Canada: Summary Of The EC Legislative Proposals On Audit Policy

Last Updated: August 6 2012
Article by Neil Manji


This briefing provides an update on the proposed legislation being considered by the European Commission (EC) and debated in the European Parliament (EP) and the Council of Ministers (Council) which could significantly affect the relationship between businesses and their auditors in Europe.

The proposals were released by the EC on November 30, 2011 and affect Public Interest Entities (PIEs) as defined below. We have provided a summary of these proposals below. These are important issues for us as auditors but also for you and all stakeholders in the capital markets. This document provides a short summary of the EC Legislative Proposals and some of our thoughts on these proposed changes.


While the enactment of these or other proposals into law would have no direct impact in Canada, Canadian regulators and standards setters are closely monitoring the developments in Europe, as well as those in the U.S. coming from the Public Company Accounting Oversight Board, and considering the implications, if any, for Canada. The views and experience of the Canadian business and investor communities will be important input into those considerations.

At this stage, these are only proposals.The process for approval involves substantial dialogue and discussion which we expect will change the final form of any legislation. The Legislative Proposal on Audit Policy forms part of a 'suite' of proposed legislation put forward by the EC to address perceived weaknesses in the financial services sector in the wake of the financial crisis. The proposals also include measures relating to corporate governance, reporting practices and credit rating agencies (CRAs).

Key points:

  • The proposed Regulation is radical in terms of its scope and the measures proposed. We expect that some of the proposals will be discarded altogether and others will be substantially revised.
  • The proposals have generated significant levels of opposition across a broad stakeholder group, including industry bodies, the EP, the governments of the EU Member States, the audit profession and a number of regulators.
  • The European proposals do not reflect the views of the majority of those consulted on the Green Paper on Audit Policy (issued in 2010) nor those of the EP.
  • The EC proposes legislation but it does not have the power to enact it - this is a joint decision between the Parliament and the Council.

Summary of the Legislative Proposal

The following summarizes the key proposals set out by the EC. The proposed legislation would affect PIEs in the EU. A copy of the full proposals can be found at: auditing/reform/index_en.htm. The Audit Policy reforms are set out in a Regulation and a Directive.

The key measures set out in the proposed Regulation include:

  • Mandatory firm rotation: Public Interest Entities (PIEs) may not engage the same audit firm for longer than six years. The initial mandate should be for a minimum of two years, renewable only once (with a four year cooling off period). Where a PIE has voluntarily appointed two statutory auditors or audit firms (joint auditors), the maximum duration of the engagement is nine years. The key audit partner shall cease participation in the audit after seven year with three year cooling off period before participating again in the audit. (PIEs generally consist of listed entities and financial institutions and intermediaries.)
  • Mandatory tendering: PIEs would be required to undertake a tendering process involving at least two audit firms, one of which must have no more than 15% of its total audit fees earned from PIEs in the previous year. As part of the appointment process, the audit committee must provide a report on the conclusions of the (re)appointment to the administrative or supervisory board. A 'credit institution' or 'insurance undertaking' must also submit its report to the competent authority.
  • The audit report: The report would be expanded to cover matters including the methodology used (for example a statement of how much of the balance sheet has been directly verified and how much has been based on system and compliance testing), any variation compared to the previous year in the weighting of substantive and compliance testing, key areas of risk of material misstatement, the extent to which the audit was designed to detect irregularities (for example fraud and details of the level of materiality applied to perform the audit). The report would not be longer than four pages or 10,000 characters. In addition, the report would identify each member of the audit engagement team and state that all members remain independent.
  • Audit committee report: The auditor would provide a longer report to the audit committee detailing information on the results of the audit carried out, including for example a statement relating to 'going concern' and the material findings of the audit.
  • Audit committee: With certain limited exemptions, each PIE would be required to have an audit committee. At least one member of the audit committee would have competence in auditing and at least two members of the committee would have competence in accounting and/or auditing. The committee members as a whole would have competence relevant to the sector in which the audited entity is operating.
  • Audit only firms: Any audit firm with more than a third of its audit revenue from large PIEs would be prohibited from providing other services. There are special definitions on how this market and market share are calculated.
  • Related financial audit services: Audit firms would only provide statutory audit to PIEs. Audit fees for related audit services would be capped at 10% of the total audit fee. Related audit services are defined by the EC as:
    • Audits of interim financial statements
    • Assurance on corporate governance statements, Corporate Social Responsibility (CSR) matters, regulatory returns and any other statutory duty imposed by EU legislation
    • Providing certification on tax requirements compliance where requested by national law
    • Any other statutory duty related to the audit imposed by EU legislation on the statutory auditor/audit firm

