On 21 June 2017, a new act on was implemented concerning statutory auditors, auditing firms and public supervision. Works on the new law have been ongoing for almost two years. The new rules implement the EU auditing regulations into the domestic legal environment. The act brings far changes, mainly for firms qualified as public interest entities, among them brokerage houses.
The main regulatory assumptions was to improve independence of auditing firms and statutory auditors (through eradication of conflict of interest areas), to enhance the quality of the statutory annual audit, and to strengthen the public supervision (through enhanced independence of the statutory auditor community).
1. Auditor rotation
The requirement to change auditor firms in public interest entities is one of the landmarks in the new law. The current maximum period when an auditing firm can provide its statutory audit service to a public interest entity is five years. This limitation applies also to auditors which are associated entities or other members of the same network operating on the EU territory. According to Regulation 537/2014, the same auditing firm will be able to perform another audit for the same public interest entity not sooner than after four years.
In practice, the public interest entity can order financial statement audits from the same auditing firm or any of its associates for a limited period of five consecutinve financial years. Afterwards the entity will be required to change the auditor and such auditor will not be able to audit it until another four years will have passed.
The required rotation applies also to lead expert auditors. The new regulations provide that a lead expert auditor cannot conduct the statutory annual audit of the same public interest entity for more than five years, and afterwards not sooner than after another three years of the last such audit.
The new law also changed the minimum period of statutory audit contracts with auditing firms – it is now 2 years in the case of both public interest entities as well as others.
2. Permitted consolidation
The EU regulation which the current act implemented in Poland contains crucial restrictions for auditing firms wishing to provide services supplemental to financial statement audits, both during the audit contract as well as one year before signing it. Essentially all such supplemental services are prohibited.
In practice, the regulations attempt to avoid a situation when an auditing firm assesses solutions that it advised itself to the client.
Being public interest entities, brokerage houses should have reviewed their auditing firm contracts by 31 December 2017 according to the transition regulations. Before that deadline non-auditing services could be provided under advisory or other contracts signed with auditing firms.
3. Audit Committee
As regards the Audit Committee, the new regulations require that its members have the knowledge and qualifications dedicated to the operating industry of a given entity. Moreover, at least one of the Audit Committee members must have knowledge and qualifications in the area of accountancy or financial statement auditing.
According to the new law, the Audit Committee chairperson can be elected by the committee members, the supervisory board or other supervisory body of the entity. In addition, a majority of the Audit Committee members (including the chairperson) need to meet the independence criteria as defined in the EU Commission recommendations (no major conflict of intrest).
Within its tasks, the Audit Committee develops procedures for choosing auditing firms and verifies their independence of the entity being audited. The Audit Committee presents the recommended auditor firms along with a declaration that such choice was not impacted by any third party. When rotating an auditing firm which cannot prolong its engagement any more (statutory requirement), the Audit Committee will recommend a choice of two firms.
Brokerage houses which have Audit Committees are required to verify the above member criteria, while other entities which are likewise required but have not established such committee yet are obligated to implement relevant changes within four months of the enforced law.
The new law expands the liability of a public interest entity for compliance with the related regulations. The Polish Financial Supervision Authority (KNF) can impose certain sanctions, including for failure to comply with the statutory audit rotation requirements or for impacting the financial statements audit procedure.
The authority may also charge the entity itself, a member of its management board or other managing body, a member of its supervisory board or other supervising body, a member of the audit committee, or another entity or third party associated with such public interest entity.
The catalogue of sanctions includes fines up to PLN 250,000 and corporate function bans for members of management/supervisory board lasting from 1 up to 3 years. The fine on a public interest entity cannot exceed 10 % of its net revenues from product sales generated by it in the previous financial year. If the entity has not achieved such type of the revenue in the previous year, the fine will be calculated based on the most recent year when such revenue had been generated.
In summary, brokerage houses which are public interest entities but have not reviewed applicability of the new law on statutory auditors should proceed with it immediately as the transitory period is coming to an end on 31 December 2017. First and foremost, brokerage houses need to verify their scope of services covered with auditing firm contracts and the related service periods. In addition, regulatory compliance should be checked against the audit committee requirements. Failure to implement such regulations could lead the Financial Supervision Authority (KNF) imposing broad sanctions on both individuals as well as a given entity itself.