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The Statutory Auditors and Third Country Auditors Regulations 2016

Type Statutory-Instrument

Publication 2016-06-15

Last updated 2025-05-11

State In force

Department King's Printer of Acts of Parliament

Source legislation.gov.uk

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Made: 15th June 2016

Coming into force in accordance with regulation 1(1)

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

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

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

PART 1 — Introduction

Citation, commencement and application

1

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

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

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

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

(a) Part 3;

(b) paragraphs 43 to 49;

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

(ii) sub-paragraphs (2)(c) and (e);

(d) in paragraph 52—

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

(ii) sub-paragraph (3);

(e) paragraphs 68 to 69;

(f) paragraph 73(3).

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

(4) In regulation 18—

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

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

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

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

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

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

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

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

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

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

Interpretation

2

In these Regulations—

“the Act” means the Companies Act 2006 ;

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

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

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

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

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

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

“competent authority” means the Financial Reporting Council Limited ;

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

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

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

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

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

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

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

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

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

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

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

PART 2 — The Competent Authority

The competent authority

3

(1) The competent authority is responsible for—

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

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

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

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

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

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

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

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

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

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

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

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

(m) imposing and enforcing sanctions.

(2) The competent authority—

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

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

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

(a) must consult the recognised supervisory bodies, and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(a) carrying out statutory audit work;

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

General requirements of auditors

4

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

(2) The relevant standards are—

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

(b) the international auditing standards adopted by the European Commission , before IP completion day in accordance with Article 26(3) of the Audit Directive (“Commission-adopted international standards”);

(ba) any UK-adopted international standards adopted and imposed by the competent authority in accordance with paragraph (3)(za);

(c) any auditing standards, procedures or requirements imposed by the competent authority in accordance with paragraph (3)(a);

(d) auditing procedures or requirements imposed by the competent authority in accordance with paragraph (3)(b); and

(e) the requirements of rules and practices of the recognised supervisory body of which the auditor is a member, provided that the rules and practices are rules and practices required by virtue of Part 2 of Schedule 10 to the Act.

(3) The competent authority may—

(za) adopt and impose international auditing standards (“UK-adopted international standards”) where those standards—

(i) have been developed with proper due process, public oversight and transparency;

(ii) are generally accepted internationally;

(iii) contribute a high level of credibility and quality to accounts of audited persons;

(iv) contribute to the public good; and

(v) are consistent with the relevant requirements listed in regulation 5(11);

(a) impose auditing standards, procedures or requirements which do not cover the same subject-matter as Commission-adopted or UK-adopted international standards; or

(b) impose auditing procedures or requirements which cover the same subject-matter as Commission-adopted or UK-adopted international standards but are necessary—

(i) to give effect to any relevant requirement relating to the scope of statutory audit; or

(ii) to add to the credibility and quality of accounts.

(3A) The Secretary of State may by regulations amend the requirements set out in Articles 7, 8 and 18 of the Audit Regulation and in paragraphs 1 to 15 of Schedule 1 to these Regulations, for the purpose of ensuring that, where the competent authority wishes to adopt international auditing standards under regulation 4(3)(za), those requirements are consistent with the standards that the competent authority wishes to adopt.

(3B) Regulations made under paragraph (3A) must not be made unless a draft of the statutory instrument containing them has been laid before Parliament and approved by a resolution of each House of Parliament.

(4) In this regulation “relevant requirement” has the same meaning as in regulation 5.

The competent authority: sanctioning powers

5

(1) If the competent authority considers that a person (“A”) has contravened a relevant requirement, it may—

(a) give a notice requiring A to cease the conduct giving rise to the contravention and to abstain from any repetition of that conduct,

(b) publish a statement (which may take the form of a reprimand or severe reprimand) to that effect,

(c) make an order prohibiting A permanently or for a specified period from carrying out statutory audits or signing audit reports,

(d) in a case where an audit report by A does not satisfy—

(i) the audit reporting requirements, or

(ii) the requirement in regulation 4(1),

make a declaration to that effect, and, where appropriate, order A to forego fees payable to A in connection with the carrying out of the statutory audit or to repay such fees,

(e) make an order prohibiting A for a specified period of up to three years from being a member of the management body of a firm that is eligible for appointment as a statutory auditor,

(f) make an order prohibiting A for a specified period of up to three years from acting as a director of or being otherwise concerned in the management of a public interest entity,

(g) impose on A a financial penalty of such amount as the competent authority considers appropriate,

(h) make an order requiring A to take such action as the competent authority considers will mitigate the effect or prevent the recurrence of the contravention,

(i) make an order excluding A from membership of one or more recognised supervisory bodies.

