How Will the EU Regulation 537/2014 Affect PIEs in Denmark?

Myththiregee Thampirajah Sillassen & Josephine Pedersen

Student thesis: Master thesis


On the 16th of April 2014, the European parliament of the council officialised regulation no. 537/2014. This regulation was the EU’s solution on listing common grounds for statutory audits of public-interest entities. The regulation suggests adjustment to existing rules, but also adds new rules. This paper focuses on the rules regarding the independence of the auditor that we expect to have the greatest impact on the audit environment and their clients in Denmark. To determine how the regulation is received and applied by the affected parties, we created an interview group and interviewed each party separately. We aimed to assemble a group where statutory auditors, some of which were specialists on the independence of auditors, and members of the audit committee from both small cap, mid cap and large cap companies were represented. The rules to gain our attention were the blacklisted non-audit services, the introduction of audit rotation on a company level, the cap on fees from non-audit services, and how the demands posed on the audit committee by the regulation will affect the independence of the auditor. We found that these services were rarely provided to a public-interest enterprise, if any enterprise, in Denmark. The companies, however, held a positive attitude towards the ban as it eliminates the grey area of which services to allow. The regulation included an option to allow certain non-audit services in national law, of which the authorities in Denmark have allowed all but one. Apart from the non-audit services allowed in the option, the blacklisted services were rarely provided, and as such we found that the ban on these non-audit services have little to no effect on the auditing of public-interest enterprises in Denmark. In regard to audit rotation on a company level we found that while a new auditor from a different firm will be more likely to identify and correct errors from previous audits than a new auditor from the same firm would be, it will also cause a lower audit quality in the first years of the audit assignment. We found that audit company rotation will affect the audit of PIEs by lowering audit quality in the first years after a new auditor is assigned. We found that the cap on fees from non-audit services is expected to ensure that the main focus of the auditor will remain on the audit assignment instead of non-audit services, thus strengthening independence. The cap on audit fees from one client is not expected to affect the ‘Big 4’, but may be relevant to smaller audit firms, in which case the cap will protect the independence of the auditor. The demands posed on the audit committee will lead to the creation of a committee under the Board of Directors that specialises in accounting and auditing matters. This committee will monitor the independence of their statutory auditor and approve the delivery of non-audit services, which we found to strengthen the independence of the auditor. The audit committee will also collaborate with the auditor in regard to financial reporting, which will result in a higher audit quality. In conclusion, we have found that the regulation will affect the audits of public-interest enterprises in Denmark by securing the auditors independence in appearance and overall raising audit quality, though audit rotation is expected to have a negative effect on audit quality

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2018
Number of pages178