Bulgaria: introduction of new law on independent financial audit

On 15 November, 2016 a new law on the performance of independent financial audits was finally adopted. This law fully repeals the previous one and promotes measures for implementing 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 introduces the requirements of Directive 2006/43/EU of the European Parliament and the Council, Directive 2014/56/EU of the European Parliament and the Council and Directive 2013/34/EU of the European Parliament and the Council.

The new law establishes a new structure and content of the mandatory financial audit reports for all types of entities according to the requirements of Regulation 537/2014.

As of 1 January, 2017 new rules on the mandatory financial audit of the so-called public-interest entities will enter into force. This will concern public companies, banks, insurers and reinsurers, pension insurance companies and funds managed by them, large investment firms, mutual funds, companies providing public services etc.

Some of the key changes regarding the mandatory financial audit of the public-interest entities include:

• Introducing mandatory joint financial audit by two auditors/audit companies of the annual financial statements of banks, insurance and reinsurance companies and pension funds. The joint audit is introduced as a measure to ensure the independence of auditors and enhance audit quality. The auditors conducting joint audits could freely decide on the distribution of tasks in the audit and have the right to express different opinions and final conclusions.

• Introducing a minimum one-year period for the contract to carry out the statutory financial audit.

• Restriction for the public-interest entities to be audited by the same auditor/s more than 7 consecutive years, and mandatory internal rotation by the auditors, who are required every four years to change the persons who on behalf of the audit company sign the audit report for the respective client.

• Introducing a “blacklist” of prohibited services, which auditors are not allowed to provide to their clients – public-interest entities in accordance with Article 5 of Regulation 537/2014. The new law allows for an exception from the prohibition if it has been granted approval by the audit committee of the company and the auditor has informed the Commission for Public Oversight of Registered Auditors about the approval in due time.

• Introducing an obligation for auditors of public-interest entities to submit an additional report to the final audit report to the audit committee of the company.

• Limitation of auditor’s remuneration for non-audit services - when the statutory auditor or the audit firm provides to the audited entity, its parent undertaking or its controlled undertakings, for a period of three or more consecutive financial years, non-audit services other than those referred to in Article 5(1) of Regulation 537/2014, the total fees for such services is limited to no more than 70% of the average of the fees paid in the last three consecutive financial years for the statutory audit(s) of the audited entity and, where applicable, of its parent undertaking, of its controlled undertakings and of the consolidated financial statements of that group of undertakings.

The objective of the new law is to create a stable and independent legal basis of supervision and control over the financial auditor’s activities and to send out a clear message to international investors.

The law is expected to be promulgated in the State Gazette at the beginning of December 2016 and will enter into force retroactively from 17 June 2016 except for the provisions on mandatory financial audit of public-interest entities, which will come into force from 1 January 2017.