Audit, Regulatory, Governance and Reporting Requirements of Audited Entities
What are the key differences between Public Interest Entities (PIEs) and non–PIEs?
Previously, we explored how the definition of PIEs has evolved, from its roots in the post–2008 financial crisis and EU regulation, to its current role in shaping UK audit and governance standards. The current definition of a PIE includes entities with transferrable securities traded on UK regulated markets, as well as unlisted banks and insurers.
In light of several high-profile company failures, recent policy discussions have focussed on the potential for a revised PIE definition to bring large private companies into the PIE regime. These company failures have also pushed audit firms into the spotlight, and stakeholders and commentators, have focussed in on audit quality as the solution for restoring and maintaining trust in capital markets. In response, the Government launched the Restoring Trust in Audit and Corporate Governance consultation proposing, amongst other things, an expansion of the PIE definition and reforms to strengthen the oversight powers of the Financial Reporting Council (FRC).
But what exactly does a PIE designation mean for an entity? All company reporting and audits are grounded in a common set of professional standards designed to ensure financial statements are compliant and accurately reflect an entity’s true financial performance and position. But for PIEs, the bar of regulatory requirements is higher, and they are subject to additional layers of audit, governance, regulatory and reporting requirements due to their greater impact on society and the economy. These additional layers aren’t just a tick box exercise; they are designed to reinforce trust and accountability where it matters the most.
The tables below outline how the PIE designation translates into further audit, governance, regulatory and reporting requirements, and what that means in practice:
Non-PIE ✓ PIE ✓
Incremental PIE Implications
Independence requirements apply to all audits performed in compliance with International Standard on Auditing (ISAs (UK)). However, PIEs are subject to greater restrictions on the non-audit services that their auditor can provide. Section 5 of the FRC’s Ethical Standard (2024) sets out the only permissible non-audit services auditors of PIEs can provide to the PIE. PIEs are also subject to mandatory audit firm rotation.
Impact
Breaching independence requirements could lead to disciplinary action by the FRC.
Non-PIE ✓ PIE ✓
Incremental PIE Implications
All audits apply a materiality threshold. However, many audit firms apply a lower materiality on their PIE audits.
Impact
A lower materiality threshold usually increases the audit testing performed and consequently the audit resources, time and cost may increase.
Non-PIE PIE ✓
Incremental PIE Implications
A PIE audit meets one of the criteria for engagement quality reviews per International Standard on Quality Management (ISQM1). Note that some non-PIEs could be subject to the criteria. This review provides an objective evaluation of significant judgments made by the audit team and the conclusions thereon.
Impact
Performed to assess whether another audit partner could reasonably come to the same opinion and conclusions expressed in the draft of the report to the audit committee and the audit report before final issuance. Provides an extra layer of scepticism and challenge for audit teams.
Non-PIE ✓ PIE ✓
Incremental PIE Implications
Every audit is required to have an audit report. However, PIE auditors are required to issue a public ‘extended audit report’, setting out the details of the scope, key audit matters considered, materiality thresholds, and any other significant issues or deficiencies identified. In addition, ISA700 requires auditors to declare who they were appointed by and when, their independence and any non-audit services provided.
Impact
The additional requirements mean increased time and effort is required to produce the audit opinion and can lead to additional scrutiny of the company from external stakeholders.
Although the same auditing standards apply, more extensive independence, materiality and quality review requirements are generally applied to PIE audits when compared to non-PIE audits.
Non-PIE PIE ✓
Incremental PIE Implications
A PIE entity is required to have an established audit committee with a majority of independent members and include at least one member with expertise in accounting or auditing, or both. Collectively, the members should have experience relevant to the company’s industry. The audit committee has additional oversight roles, and the auditor has additional reporting requirements to the audit committee.
Impact
The audit committee role includes overseeing the financial reporting of the company, having some level of audit oversight, reviewing auditor documents and being involved in the oversight of internal controls.
The auditor submits an additional report to the audit committee of a PIE explaining results of the audit and a number of other items including an independence declaration.
While governance is important for any entity, there are additional requirements related to PIE reflecting their broader systemic importance and a greater need for oversight.
Non-PIE PIE ✓
Incremental PIE Implications
Audit firms and/or ‘responsible individuals’ performing PIE audits must be registered with the FRC on the PIE Auditor register.
Impact
This is an additional step in terms of meeting requirements for approval on top of being recognised as a responsible individual permitted to sign audit reports.
PIE ✓ Non-PIE ✓
Incremental PIE Implications
Both PIEs and non-PIEs are subject to external inspection, but PIE audits are subject to Audit Quality Review (AQR) inspections by the FRC.
Impact
AQR inspections are generally more frequent and lengthier than the reviews from other bodies such as Institute of Chartered Accountants in England and Wales (ICAEW’s) Quality Assurance Department (QAD) reviews of non-PIE entities.
PIE audits are subject to additional registration requirements and external scrutiny. However, quality should still be at the forefront of all audits.
PIE ✓ Non-PIE
Incremental PIE Implications
Companies of a certain size need to include a Non-financial Sustainability Information Statement in their annual accounts, this will include PIEs if they meet the size threshold.