(2) The competent authority may only exercise the powers under paragraph (1) if A is eligible for appointment as a statutory auditor (or was so eligible at the time of the contravention).

(3) In determining the type and level of sanctions to be imposed under this regulation, the competent authority must take into account all relevant circumstances, including—

(a) the gravity and duration of the contravention;

(b) A's degree of responsibility;

(d) the amount, so far as can be determined, of profits gained or losses avoided by A;

(e) the extent to which A has co-operated with the competent authority;

(f) any previous contravention by A of a relevant requirement.

(4) For the purpose of paragraph (3)(c), A's financial strength may be determined in such manner as the competent authority considers appropriate, including—

(a) where A is a firm by reference to A's total turnover; or

(b) where A is an individual by reference to A's annual income.

(5) The competent authority may make an order (“a costs order”) requiring A to pay the costs reasonably incurred by the competent authority in determining whether A has contravened the requirement, including—

(a) its administrative costs;

(b) its costs of obtaining legal advice; and

(6) Where a recognised supervisory body has paid any part of the costs incurred by the competent authority, a costs order may include those costs and the competent authority must reimburse those costs to the recognised supervisory body.

(7) Any other sums received by the competent authority in payment of its costs or in payment of a financial penalty must be paid to the Secretary of State.

(8) Where the competent authority imposes a financial penalty on A or makes a costs order applying to A—

(a) it must specify a date by which the penalty is or the costs are required to be paid; and

(b) that date must be—

(i) in the case of a financial penalty, at least 28 days after the date on which the competent authority imposed the financial penalty, or

(ii) in the case of a costs order, at least 28 days after the date on which the competent authority made the costs order.

(9) The competent authority may not exercise the powers under this regulation if and to the extent that it has delegated a task under regulation 3 which arises from its responsibilities under regulation 3(1)(m).

(10) The competent authority must provide for an appeal against any decisions it makes under this regulation to be considered by an independent tribunal.

(11) In this regulation—

a “relevant requirement” means a requirement with which A must comply under—these Regulations (including the requirement under regulation 4(1)),the Audit Regulation,Parts 16 or 42 of the Act,Parts 10 to 12 of the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 ,Parts 2 and 3 of, or the Schedule to, the Partnerships (Accounts) Regulations 2008 ,Regulation 3 of, or Schedule 1 to, the Unregistered Companies Regulations 2009 ,...Parts 2 and 3 of, or Schedule 1 and 2 to, the Insurance Accounts Directive (Miscellaneous Insurance Undertakings) Regulations 2008 ,Part 8 of, or Schedule 11 to, the Building Societies Act 1986 , or of any subordinate legislation made under that Part or that Schedule,Part 6 of, or Schedule 14 or Schedule 14A to, the Friendly Societies Act 1992 , or of any subordinate legislation made under that Part of that Schedule, in so far as those provisions apply to a friendly society that is subject to special requirements under that Act (see section 78A(3) of that Act ),Parts 2 and 3 of, or Schedules 1 and 3 to, the Insurance Accounts Directive (Lloyd's Syndicates and Aggregate Accounts) Regulations 2008 , anda standard set under the arrangements required by Schedule 10 to the Act, where those paragraphs continue to apply by virtue of regulation 1 of these Regulations,

“subordinate legislation” means legislation made by way of statutory instrument, and

“turnover”, in relation to a firm, means the amounts derived from the provision of goods and services within the United Kingdom, after deduction of—trade discounts,value added tax, andany other taxes based on the amounts so derived.

Publication of sanctions and measures

6

(1) The competent authority shall publish, in accordance with paragraphs (2) to (5) details of the sanctions it imposes under regulation 5.

(2) The details published under paragraph (1) must include—

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

(b) unless any of the circumstances mentioned in paragraph (3) applies, the identity of the person (“A”) sanctioned under regulation 5; and

(3) The circumstances in which A's identity must not be published are—

(a) where A is an individual and the competent authority considers the publication of personal data would be disproportionate;

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

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

(4) The competent authority shall ensure that—

(a) information published under this regulation remains published for a proportionate period, and

(b) is available on the competent authority's website for at least five years after the relevant date.

