Other Entities of Public Interest – a New Ethical Concept
Tuesday 15 December 2020 saw the Financial Reporting Council’s (FRC) new concept of an Other Entity of Public Interest (OEPI) coming into effect.
What is the impact?
Under the FRC’s revised Ethical Standard, auditors of OEPIs are subject to the same stringent restrictions on the non-audit services which they can provide as they are in relation to Public Interest Entity (PIE) audit clients. Permissible non-audit services for OEPIs are restricted to the “whitelist” set out in paragraph 5.40 of the standard. These restrictions apply to the provision of non-audit services to the OEPI itself, any UK parent of the OEPI, and any entities anywhere in the world which are controlled by the OEPI. It should be noted, however, that the non-audit services cap, and the requirements for tendering and rotation of auditors, which apply to PIEs, do not apply to OEPIs.
How do I determine if my client is an OEPI?
To determine whether an entity is an OEPI, the most recent audited set of financial statements should be examined (referred to beyond as Period A). If the OEPI limits are breached (see definition below) in Period A, the restrictions take effect in respect of the accounting period commencing after the date on which the audit report for Period A was signed. As a result of the effective date, this first period in which OEPI restrictions apply will not commence before 15 December 2020, but Period A, on which OEPI status is judged, could fall wholly or in part before that date. Examples of how this works are given in Appendix 1 to the FRC’s implementation guidance for the revised Ethical Standard.
What is the definition?
The FRC states that OEPIs are entities which do not meet the definition of a PIE, but are nevertheless of significant public interest to stakeholders. Specifically, these are:
AIM listed entities which exceed the threshold to be an SME listed entity as calculated using the FRC’s definition (see below);
Lloyd’s syndicates;
Private sector pension schemes with more than 10,000 members and more than £1billion of assets, by reference to the most recent set of audited financial statements; and
Entities that are subject to the governance requirements of The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) by reference to the most recent set of audited financial statements (see below), excluding fund management entities which are included within a private equity or venture capital limited partnership fund structure.
In broad terms, an AIM listed entity qualifies as an SME listed entity (and hence is not an OEPI) if the average market capitalisation of its listed equity based on year-end quotes for the previous three calendar years does not exceed €200 million. There are other measures for entities with non-equity listed instruments and for those which have been listed for less than three years. Reference should be made to the full definition in the FRC’s Glossary
Entities subject to the governance requirements of SI 2018/860 are those which are required to include a Statement of Corporate Governance Arrangements in their Directors’ Report. This applies to companies which meet either or both of the following conditions:
Employees > 2,000; and/or
Turnover > £200 million AND Total assets (before deducting any liabilities) > £2 billion.
Is there anything to be particularly careful of?
Two things…
Firstly, in its implementation guidance for the Ethical Standard, the FRC sets out that, after 15 December 2020, auditors should not agree any new engagements for non-audit services which will be prohibited under the OEPI requirements, even if those services relate to accounting periods before the new arrangements come into effect (ie accounting periods which commenced before 15 December 2020). In other words, it is only permissible to provide non-audit services which will be prohibited for OEPIs where they relate to an accounting period which commenced before 15 December 2020 AND they were contracted for before that date AND the work actually commenced before that date.
Secondly, there is an important distinction between the requirement under companies legislation to publish a Statement of Corporate Governance Arrangements, and the conditions causing the company to be treated as an OEPI. Whereas the Statement of Corporate Governance Arrangements is only required to be given in the second year that a company meets the conditions above (unless it is its first year of trading), the OEPI classification applies as a result of just one year of meeting the conditions. This is explained in more detail in the FRC’s implementation guidance
Please contact us if you would like to discuss how this could affect you.