Impact
The additional requirements will require PIEs to spend increased time and effort to perform work over the disclosures. Some work also may be required over these by disclosures by the auditors.
Although some PIEs will meet the threshold for additional non-financial reporting requirements, this is not exclusive to PIEs.
| Non-PIE | PIE | Incremental PIE Implications | Impact | ||||
| Audit Requirements | Independence Requirements | ✓ | ✓ | Independence requirements apply to all audits performed in compliance with International Standard on Auditing (ISAs (UK)). However, PIEs are subject to greater restrictions on the non-audit services that their auditor can provide. Section 5 of the FRC’s Ethical Standard (2024) sets out the only permissible non-audit services auditors of PIEs can provide to the PIE. PIEs are also subject to mandatory audit firm rotation. | Breaching independence requirements could lead to disciplinary action by the FRC. | ||
| Materiality | ✓ | ✓ | All audits apply a materiality threshold. However, many audit firms apply a lower materiality on their PIE audits. | A lower materiality threshold usually increases the audit testing performed and consequently the audit resources, time and cost may increase. | |||
| Engagement Quality Reviews | ✓ | A PIE audit meets one of the criteria for engagement quality reviews per International Standard on Quality Management (ISQM1). Note that some non-PIEs could be subject to the criteria. This review provides an objective evaluation of significant judgments made by the audit team and the conclusions thereon. | Performed to assess whether another audit partner could reasonably come to the same opinion and conclusions expressed in the draft of the report to the audit committee and the audit report before final issuance. Provides an extra layer of scepticism and challenge for audit teams. | ||||
| Audit Opinion | ✓ | ✓ | Every audit is required to have an audit report. However, PIE auditors are required to issue a public ‘extended audit report’, setting out the details of the scope, key audit matters considered, materiality thresholds, and any other significant issues or deficiencies identified. In addition, ISA700 requires auditors to declare who they were appointed by and when, their independence and any non-audit services provided. | The additional requirements mean increased time and effort is required to produce the audit opinion and can lead to additional scrutiny of the company from external stakeholders. | |||
| Summary | Although the same auditing standards apply, more extensive independence, materiality and quality review requirements are generally applied to PIE audits when compared to non-PIE audits. | ||||||
| Non-PIE | PIE | Incremental PIE Requirements | Impact | ||||
| Governance Requirements | Mandatory Audit Committee | ✓ | A PIE entity is required to have an established audit committee with a majority of independent members and include at least one member with expertise in accounting or auditing, or both. Collectively, the members should have experience relevant to the company’s industry. The audit committee has additional oversight roles, and the auditor has additional reporting requirements to the audit committee. |
The audit committee role includes overseeing the financial reporting of the company, having some level of audit oversight, reviewing auditor documents and being involved in the oversight of internal controls. The auditor submits an additional report to the audit committee of a PIE explaining results of the audit and a number of other items including an independence declaration. |
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| Summary | While governance is important for any entity, there are additional requirements related to PIE reflecting their broader systemic importance and a greater need for oversight. | ||||||
| Non-PIE | PIE | Incremental PIE Implications | Impact | ||||
| Regulatory Requirements | Registration on PIE Auditor Register | ✓ | Audit firms and/or ‘responsible individuals’ performing PIE audits must be registered with the FRC on the PIE Auditor register. | This is an additional step in terms of meeting requirements for approval on top of being recognised as a responsible individual permitted to sign audit reports. | |||
| External Reviews | ✓ | ✓ | Both PIEs and non-PIEs are subject to external inspection, but PIE audits are subject to Audit Quality Review (AQR) inspections by the FRC. | AQR inspections are generally more frequent and lengthier than the reviews from other bodies such as Institute of Chartered Accountants in England and Wales (ICAEW’s) Quality Assurance Department (QAD) reviews of non-PIE entities. | |||
| Summary | PIE audits are subject to additional registration requirements and external scrutiny. However, quality should still be at the forefront of all audits. | ||||||
| Non-PIE | PIE | Incremental PIE Implications | Impact | ||||
| Reporting Requirements | Non-Financial Information | ✓ | ✓ | Companies of a certain size need to include a Non-financial Sustainability Information Statement in their annual accounts, this will include PIEs if they meet the size threshold | The additional requirements will require PIEs to spend increased time and effort to perform work over the disclosures. Some work also may be required over these by disclosures by the auditors. | ||
| Summary | Although some PIEs will meet the threshold for additional non-financial reporting requirements, this is not exclusive to PIEs. | ||||||
Conclusion
The designation of PIE status introduces a layer of complexity and oversight on top of the baseline standards which drives greater transparency, but necessitates additional requirements to be met.
Yet, as we have outlined in this paper, the heightened expectations on PIEs should not take away from the fact that quality is non-negotiable across both PIE and non-PIE audits for it is quality that upholds trust.
Our forthcoming papers and research will examine:
- The roles, responsibilities and accountability of Directors and Auditors
- The overlap between regulatory requirements on sector specific businesses
- The key factors involved in previous corporate failures in the UK, and the relationship with existing reporting, governance and audit requirements
Please do get in touch on info@cpia.org.uk to request a copy of the first briefing, or, to book a further conversation on any of the material included.
