspection must review one or more statutory audits in which the person to whom the inspection relates has participated.

(7) The inspection must include an assessment of—

(a) the person's compliance with the standards set by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016;

(b) the resources allocated by the person to statutory audit work;

(c) in the case of an inspection in relation to a firm, its internal quality control system;

(d) the remuneration received by the person in respect of statutory audit work.

(8) The inspection must be appropriate and proportionate in view of the scale and complexity of the statutory audit work of the person subject to inspection.

(9) Where undertaking inspections of statutory audits of undertakings that qualify as small (see sections 382 and 383) or medium sized (see sections 465 and 466) the body must take account of the fact that the standards determined by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016 are designed to be applied in a manner that is proportionate to the scale and complexity of the business of the audited person.

(10) An inspection conducted in relation to a firm may be treated as an inspection of all individuals responsible for statutory audit work on behalf of that firm, if the firm has a common quality assurance policy with which each such individual is required to comply.

(11) The main conclusions of the inspection must be recorded in a report which is made available to—

(a) the person to whom the inspection relates, and

(b) the body.

(12) The body must, at least once in every calendar year, deliver to the Secretary of State a summary of the results of inspections conducted under this paragraph.

Membership, eligibility and enforcement

14.   The rules and practices of the body relating to—

(a) the admission and expulsion of members,

(b) the grant and withdrawal of eligibility for appointment as a statutory auditor by the body, where this task has been delegated to the body by the competent authority under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016, and

(c) the enforcement action the body takes in respect of its members, where tasks related to the competent authority's responsibility for imposing and enforcing sanctions have been delegated to the body under that regulation,

must be fair and reasonable and include adequate provision for appeals.”.

66.—(1) Paragraph 15 is amended as follows. U.K.

(2) For sub-paragraph (2) substitute—

“(2) The arrangements mentioned in sub-paragraph (1) must make provision for the whole or part of the function of investigating those complaints to be performed by the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016.”.

67.  For paragraph 16 substitute— U.K.

“Independent investigation for enforcement purposes

16.— (1) The body must have rules and practices designed to ensure that, where the competent authority has decided that any particular enforcement action should be taken against a member of the body following the conclusion of an investigation under the Statutory Auditors and Third Country Auditors Regulations 2016, that decision is to be treated as if it were a decision made by the body in enforcement proceedings against the member.

(2) The body must have adequate arrangements as part of its rules and practices—

(a) to facilitate the conduct of investigations into non-delegated cases by the competent authority in connection with the performance of statutory audit functions or third country audit functions by members of the body;

(b) for the holding by the competent authority of hearings relating to members of the body in accordance with the Statutory Auditors and Third Country Auditors Regulations 2016, where necessary following those investigations; and

(c) for making decisions by the competent authority following those investigations as to whether (and, if so, what) enforcement action should be taken against members of the body.

(3) “Non-delegated cases” means matters relating to tasks which have not been delegated to the body by the competent authority under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016.”.

68.—(1) Paragraph 16A is amended as follows. U.K.

(2) For the words “audit working papers”, wherever they appear, substitute “ audit working papers and investigation reports ”.

69.—(1) Paragraph 16AB is amended as follows. U.K.

(2) For the words “audit working papers”, wherever they appear, substitute “ audit working papers and investigation reports ”.

70.  After paragraph 20 insert— U.K.

“Supplementary: funding of arrangements

20ZA.— (1) This paragraph applies where, under regulation 3 of the Statutory Auditors and Third Country Auditors Regulations 2016, the competent authority has delegated the task of approving persons as eligible for appointment as statutory auditors to a body (“B”).

(2) B must pay the costs incurred by—

(a) the competent authority in carrying out activities mentioned in paragraphs 9 to 10C, 12, 13 and 16, or

(b) another recognised supervisory body, in carrying out those activities as a result of the competent authority delegating a task to the other body,

in relation to any statutory auditor bound by B's rules.”.