(5) In this regulation and in regulations 7 and 8, “the relevant date” means—

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

(b) where the competent authority imposes a sanction and that decision is not appealed, the date by which the appeal should have been lodged.

Enforcement of sanctions

7

(1) This regulation applies if—

(a) the competent authority has imposed a sanction under sub-paragraph (a), (c), (d) (insofar as it relates to an order to forego or repay fees), (e), (f), (g) or (h) of regulation 5(1) or made a costs order under regulation 5(5); and

(b) the person on whom the sanction or costs order was imposed—

(i) has not by the relevant date appealed against the decision, or

(ii) has appealed against the decision, but the appeal was unsuccessful or has been withdrawn.

(2) If on an application by the competent authority the court decides that a person has not complied with a sanction or costs order to which this regulation applies, the court may order that person to take such steps as the court considers will secure compliance with the sanction or costs order.

(3) In this regulation, “the court” means the High Court or, in Scotland, the Court of Session.

Recovery of financial penalties

8

(1) If the whole or any part of a financial penalty or costs order is not paid by the time by which it is required to be paid, the unpaid balance from time to time carries interest at the rate for the time being specified in section 17 of the Judgments Act 1838 .

(2) Where a financial penalty or costs order, or any part of a financial penalty or costs order, has not been paid by the time when it is required to be paid and—

(a) no appeal has been made in respect of that penalty or costs order by the relevant date; or

(b) an appeal has been made in respect of that penalty or costs order, but has been determined or withdrawn,

the competent authority may recover from the person on whom the penalty or costs order was imposed, as a debt due to the competent authority, any of the penalty or costs order and any of the interest which has not been paid.

Monitoring of audits by the competent authority

9

(1) The competent authority must monitor the conduct of statutory audit work relating to public interest entities by means of a system of inspections that satisfies the requirements of Article 26 of the Audit Regulation.

(2) The competent authority must monitor the conduct of statutory audit work which does not relate to public interest entities in accordance with paragraphs (4) to (12).

(3) Paragraph (2) does not apply to the extent that the competent authority has delegated this task under regulation 3.

(4) The competent authority must have adequate arrangements for monitoring the conduct of statutory audit work and must ensure those arrangements operate independently of the persons monitored.

(5) The competent authority must have adequate resources for effectively monitoring the conduct of statutory audit work and ensure those resources may not be influenced improperly by the persons monitored.

(6) Monitoring the conduct of statutory audit work must be carried out by means of inspections which are conducted by persons who—

(a) have an appropriate professional education;

(b) have experience of—

(i) statutory audit work, or

(ii) equivalent work, for the purposes of an appointment of a person to conduct inspections made prior to IP completion day, on the audit of accounts under the law of an EEA State, or part of an EEA State, or Gibraltar, or

(iii) equivalent work, for the purposes of an appointment of a person to conduct inspections, on the audit of accounts under the law of—

(aa) an equivalent third country, or part of an equivalent third country, or

(bb) a transitional third country, or part of a transitional third country;

(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.

(7) An inspection must—

(a) review one or more statutory audits in which the person to whom the inspection relates has participated;

(b) in relation to the person to whom the inspection relates, include an assessment of—

(i) that person's compliance with the standards determined by the competent authority under these Regulations;

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

(iii) if that person is a firm, its internal quality control system;

(iv) the remuneration received by that person in respect of statutory audit work; and

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

(8) 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.

(9) 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 competent authority.

(10) An inspection must be carried out in relation to each person eligible for appointment as a statutory auditor—

(a) at such frequency as the competent authority considers appropriate given the risks arising from the statutory audit work undertaken by the person; and

(b) 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 audited person not subject to the small companies regime (within the meaning in section 381 of the Act).

(11) The competent authority must, at least once every calendar year, publish a report containing a summary of the results of inspections conducted under this regulation (and must publish this report at the same time that it publishes the information it is required to publish under Article 28(d) of the Audit Regulation).

(12) In relation to inspections of statutory audits of undertakings that qualify as small (by virtue of section 382 or 383 of the Act) or medium-sized (by virtue of section 465 or 466 of that Act), the competent authority must take account of the fact that the standards it has determined under these Regulations are designed to be applied in a manner that is proportionate to the scale and complexity of the business of the audited person.

Investigation powers

10

Schedule 2 (investigation powers) has effect.