In addition, certain non-audit services would specifically be prohibited for audit clients:

  • Expert services unrelated to the audit, tax consultancy, general management and other advisory services
  • Bookkeeping and preparing accounting records and financial statements
  • Designing and implementing internal control or risk management procedures related to the preparation and/or control of financing information included in the financial statements and advice on risk
  • Actuarial and legal services, including acting for the audit client in litigation
  • Designing and implementing financial information technology systems
  • Participating in the audit client's internal audit and providing services related to the internal audit function
  • Broker or dealer, investment adviser, or investment banking services By exception, certain non-audit services could be provided subject to prior approval of the audit committee:
  • Human resources services, including recruiting senior management
  • Comfort letters in connection with the issuance of securities

Also, by exception, the following services could be provided subject to prior approval of the competent authority (a specified regulator):

  • Due diligence services on potential mergers and acquisitions
  • Certain services relating to the design and implementation of financial information technology systems

PwC principles

We believe the time is right to consider changes in the role of the public company auditor. We have assessed these proposals against the following guiding principles, which we have found to be useful in identifying constructive changes and avoiding any that will inadvertently do harm to audit quality.

  • Changes should:
  • Maintain or improve audit quality
  • Enhance the value of the audit to users
  • Increase the reliability of information the entity provides in public reports.
  • Changes should maintain or enhance the effectiveness of the relationships and interactions of auditors with those charged with governance (e.g. audit committees) and management.
  • Auditor reporting should be sufficiently similar to facilitate users' comparison of the underlying economic reality/state of affairs of different entities.
  • Auditor reporting can provide greater insight based on the audit but the auditor should not be an original source of factual data or information about the entity.

Summary of PwC views

The PwC network of firms strongly supports changes which enhance competition and transparency, independence and audit quality, and where the benefits of which outweigh the corresponding increase in costs or red tape. We support:

  • Augmenting the already well established practices of audit committees in Canada to act as the main representatives of shareholders by overseeing the appointment of auditors, the execution of the audit and the provision of any non-audit services supplied by the auditor and consideration of enhanced communication by audit committees to shareholders on these matters.
  • Increased auditor assurance on certain financial information relevant to the market place
  • Prohibiting contractual clauses which require the use of a large network audit firm
  • Development of national level plans (living wills) to ensure continuity of audit service in the event of failure of an audit firm
  • Changing the rules governing ownership of audit firms and liability reform
  • Improving two-way communication between financial institution regulators and auditors
  • Ways in which audit reporting might be made more relevant to evolving market needs. We believe these should be dealt with through the consultations of the International Auditing and Assurance Standards Board (IAASB) and the Public Company Accounting Oversight Board (PCAOB).

We are concerned about other aspects of the Commission's proposals because there is little or no empirical evidence of benefits to support them, they would be unduly costly, or could have negative unintended consequences especially at a time of economic weakness and poor growth. We do not support:

  • Mandatory rotation of audit firms - which has been shown through various studies to diminish audit quality, increase costs and not provide any corresponding benefits to small firms.
  • Restrictions on the tenure of audit firms - evidence shows this increases costs for businesses and restricts their ability to determine the most suitable service provider but does not improve quality.
  • Restrictions on services audit firms can provide to their audit clients - this restricts companies' abilities to determine the most suitable service provider, and audit firms are already subject to detailed ethical and performance standards and codes of conduct.
  • Audit-only firms - which decreases quality of audits and restricts businesses from selecting the most efficient and effective service provider, and would, over time, negatively impact the ability of audit-only firms to attract and retain suitably skilled and qualified staff which is only sustainable within multidisciplinary firms.
  • Joint audit (now proposed on a voluntary basis) - which has been tried and abandoned in some countries, and has not been widely adopted in countries where it is already available on a voluntary basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.