71.  For paragraph 20A substitute— U.K.

“Interpretation

20A.   In this Part of this Schedule—

“audit reporting requirements” has the meaning given by regulation 2 of the Statutory Auditors and Third Country Auditors Regulations 2016 as amended from time to time;

“issuer” has the same meaning as in Part 6 of the Financial Services and Markets Act 2000 (see section 102A(6));

“key audit partner” means—

(a)

the statutory auditor designated by an audit firm for a particular audit engagement as being primarily responsible for carrying out the statutory audit on behalf of the audit firm; or

(b)

in the case of a group audit, the statutory auditor designated by an audit firm as being primarily responsible for carrying out the statutory audit at the level of the group and the statutory auditor designated as being primarily responsible at the level of material subsidiaries; or

(c)

the statutory auditor who signs the audit report.

“public interest entity” means—

(a)

an issuer whose transferable securities are admitted to trading on a regulated market;

(b)

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, other than one listed in Article 2 of Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and investment firms;

(c)

an insurance undertaking within the meaning given by Article 2(1) of Council Directive 1991/674/EEC of the European Parliament and of the Council on the annual accounts and consolidated accounts of insurance undertakings,

“regulated market” has the same meaning as in Part 6 of the Financial Services and Markets Act 2000 (see section 103(1));

“statutory audit function” means any function performed as a statutory auditor;

“third country audit function” means any function related to the audit of a UK-traded non-EEA company or of an equivalent body corporate whose transferable securities are admitted to trading on a regulated market situated or operating in another EEA state; and

“transferable securities” means anything which is a transferable security for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments.”.

72.  Part 3 is repealed. U.K.

73.—(1) Schedule 11A (specified persons, descriptions, disclosures etc for the purposes of section 1224A) is amended as follows. U.K.

(2) For paragraph 16 substitute—

“16.   The competent authority.”.

(3) In paragraph 80, for the words “audit working papers” in both places where they appear substitute “ audit working papers and investigation reports ”.

Regulation 16

SCHEDULE 4 U.K. Amendments to Part 8 of the Building Societies Act 1986

PART 1 U.K. Introductory

1.  In this Schedule— U.K.

(a) a reference to a numbered section is a reference to that section of Building Societies Act 1986; and

(b) a reference to a numbered Schedule is a reference to that Schedule to that Act.

PART 2 U.K. Amendments to Part 8 of the Building Societies Act 1986

2.  Part 8 of the Building Societies Act 1986 is amended as follows. U.K.

3.  In section 78 (auditor's report) M51 — U.K.

(a) in subsection (1), before “report” insert “ written ”;

(b) for subsections (3A) to (4A) substitute—

“(3A) The auditor's report must include—

(a) the identity of the building society whose annual accounts are the subject of the audit,

(b) a description of the annual accounts that are the subject of the audit (including the period covered by those accounts),

(c) a description of the financial reporting framework that has been applied in the preparation of those accounts, and

(d) a description of the scope of the audit identifying the auditing standards in accordance with which the audit was conducted.

(4) The report must clearly state the opinion of the auditor as to—

(a) whether the annual accounts have been properly prepared in accordance with the requirements of this Act (and, where applicable, Article 4 of the IAS Regulation), and

(b) in particular whether the annual accounts give a true and fair view in accordance with the relevant financial reporting framework—

(i) in the case of an individual balance sheet, of the state of affairs of the society as at the end of the financial year,

(ii) in the case of an individual income and expenditure account, of the income and expenditure of the society for the financial year, and

(iii) in the case of group accounts, of the state of affairs as at the end of the financial year and the income and expenditure for the financial year of the society and the subsidiary undertakings dealt with in the group accounts, so far as concerns members of the society.

(4A) The auditor's opinion must—

(a) be either unqualified or qualified,

(b) include a reference to any matters to which the auditor wishes to draw attention by way of emphasis without qualifying the audit opinion,

(c) include a statement on any material uncertainty relating to events or conditions that may cast significant doubt about the building society's ability to continue as a going concern, and

(d) identify the auditor's place of establishment.”;

(c) in subsection (6), after “subsection (4)” insert “ (b) ”;

(d) for subsection (7) substitute—

“(7) The auditor's report, in so far as it deals with the documents specified in subsection (3) above, must—

(a) state whether, in his opinion, based on the work undertaken in the course of the audit—