Performance, monitoring and enforcement of third country audit functions

11

(1) Regulations 4 to 9 and Schedule 2 apply in relation to—

(a) the performance of third country audit functions by persons who are eligible for appointment as statutory auditors,

(b) the monitoring by the competent authority of the performance of third country audit functions by persons who are eligible for appointment as statutory auditors, and

(c) the imposition of sanctions by the competent authority in relation to the performance of third country audit functions by persons who are eligible for appointment as statutory auditors,

as they apply to the conduct of statutory audit work, the monitoring of that work and the imposition of sanctions in relation to that work, subject to the modifications set out in paragraphs (3) to (6).

(2) Paragraph (1) does not apply in respect of monitoring of the performance of third country audit functions—

(a) for an audited entity ...—

(i) which is incorporated or formed under the law of an equivalent third country or a transitional third country

(ia) where the performance of any third country audit functions in respect of the audited entity is subject to the systems of public oversight, quality assurance and investigations and sanctions of the third country competent authority in that equivalent third country or transitional third country; and

(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) by a person who is eligible for appointment as a statutory auditor—

(i) who is also eligible for appointment as an auditor of bodies corporate incorporated or formed under the law of an equivalent third country or a transitional third country, and

(ii) whose performance of third country audit functions is subject to the systems of public oversight, quality assurance and investigations and sanctions of the third country competent authority in that equivalent third country or transitional third country.

(3) Regulations 4 to 9 and Schedule 2 apply but as if—

(a) for any cross-references to provisions within those regulations, there were substituted references to those provisions as they apply by virtue of this regulation; and

(b) for references to—

(i) “conduct of statutory audit work” or “conduct of a statutory audit” there were substituted references to “performance of third country audit functions”, except in regulation 5(1)(c),

(ii) “statutory auditors”, except in regulation 5(1)(e), or “persons appointed to conduct a statutory audit” there were substituted references to “a person who is eligible for appointment as a statutory auditor and who is appointed to perform third country audit functions”,

and related expressions are to be construed accordingly.

(4) Regulation 4 applies but as if for paragraphs to (2) to (4) there were substituted—

(2) The relevant standards are— (a) the international auditing standards adopted by the European Commission in accordance with Article 26(3) of the Audit Directive before IP completion day, or standards which are equivalent, (aa) the UK-adopted international standards adopted by the competent authority in accordance with regulation 4(3)(za), or standards which are equivalent, (b) any auditing standards, procedures or requirements imposed by the competent authority in relation to the conduct of statutory audit which do not cover the same subject-matter as the standards referred to in paragraphs (a) or (aa), or standards, procedures or requirements which are equivalent, and (c) any auditing standards, procedures or requirements imposed by the competent authority in accordance with the requirements set out in paragraphs 1 to 6 and 8 of Schedule 1, or with any other equivalent standards, procedures or requirements. (3) The person who is eligible for appointment as a statutory auditor who is appointed to perform third country audit functions must, if not already required to do so by reason of carrying out statutory audits of public interest entities, publish on a website an annual transparency report equivalent to that required for auditors of public interest entities by Article 13 of the Audit Regulation (transparency report).

(5) Regulation 5 applies but as if—

(a) paragraph (9) were omitted;

(b) for the definition of a “relevant requirement” in paragraph (11) were substituted—

a “relevant requirement” means a requirement with which A must comply under— 1. these Regulations (including the requirement under regulation 4(1)), or 2. the Audit Regulation;

; and

(6) Regulation 9 applies but as if—

(a) for paragraph (1) were substituted—

(1) The competent authority must monitor the performance of third country audit functions by persons eligible for appointment as statutory auditors, and may do so by means of a system of inspections.

(b) in paragraph (2)—

(i) the words “which does not relate to public interest entities” were omitted, and

(ii) for “(4) to (12)” were substituted “ (4) to (11) ”;

(d) in paragraph (6), sub-paragraph (b) were omitted;

(e) in paragraph (10)—

(i) after “statutory auditor” were inserted “ in respect of their performance of third country audit functions ”; and

(ii) sub-paragraph (b) were omitted;

(f) paragraph (12) were omitted.

(7) Schedule 2 applies but as if—

(a) in paragraph 1, sub-paragraphs (3) and (4) were omitted; and

(b) paragraph 4 were omitted.

