Landmark dispute over restrictions on the provision of audit services

We successfully represented audit firm KPMG in their dispute with the Estonian Auditing Activities Oversight Board (AJN) in district court. As a result, the ”yellow” quality label assigned to KPMG will expire. In addition, the disciplinary sanction imposed on KPMG was also revoked and the AJN must return the EUR 16,000 fine already paid by KPMG.

The interpretation of the restrictions

At the center of this landmark dispute was the interpretation of the restrictions that the EU law has set on auditors. To avoid situations where auditors assess their own work, the EU has set restrictions to the additional services provided to entities of public interest by auditors. These entities include credit institutions, insurance companies, or companies whose transferable securities are admitted to trading on a regulated securities market. At the same time, the regulation set by the EU also states that under some circumstances the auditors are allowed to consult their clients on tax and legal issues prior to auditing.

The main question of the dispute was how to interpret these restrictions and if the actions of the auditors were in line with them. Another problem was that the translations of the regulation in the different languages did not overlap.

The allegations have been refuted

The AJN has interpreted the restrictions more strictly than other countries and international organizations, eliminating practically any chance of additional services. In a recent judgment, the district court clearly says that penalizing auditors based on this narrow interpretation of the restrictions is not in line with the EU law. To date, the Estonian Board of Auditors has itself issued a guide to non-audit services, which refutes AJN’s previous positions.

Additional services are allowed if they do not have a direct or significant effect on the financial statements

In conclusion, the court found that additional services are permitted if they do not have a direct and significant effect on the financial statements later audited by the same auditor and if the implementation of the legal or tax advice is entirely up to the client.

Our client team

The client was represented by our dispute resolution specialists partners Norman Aas and Allar Jõks.