(i) the documents have been prepared so as to conform to the requirements of, or made under, sections 74 and 75 respectively,

(ii) the information given in the annual business statement gives a true representation of the matters in respect of which it is given, and

(iii) the information given in the directors' report for the financial year for which the accounts are prepared is consistent with those accounts,

(b) state whether, in the light of the knowledge and understanding of the building society and its environment obtained in the course of the audit, the auditor has identified material misstatements in the directors' report, and

(c) if applicable, give an indication of the nature of each of the misstatements referred to in paragraph (b).”; and

(e) after subsection (10) insert—

“(11) Where more than one person is appointed as an auditor—

(a) all the persons appointed must jointly make a report under this section and the report must include a statement as to whether all the persons appointed agree—

(i) on the matters contained in the report, and

(ii) on the statements and indications given under subsection (7); and

(b) if all the persons appointed cannot agree on—

(i) the matters contained in the report, or

(ii) on the statements and indications given under subsection (7),

the report must include the opinions of each person appointed and give reasons for the disagreement.”.

Marginal Citations

M51 Section 78 was amended by paragraphs 1 and 7 of Schedule 9 to the Financial Services (Banking Reform) Act 2013 (c. 33) and by S.I. 1995/3233, 2004/3380, 2008/1519.

4.  In section 78A (signature of auditor's report) M52 — U.K.

(a) in subsection (1), after “the auditor” insert “ (or, where more than one person is appointed as auditor, all of their names) ”; and

(b) after subsection (2) insert—

“(2A) Where more than one person is appointed as auditor, the report must be signed by all of them.”.

Marginal Citations

M52 Section 78A was inserted by S.I. 2004/3380 and then substituted by S.I 2008/1519.

5.  After section 78C(1) (names to be stated in copies of auditor's report filed or published) M53 insert— U.K.

“(1A) If more than one individual is appointed as auditor, the reference in subsection (1)(a) to the name of the auditor is to be read as a reference to the names of all the auditors.”.

Marginal Citations

M53 Section 78C was inserted by S.I. 2004/3380 and then substituted by S.I. 2008/1519; it was amended by S.I. 2013/496.

6.  At the beginning of section 78D(1) (circumstances in which names may be omitted) M54 , for “The” substitute “ An ”. U.K.

Marginal Citations

M54 Section 78D was inserted by S.I. 2004/3380 and then substituted by S.I. 2008/1519; it was amended by S.I. 2013/496.

7.  In subsection 79 (auditor's duties and powers) M55 — U.K.

(a) for subsection (2) substitute—

“(2) If the auditor is of the opinion that—

(a) proper accounting records have not been kept under section 71, or

(b) the annual accounts are not in agreement with the accounting records,

the auditor must state that fact in his report.”; and

(b) after subsection (6) insert—

“(6A) Where more than one person is appointed as auditor, the report must include a statement as to whether all the persons appointed agree on any statements given under subsections (2) and (6) and, if they cannot agree on those statements, the report must include the opinions of each person appointed and give reasons for the disagreement.”.

Marginal Citations

M55 Section 79 was amended by paragraph 34 of Schedule 7, and Schedule 9, to the Building Societies Act 1997 (c. 32) and by S.I. 2001/2617 and 2008/1519.

8.  In Schedule 11— U.K.

(a) after paragraph 3 insert—

“3A.— (1) Any term in a contract which, in relation to the conduct of an audit of a building society, has the effect of restricting the general meeting of the building society's choice of auditor to certain categories or lists of auditors has no effect.

(2) If a third party attempts to impose a contractual clause of the kind mentioned in sub-paragraph (1), or to improperly influence the decision of a general meeting of the building society on the selection of an auditor, the directors of the building society must inform the competent authority without delay.

3B.— (1) This paragraph applies to the appointment of an auditor or auditors under section 77, where the building society has an audit committee.

(2) Before an appointment to which this paragraph applies is made—

(a) the audit committee of the building society must make a recommendation to the directors in connection with the appointment, and

(b) the directors must propose an auditor or auditors for appointment, including the following information in the proposal—

(i) the recommendation made by the audit committee in connection with the appointment, or

(ii) if the directors' proposal departs from the preference of the audit committee, the reasons for not following the recommendation.