(8) In this regulation, “third country audit function” means any function related to the audit of a UK-traded third country company or of a body corporate incorporated or formed under the law of a third country whose transferable securities are admitted to trading on a regulated market situated or operating in an equivalent third country or a transitional third country.

PART 3 — Restrictions on choice of Auditor

Contractual terms restricting choice of auditor

12

(1) This regulation applies to any term in a contract which, in relation to the conduct of a statutory audit of an audited person other than a person which is a public interest entity, provides for the restriction of the audited person’s choice of statutory auditor to certain categories or lists of statutory auditors.

(2) A term to which this regulation applies has no effect.

PART 4 — Miscellaneous

Power to grant exemptions from the requirements of Article 4(2) of the Audit Regulation (limit on total fees charged for non-audit services)

13

(1) The competent authority may grant to a statutory auditor, in relation to the provision of services to an audited person, an exemption from the requirements of Article 4(2) of the Audit Regulation.

(2) The competent authority must be satisfied that exceptional circumstances exist before granting an exemption under this regulation.

(3) An exemption granted under this regulation may apply—

(a) for one financial year, or

(b) for two consecutive financial years.

Amendment to the Partnerships (Accounts) Regulations 2008

14

(1) The Partnerships (Accounts) Regulations 2008 are amended as follows.

(2) In regulation 9 (functions of auditor), after paragraph (1)(a) insert—

(aa) section 496 (auditor's report on strategic report and director's report);

Amendments to the Companies Act 2006

15

Schedule 3 has effect.

Amendments to the Building Societies Act 1986

16

Schedule 4 has effect.

Amendments to other enactments

17

Schedule 5 has effect.

Amendment of the Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008

18

(1) The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) Regulations 2008 are amended as follows.

(2) In regulation 4 (disclosure of remuneration: small and medium-sized companies)—

(a) in paragraph (1), omit “small or”; and

(b) omit paragraph (4).

(3) In regulation 6 (group accounts), for sub-paragraph (2)(b) substitute—

(b) a subsidiary company where— (i) its parent is required to prepare and does prepare group accounts in accordance with the Act, (ii) the company is included in the consolidation, and (iii) the statutory auditor is the same for both the company and its parent;

Amendments to the Statutory Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc) Order 2012

19

(1) The Statutory Auditors (Amendment of Companies Act 2006 and Delegation of Functions etc) Order 2012 is amended as follows.

(2) After article 7(5) (transfer of functions) insert—

(6) In this article— (a) the reference in paragraph (1) to the functions of the Secretary of State under Part 42 of the Companies Act 2006 includes a reference to functions which have been amended by the Statutory Auditors and Third Country Auditors Regulations 2016; and (b) references to provisions of the Companies Act 2006 in paragraphs (2) to (5) include amendments made to those provisions by the Statutory Auditors and Third Country Auditors Regulations 2016.

Amendment of the Statutory Auditors and Third Country Auditors Regulations 2013

20

(1) The Statutory Auditors and Third Country Auditors Regulations 2013 are amended as follows.

(2) In regulation 8 (application statement)—

(a) for paragraph (d) substitute—

(d) the third country auditor conducts audits of UK-traded non-EEA companies in accordance with— (i) the international auditing standards adopted by the European Commission in accordance with Article 26(3) of the Audit Directive, or with standards which are equivalent, (ii) any auditing standards, procedures or requirements imposed by the competent authority in accordance with regulation 4(3)(a) of the Statutory Auditors and Third Country Auditors Regulations 2016, or with standards, procedures or requirements which are equivalent, and (iii) the requirements set out in Articles 22, 22b and 25 of the Audit Directive (independence, objectivity and audit fees), or with requirements which are equivalent;

(b) omit paragraph (e); and

(3) Omit regulation 13.

Exclusion of large debt securities issuer from definition of “UK-traded non-EEA company”

21

(1) A large debt securities issuer is excluded from the definition of “UK-traded third country company” for the purposes of Part 42 of the Act.

(2) In paragraph (1) “large debt securities issuer” means a body corporate whose only issued transferable securities admitted to trading on a UK regulated market are debt securities, the denomination per unit of which is not less than—

(a) £35,000 or an equivalent amount, in the case of securities admitted to trading on a UK regulated market before 31st December 2010,

(b) £70,000 or an equivalent amount, in the case of securities admitted to trading on a UK regulated market on or after 31st December 2010.

