A new statutory instrument (SI) applying to companies, The Statutory Auditors and Third Country Auditors Regulations 2016, is due to be published on 17 June 2016.

The new rules will have an impact on all areas of audit regulation, including market competition, auditor oversight, audit quality and standards application, audit reporting, corporate governance related to auditors, auditor selection and auditor independence.

The new regulations will be operated on a comply or explain basis among public interest entities (PIEs), which are defined by the EU as ‘all entities that are both governed by the law of a member state and listed on a regulated market’. There are estimated to be around 2,500 such companies registered in the UK.

PIEs are now required to put their audits out for tender at least every 10 years and change their auditor at least every 20 years, while there are limits on the level of non-audit fees which can be paid. This will apply in respect of financial years beginning on or after 17 June 2016.

In an impact assessment released by the Department for Business, Innovation and Skills (BIS) in June 2015, the government estimated that the new rules will have a net cost to business of £39.61m a year. PIEs and auditors are expected to face initial costs of around £73m in relation to familiarisation and implementation, with additional costs for unlisted insurers of setting up audit committees and increased costs around the requirement for more frequent audit committee meetings.

When the new legislation was debate earlier this month in the House of Lords, in the final stage before it was passed into law, the government spokesman for the bill said the requirement on retendering and rotation will be introduced on a phased basis. Some engagements will be given a further four or seven financial years after the regulations come into force, depending on how long they have already been in place. That engagement must then be brought to an end.

The new rules also see the Financial Reporting Council (FRC) become the single competent authority responsible for the regulation of statutory audits, delegating tasks to the ICAEW and other recognised supervisory bodies.

One of the drivers for the ARD was opening up the audit market to wider competition, with BDO predicting the new rules could open up a £10bn market for advisers, based on its analysis of 895 UK PIEs. 

The firm says its analysis in the run up to the changes suggests that while mandatory rotations have seen new auditors put in place, most auditors were replaced by another Big Four firm.

The latest Accountancy FTSE 100 audit survey showed the combined value of audit and non-audit work for public interest entities (PIEs) was worth £692.2m, with £534.1m derived from audit work, while £158m was gleaned through non-audit work.

In all, Accountancy’s FTSE 250 auditors survey – published last month – showed the total value of audit and non-audit work in 2015 was £273.3m, with £184.9m in audit fees and £88.4m in non-audit fees.

Accountancy’s research shows that the mid tier has yet to make any significant inroads into the FTSE 250 market, despite the significant increase in tenders and audit changes. In the last year, 40 companies have either changed or confirmed plans to change their auditor, with no firms outside the Big Four appointed.

However audit statistics for the past year show there has been little change in the dominance of the Big Four. While PwC’s market share of the FTSE 100 fell from 39% at 10 June 2015 to 35% at 13 June 2016, KPMG’s share is largely the same (25% currently versus 26%), while both Deloitte (current share 23%, was 20%) and EY (current share 16%, was 13%) have picked up additional clients.

In comparison, their mid-tier rivals Grant Thornton and BDO have not gained share, with BDO still having only one FTSE 100 audit client and GT losing its single audit in this market.  The pattern is similar in both the FTSE 250 and FTSE 350 rankings.

However, the firm says the non-audit fees of UK registered PIEs provide ‘a huge opportunity for non-Big Four firms to win conflict work and build relationships and credibility with businesses’.

Jo Gilbey, BDO partner, said: ‘Today marks a turning point for the profession. We have always believed audit reform is a long-term game. Genuine opportunities to win the larger company audits are likely to come to fruition in the second round of rotation. That said, the opportunities presented now are vast, particularly in the non-audit services market.

‘The time for careful navigation of rules is over. We expect all PIEs – and many of the larger AIM companies – will seek a strict separation of the provision of audit and non-audit services.’

Gilly Lord, PwC’s UK head of regulatory affairs, issues a warning about the volume and complexity of the new rules, suggesting that some companies may not be familiar with all of the details.

‘In some areas, notably the “blacklist” of prohibited non-audit services, there’s still a lot of debate about the right interpretation.  Auditors and audit committees will need to make some important judgements under the new regime.  

‘The 70% fee cap on the level of permissible non-audit services sounds simple – but the calculation is actually very complex.  Monitoring compliance will need a lot of care.  There is still some time to plan as, technically, the fee cap does not apply until the first financial year beginning on or after 17h June 2019,’ Lord said.

Despite the current uncertainty over the UK’s continued membership of the EU, Lord said it was ‘unlikely’ the new rules would fall away in the event of the UK voting to leave the EU in next week’s referendum.  

‘In the short term, we wouldn’t expect legislative change in this area, and in the medium term, it’s likely that the UK would continue to apply much of the European regime in order to maintain market access,’ she said.

The draft legislation for the statutory instrument is here.

At time of publication the statutory instrument applying to companies has not yet been published.