(3) Before the audit committee makes a recommendation or the directors make a proposal under sub-paragraph (2), the committee or directors must carry out a selection procedure in accordance with Article 16(3) of the Audit Regulation.

(4) The audit committee must in its recommendation—

(a) identify its first and second choice candidates for appointment,

(b) give reasons for the choices so identified,

(c) state that—

(i) the recommendation is free from influence by a third party, and

(ii) no contractual term of the kind mentioned in paragraph 3A has been imposed on the building society.

(5) Sub-paragraphs (3) and (4) do not apply in relation to a recommendation or proposal for appointment of an auditor or auditors for a financial year (“the relevant financial year”)—

(a) if the relevant financial year begins during a transitional period mentioned in sub-paragraph (6); or

(b) if—

(i) a selection procedure mentioned in sub-paragraph (7) has been carried out in respect of the appointment of the auditor or auditors in relation to a financial year beginning less than ten years before the first day of the relevant financial year; and

(ii) the auditor or auditors were appointed for the financial year before the relevant financial year.

(6) The transitional periods are—

(a) in the case of an auditor who was first appointed for a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the building society that begins on or after 17th June 2020;

(b) in the case of an auditor who was first appointed for a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the building society that begins on or after 17th June 2023.

(7) The selection procedures are—

(a) a selection procedure which is in accordance with sub-paragraphs (3) and (4);

(b) a selection procedure which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the building society had an audit committee), which was carried out in relation to a financial year which began before 17th June 2016.

3C.— (1) This paragraph applies to the appointment of an auditor or auditors under section 77, where the building society does not have an audit committee.

(2) Before an appointment to which this paragraph applies is made the directors must propose an auditor or auditors for appointment.

(3) Before the directors make a proposal under sub-paragraph (2), they must carry out a selection procedure in accordance with Article 16(3) of the Audit Regulation.

(4) Sub-paragraph (3) does not apply in relation to a proposal for appointment of an auditor or auditors for a financial year (“the relevant financial year”)—

(a) if the relevant financial year begins during a transitional period mentioned in sub-paragraph (5); or

(b) if—

(i) a selection procedure mentioned in sub-paragraph (6) has been carried out in respect of the appointment of the auditor or auditors in relation to a financial year beginning less than ten years before the first day of the relevant financial year; and

(ii) the auditor or auditors were appointed for the financial year before the relevant financial year.

(5) The transitional periods are—

(a) in the case of an auditor who was first appointed in respect of a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the building society that begins on or after 17th June 2020;

(b) in the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, the period which begins on 17th June 2016 and ends on the day before the first day of the first financial year of the building society that begins on or after 17th June 2023.

(6) The selection procedures are—

(a) a selection procedure which is in accordance with sub-paragraph (4);

(b) a selection procedure which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the company had an audit committee), which was carried out in relation to a financial year which began before 17th June 2016.”.”;

(b) before paragraph 6 insert—

“Tenure U.K.

5A.— (1) The terms of appointment of an auditor or auditors are subject to the requirement that the auditor or auditors cease to hold office at the conclusion of the annual general meeting in respect of the first complete financial year that follows the expiry of the maximum engagement period.

(2) In this paragraph—

“the maximum engagement period” means, subject to sub-paragraph (3) and paragraph 5B (which makes transitional provision in relation to auditors appointed before 17th June 2016), whichever of the following periods is longest—

(a)

the period of ten years beginning with the first day of the first financial year in respect of which the auditor was appointed,

(b)

the period of twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed, if the selection requirements are satisfied for at least one financial year which begins every ten years in that period, or

(c)

such other period of no more than twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed and ending on the last day of the relevant ten year period;

“the relevant ten year period” means the period of ten years beginning with the first day of the last financial year—

(a)

which begins within ten years of the first day of the first financial year in respect of which the auditor was appointed, and

(b)

in respect of which the auditor was reappointed following the carrying out of a selection procedure in accordance with the selection requirements; and

“the selection requirements” means—

(a)

the requirements of paragraph 3B(3) and (4) if the building society has an audit committee, or

(b)

the requirements of paragraph 3C(3) if the building society does not have an audit committee.

