The law of 23 July 2016 on the audit profession and Regulation (EU) N° 537/2014 on specific requirements regarding the statutory audit of public interest entities extend the responsibilities of audit committees ("ACs"). We've outlined 6 steps to consider in your process of implementing the new requirements:
Step 1 – Does your entity require an AC? Do you
have the right members on the AC?
Step 2 – What are the roles and responsibilities of the
AC?
Step 3 – How should the AC be involved in the tender
process?
Step 4 – What is the specific role of the AC in terms of
non-audit services?
Step 5 – What kind of relationship should the AC maintain
with the external auditor?
Step 6 – What should the additional report of the external
auditor to the AC include?
In this article, we focus on step 1.
Do I need to establish an AC?
The entities required to establish an audit committee are public interest entities ("PIEs"). PIES include:
- Luxembourg entities whose transferable securities are traded on a regulated market of any Member State. According to the CSSF, investment funds having their units admitted to trading on a regulated market are PIEs
- Credit institutions
- Insurance and reinsurance undertakings (except for pension funds and captive companies)
Exemptions based on size and complexity
The following PIEs are exempt from the obligation to have an AC:
- Certain subsidiaries of a group
- Listed UCITS or AIFs
- Entities whose only activity is to issue asset-backed securities
- Certain Luxembourg credit institutions
- Entities with a body performing functions equivalent to an AC
Simplification rules based on the size of the entity
The following PIEs can apply simplification rules:
- Small and medium-sized undertakings
- Luxembourg entities listed on a regulated market with reduced market capitalisation
In such circumstances, the management body or the supervisory body of the audited entity may act as an AC provided that, if the chair of that body is an executive member, he/she is not appointed chair of the AC.
Do I have adequate resources on the AC?
The independence, competence and capacity of AC members should be assessed in light of new requirements.
- The AC should be composed of non-executive members of the management body or the supervisory body of the audited entity.
- AC members can be directly appointed by the annual general meeting of shareholders.
- A majority of the members of the AC must be independent of the audited entity unless all the AC members are members of the management body or the supervisory body.
- At least one member of the AC must have competence in accounting and/or auditing.
- The AC members as a whole should have competence relevant to the industry sector of the entity.
- The chair of the AC is appointed by its members or by the supervisory body of the entity and must be independent from the entity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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