(3) In paragraph (2)—

“an equivalent amount” means an amount of a currency other than pounds Sterling which at the date the security was issued was equivalent to the relevant amount of pounds Sterling; and

“debt securities” has the same meaning as in Article 2(1)(b) of Directive 2004/109/EC of the European Parliament and of the Council on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/43/EC.

(4) Regulation 43 of the Statutory Auditors and Third Country Auditors Regulations 2007 is revoked.

Amendment of the Companies Act (Transfer of Audit Working Papers to Third Countries) Regulations 2010

22

(1) The Companies Act 2006 (Transfer of Audit Working Papers to Third Countries) Regulations 2010 are amended as follows.

(2) Omit—

(a) regulation 1(3); and

(b) regulation 4.

Amendment to the Companies (Bodies Concerned with Auditing Standards etc.) (Exemption from Liability) Regulations 2016

23

(1) The Companies (Bodies Concerned with Auditing Standards etc.) (Exemption from Liability) Regulations 2016 are amended as follows.

(2) In regulation 2, in paragraph (2), after “(2)(a) to (d)” insert “ , (ea) ”.

Review

24

(1) The Secretary of State must from time to time—

(a) carry out a review of the provisions of these Regulations,

(b) set out the conclusions of the review in a report, and

(2) The report must, in particular—

(a) set out the objectives intended to be achieved by those provisions,

(b) assess the extent to which those objectives are achieved,

(d) if those objectives remain appropriate, assess the extent to which they could be achieved in another way which involves less onerous regulatory provision.

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) The first report under this regulation must be published before the end of the period of five years beginning with the date on which these Regulations come into force.

(5) Subsequent reports under this regulation must be published at intervals not exceeding five years.

(6) In this regulation, “regulatory provision” has the meaning given by section 32(4) of the Small Business, Enterprise and Employment Act 2015 .

SCHEDULE 1 — Requirements for professional ethics, independence, objectivity, confidentiality, auditing standards and audit reporting

1

In this Schedule—

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

“key audit partner” means—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;in the case of a group audit, any of the following—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;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; oran 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.

2

(1) Standards must ensure that—

(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 financial year of the accounts to be audited; and

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

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—

(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

(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-

(a) A,

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

(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—

(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 financial year of the accounts to be audited, the audited person is acquired by, merges with or acquires another person, A shall—

(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.

7

(1) Standards must ensure that—

(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—in the case of a public interest entity, two years, andin 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 partner (apart from a key audit partner) or employee of A, orany individual whose services are placed at A's disposal or under A's control;

“relevant position” means—any key management position,membership of the audited person's audit committee,membership of any body performing equivalent functions to an audit committee in relation to the audited person,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—

(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 as eligible for appointment as a statutory auditor ...

(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.

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—

(a) these Regulations,

(b) the Audit Regulation, or

(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—

(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 ... holds an appropriate qualification ...

(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.

11

(1) Standards must ensure that, when A is a firm, A—

(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,

(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—

(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;

(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—

(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.

15

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

(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,

(i) evaluates and reviews the audit work carried out by any statutory auditors... 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 ... or third country auditor to the transfer of relevant documentation during the conduct of the audit of consolidated accounts as a condition of the group auditor relying on the work of the statutory auditor ... 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 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 ... 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);

(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.

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.

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

(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

SCHEDULE 2 — 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.

(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

(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.

(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—the High Court,in relation to England and Wales, the county court,in relation to Northern Ireland, a county court,the Court of Session, orthe sheriff;

“officer” means—in the case of a company, a director, manager, secretary or other similar officer,in the case of a limited liability partnership, a member,in the case of a partnership other than a limited liability partnership, a partner, andin 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.

(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 (false statutory declarations and other false statements without oath),

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

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

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—

(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—communications between a professional legal adviser and the adviser's client, orcommunications 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—Saturday or Sunday,Christmas Day or Good Friday, ora day which is a bank holiday under the Banking and Financial Dealings Act 1971 in that part of the United Kingdom in which the premises are situated.

5

(1) A person commits an offence if the person—

(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.

SCHEDULE 3 — Amendments to the Companies Act 2006

PART 1 — Introductory

1

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

2

In this Schedule—

(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 — Amendment to Part 15 of the Companies Act 2006

3

(1) Section 461 (permitted disclosure of information obtained under compulsory powers) is amended as follows.

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

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

PART 3 — 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—

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