(3) The maximum engagement period may be extended by a period of up to two years with the approval of the competent authority, provided that—

(a) in a case where the period within paragraph (a) of the definition of “the maximum engagement period” is being extended, the appointment of the auditor for the first complete financial year following the end of that period is made following the carrying out of a selection procedure in accordance with the selection requirements; and

(b) in all cases, the competent authority is satisfied that exceptional circumstances exist.

(4) An auditor is ineligible for appointment as auditor if—

(a) within the four years preceding the start of the financial year to which that appointment relates the auditor has ceased by virtue of sub-paragraph (1) to hold office as auditor of that building society, or

(b) the auditor is a member of the same network as an auditor who within the four years preceding the start of the financial year to which that appointment relates has ceased by virtue of that sub-paragraph to hold office as auditor of that building society.

(5) In this paragraph, “network” means an association of persons other than a firm co-operating in audit work by way of—

(a) profit-sharing;

(b) cost-sharing;

(c) common ownership, control or management;

(d) common quality control policies and procedures;

(e) common business strategy; or

(f) use of a common name.

Maximum engagement period: transitional arrangements

5B.— (1) In the case of an auditor who was first appointed in respect of a financial year beginning before 17th June 1994 and who continues to hold office on 17th June 2016, “the maximum engagement period” means the period ending on the day before the first day of the first financial year of the building society that begins on or after 17th June 2020.

(2) In the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 1994 and before 17th June 2003 and who continues to hold office on 17th June 2016, “the maximum engagement period” means the period ending on the day before the first day of the first financial year of the building society that begins on or after 17th June 2023.

(3) In the case of an auditor who was first appointed in respect of a financial year beginning on or after 17th June 2003 and before 17th June 2016 and who continues to hold office on 17th June 2016, “the maximum engagement period” means whichever of the following periods is longest—

(a) the period ending on whichever is the later of—

(i) the day before the first day of the first financial year of the building society that begins on or after 17th June 2016;

(ii) the last day of the period of ten years beginning with the first day of the first financial year of the building society in respect of which the auditor was appointed.

(b) the period of twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed, if the selection requirements are satisfied for at least one financial year which begins every ten years in the period beginning on 17th June 2007, or

(c) such other period of no more than twenty years beginning with the first day of the first financial year in respect of which the auditor was appointed and ending on the last day of the relevant ten year period.

(4) In this paragraph—

“the relevant ten year period” means the period of ten years beginning with the first day of the last financial year—

(a)

which begins either within ten years of the first day of the first financial year in respect of which the auditor was appointed or if later, on or before 16th June 2017, and

(b)

in respect of which the auditor was reappointed following the carrying out of a selection procedure in accordance with the selection requirements;

“the selection requirements” means—

(a)

in relation to a financial year beginning on or after 17th June 2016—

(i)

the requirements of paragraph 3B(3) and (4) if the building society has an audit committee, or

(ii)

the requirements of paragraph 3C(3) if the building society does not have an audit committee,

(b)

in relation to a financial year beginning before 17th June 2016, the requirement that the building society carries out a tender process which substantially meets the requirements of Article 16(2) to (5) of the Audit Regulation, having regard to the circumstances at the time (including whether the building society had an audit committee).

(5) The maximum engagement period may be extended by a period of up to two years with the approval of the competent authority, provided that—

(a) in a case where the period under sub-paragraph (3)(a) is being extended, the appointment of the auditor for the first complete financial year following the end of that period is made following the carrying out of a selection procedure in accordance with the selection requirements; and

(b) in all cases, the competent authority is satisfied that exceptional circumstances exist.”;

(c) after paragraph 6(4) insert—

“(5) An auditor may not be removed from office before the expiration of that auditor's term of office except—

(a) by resolution under this paragraph, or

(b) in accordance with paragraph 6ZA.”;

(d) after paragraph 6 insert—

“Application to court to remove auditor from office

6ZA.— (1) The competent authority may apply to the High Court for an order removing an auditor of a building society from office if the authority considers that there are proper grounds for removing the auditor from office.

