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Audit, governance, oversight and reporting requirements

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. Over time, those entities with transferrable securities traded on UK regulated markets, as well as unlisted banks and insurers have become subject to the PIE regime.  

Recent policy discussions have also focussed on the potential for a revised PIE definition. But what exactly does a PIE designation mean for an entity? In this edition, we explore the practical implications of PIE status, highlighting what it means for audit, governance, oversight and reporting requirements.

The audit of today

A series of several high-profile company failures has pushed audit firms into the spotlight, and stakeholders and commentators, have focussed 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 reforms to strengthen oversight and the Financial Reporting Council (FRC) has also emphasised the need for quality via its blueprint for what is required by audit firms to deliver a quality audit. This reflects that a high-quality audit is integral to building public trust.

All 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 position. But for PIEs, the bar of regulatory requirements is higher, and they are subject to additional layers of audit, governance, oversight and reporting due to their greater impact on society and the economy. These enhanced requirements mean that the scope of audits of PIEs is wider, covering more company information and including an extended audit report.  These additional layers aren’t just a tick box exercise, they are designed to reinforce trust and accountability where it matters the most.

The table below outlines how the PIE designation translates into further audit, governance, oversight and reporting requirements, and what that means in practice:

The implications of PIE status over Audit, Governance, Oversight and Reporting Requirements of an audited entity

PIE ✓ Non-PIE ✓

Incremental PIE Implications
Independence requirements apply to all audit engagements 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 perform. Section 5 of the FRC’s Ethical Standards (2024) sets out the restrictions and full list of permissible non-audit services. PIEs are also subject to mandatory audit firm rotation.

Impact
Performed to assess whether a key audit partner could reasonably come to opinion and conclusions expressed in the draft of the reports before final issuance. Provides an extra layer of scepticism and challenge for audit teams.

PIE ✓ Non-PIE

Incremental PIE Implications
All audits apply a materiality level, however lower materiality is usually applied to PIEs.

Impact
A lower materiality threshold increases the testing required and consequently the audit resources, time and cost may increase

PIE ✓ Non-PIE

Incremental PIE Implications
International Standard on Quality Management (ISQM1) requires that an engagement quality review is performed. This review provides an independent evaluation of significant judgments made by the audit team, the conclusions reached and the auditor’s report.

Impact
A lower materiality threshold increases the testing required and consequently the audit resources, time and cost may increase

Summary
Stricter independence requirements applied to PIEs and the audit can be more extensive although a majority of same auditing standards apply. Quality should still be at the forefront of each audit.
PIE Non-PIE Incremental PIE Implications Impact
Audit Requirements Independence Requirements ✓ ✓ Independence requirements apply to all audit engagements 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 perform. Section 5 of the FRC’s Ethical Standards (2024) sets out the restrictions and full list of permissible non-audit services. PIEs are also subject to mandatory audit firm rotation. Breaching independence requirements could lead to enforcement action by the FRC.
Lower Materiality ✓ All audits apply a materiality level, however lower materiality is usually applied to PIEs. A lower materiality threshold increases the testing required and consequently the audit resources, time and cost may increase
Engagement Quality Reviews ✓ International Standard on Quality Management (ISQM1) requires that an engagement quality review is performed. This review provides an independent evaluation of significant judgments made by the audit team, the conclusions reached and the auditor’s report. Performed to assess whether a key audit partner could reasonably come to opinion and conclusions expressed in the draft of the reports before final issuance. Provides an extra layer of scepticism and challenge for audit teams.
Summary Stricter independence requirements applied to PIEs and the audit can be more extensive although a majority of same auditing standards apply. Quality should still be at the forefront of each audit.
PIE Non-PIE Incremental PIE Implications Impact
Regulatory Requirements Firm and Individual Registration on PIE Audit Register ✓ Audit firms and ‘responsible individuals’ performing PIE Audits must be registered with the FRC on the PIE Audit register. Audit firms in scope of the PIE Auditor Registration Regulations must be registered with the FRC to undertake PIE work. The PIE auditor approval and registration process is separate and additional to the Recognised Supervisory Body audit registration process for statutory auditors.
External Reviews ✓ ✓ Both PIEs and non-PIEs are subject to inspection. Firms that undertake 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 Stricter independence requirements applied to PIEs and the audit can be more extensive although a majority of same auditing standards apply. Quality should still be at the forefront of each audit.
PIE Non-PIE Incremental PIE Implications Impact
Audit Committee 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 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 shall submit 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 and note of all the key audit partners involved in the audit. Paragraph 16-2 of ISA 260 sets out the full list of reporting requirements.
Summary While there will always be governance required for an entity, there are additional requirements related to PIEs reflecting their broader systemic importance and a greater need for oversight.
The implications of PIE status over Audit, Governance, Oversight and Reporting Requirements of an audited entity
PIE Non-PIE Incremental PIE Implications Impact
Financial Reporting Audit Opinion ✓ ✓ Every audit is required to have a final 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. An extended audit report entails the need for the auditor to describe key audit matters, materiality and scoping. In addition, per ISA 700 the auditor report shall:
  • State by whom or which body the auditor was appointed
  • Indicate date of appointment
  • Declare Non-Audit Services prohibited by the FRC’s Ethical Standard were not provided and firm remained independent of entity conducting the audit
  • Indicate any further services which were provided by the firm to the entity and its subsidiary undertakings not disclosed in the annual report or financial statements.
Non-Financial Information ✓ PIEs with a certain number of employees are required to include a non-financial information statement in their annual accounts, setting out information on employee matters, social and community issues, climate-related disclosures, and Section 172 statement on how directors have fulfilled their duties under Companies Act 2006. There may be additional requirements to perform work over this information dependent on the nature of the disclosures. Consideration of the impact from a non-audit services perspective would be needed.
Summary There are some additional reporting requirements for PIEs. However, both UK registered PIE and non-PIE entities will have to file their accounts at Companies House reinforcing the importance of accountability for producing accurate financial reporting.

Conclusion

The designation of PIE status introduces a layer of complexity and oversight on top of the baseline standards which drives greater transparency, but on the other does require 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.