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Auditors face FTSE 350 concerns over cost of transition to new EU audit rules

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AUDITORS are facing deepening concerns from FTSE 350 businesses over the cost of transition to the new EU audit regulatory regime, research from EY has found.

The rule, which imposes mandatory audit firm rotation and significant restrictions on non-audit services for EU Public Interest Entities (PIEs), will come into force or financial years beginning on or after 17 June 2016. Special transition arrangements apply to the provisions on mandatory firm rotation.

According to the study, the perceived risk of an increase in the audit cost was a source of some disquiet to 41% of respondents. More than one in five (21%) said the transition costs will be between 20% and 50% of their annual audit fee, while the majority expect the transition to amount to between 10% and 20% of the annual audit fee.

Changes to assumptions governing accounting judgements such as fair value estimates, impairments and revenue recognition also ranked highly among companies’ concerns.

“A change in the view of existing accounting judgements will create risks and more efforts will have to be put in to justify the accounts and the entries, which could impact the audit quality” one head of tax at an energy, mining and utilities corporate in the FTSE 100 told the study.

Despite those worries, the legislation has been broadly welcomed, with companies believing they will benefit from fresh insights and new perspectives.

In March, EY head of audit Hywel Ball told sister title Accountancy Age he believes mandatory rotation is reinforcing the Big Four’s dominant position in the large listed market while also forcing them to tender for clients further down the market.

Greater churn at the top of the market, coupled with companies’ preference to remain with Big Four auditors, causes the firms to cast their sights downwards, Ball said.

However, senior auditors from non-Big Four firms later claimed the suggestion was “premature”, adding results could take between five and ten years to emerge.

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