(2) The members of a building society may apply to the High Court for an order removing an auditor of the building society from office if the applicant or applicants consider that there are proper grounds for removing the auditor from office.

(3) If the court is satisfied, on hearing an application under sub-paragraph (1), that there are proper grounds for removing the auditor from office, it may make an order removing the auditor from office.

(4) If the court is satisfied, on hearing an application under sub-paragraph (2), that—

(a) the applicants represent in total—

(i) not less than 5% of the voting rights of all the members having a right to vote at a general meeting of the building society, or

(ii) not less than 5% in nominal value of the amount standing to the credit of shares in a building society as shown by the latest balance sheet, and

(b) there are proper grounds for removing the auditor from office,

the court may make an order removing the auditor from office.

(5) For the purposes of this paragraph, divergence of opinions on accounting treatments or audit procedures are not to be taken to be proper grounds for removing an auditor from office.”;

(e) in paragraph 6A(1) M56 , after “removed from office” insert “ , other than by order of the High Court made under paragraph 6ZA, ”;

(f) for the heading to paragraph 8C M57 substitute “Interpretation”; and

(g) for paragraph 8C substitute—

“8C.   In this Schedule—

“appropriate audit authority” means—

(a)

the Secretary of State, or

(b)

if the Secretary of State has delegated functions under section 1252 of the Companies Act 2006 M58 to a body whose functions include receiving the equivalent notice under section 522 M59 or 523 M60 of that Act, that body;

“audit committee” means a body which performs the functions referred to in Article 39(6) of 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, or equivalent functions;

“Audit Regulation” means Regulation 537/2014 of the European Parliament and of the Council on specific requirements regarding statutory audit of public interest entities and repealing Commission Decision 2005/989/EC; and

“competent authority” means the Financial Reporting Council Limited M61 .”.

Marginal Citations

M56 Paragraph 6A was inserted by S.I. 2008/1519.

M57 Paragraph 8C was inserted by S.I. 2008/1519.

M58 2006 c. 46.

M59 Section 522 was amended by S.I. 2015/1732.

M60 Section 523 was amended by section 18 of the Deregulation Act 2015.

M61 A company registered in England and Wales with number 02486368.

Regulation 17

SCHEDULE 5 U.K. Amendments to other enactments

Amendments to Part 1 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 U.K.

1.—(1) Part 1 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 is amended as follows.

(2) In section 15D(4) (permitted disclosure of information obtained under compulsory powers)—

(a) for paragraph (aa) substitute—

“(aa) for the purposes of facilitating—

(i) the carrying out of inspections under paragraph 1 of Schedule 12 to the Companies Act 2006 (arrangements for independent monitoring of audits of UK-traded non-EEA companies); or

(ii) the carrying out of investigations under paragraph 2 of that Schedule (arrangements for independent investigations for disciplinary purposes).”;

(b) after paragraph (aa) insert—

“(ab) for the purposes of enabling the competent authority to exercise its functions under the Statutory Auditors and Third Country Auditors Regulations 2016 or under Regulation (EU) 537/2014 on specific requirements regarding statutory audit of public interest entities;”.

(3) In section 16(2) (grants to bodies concerned with accounting standards etc), after paragraph (e) insert—

“(ea) exercising the functions of the competent authority under the Statutory Auditors and Third Country Auditors Regulations 2016 and under Regulation (EU) 537/2014 on specific requirements regarding statutory audit of public interest entities;”.

Amendments to Schedule 5 to the Local Audit and Accountability Act 2014 U.K.

2.—(1) The Local Audit and Accountability Act 2014 M62 is amended as follows.

(2) In Schedule 5, for paragraph 1(3), substitute—

“(3) The reference in sub-paragraph (1) to Part 42 of the Companies Act 2006—

(a) includes sections 1288, 1289, 1290 and 1292 of that Act (regulations and orders) as they apply in relation to that Part;

(b) does not include the amendments made to that Part by the Statutory Auditors and Third Country Auditors Regulations 2016.”

Marginal Citations

M62 2014 c. 2.