Following the inevitable rounds of infighting, European Union countries are taking the final steps to enact legislation to bring their auditing standards into line with best international practices as set out by the International Auditing and Assurance Standards Board.At press time, the European Parliament was expected to rubber-stamp an upgraded version of the EU's Eighth Directive on statutory auditing, which got through the committee stage in September. The agreed-upon package will be published before the end of the year, leading on to official enactment by the EU national governments.
The measure would mean that those European countries not already up to speed on standards adoption would have to be within about two years.
The auditing directive compliments International Financial Reporting Standards on accounting guidelines, which became effective on January 1.
But many countries were already on board regarding auditing guidelines contained in the directive, including the United Kingdom, Ireland, Germany, France, Italy, the Netherlands, Luxembourg, Cyprus, Malta, Latvia, the Czech Republic, Slovakia and Slovenia.
Prior to the summer recess, heavy lobbying pressure, particularly from the U.K., attacked proposals over the structure of company audit committees.
Sir Digby Jones, director general of the Confederation of British Industry, complained that Brussels was going "even further than the United States' Sarbanes-Oxley Act," and also called the new measures "simply unbelievable."
Jones said that, under Section 407 of SOX, companies must disclose whether or not they have a financial expert on their audit committee, and Brussels was threatening to impose a legal requirement on audit committees to have at least one member competent in accounting and/or auditing.
At Britain's Institute of Directors, director general Miles Templeman protested that compulsory audit committees would "significantly undermine the collective responsibility of the members of unitary boards, seriously reducing the pool of potential audit committee members."
The version now being accepted has a "carve-out" from the original plan to make audit committees obligatory for all public companies. That aspect will now be left to national governments to decide.
A key member of the European Parliament, Bert Doorn, said that, in order to reach an agreement, the decision-makers accepted the principle that EU nations would not make the audit committee compulsory, as long as they legislated for an equivalent process.
He noted that the whole remit of corporate governance belonged to the discretion of national governments. Audit committees are required under the rules in the U.S.
The European Accountants Federation is clearly unhappy about Europe's cave in. It refers to audit committees as "cornerstones of public confidence in corporate governance." The most it has conceded is that the European countries "might be permitted to specify categories" of public interest entities that should be exempted at a national level from the general requirement for audit committee.
FEE's president, David Devlin, wrote to legislators that the exceptions they had in mind included small, unlisted credit institutions.
However, the European Parliament's Legal Affairs Committee agreed unanimously to support the auditing directive in its new form.
Expressing a positive view of the ramifications of the directive, Graham Ward, of the International Federation of Accountants, commented that the effect on world investment, including in developing countries, is "immeasurably beneficial, on a historic scale."
"At best, this could affect billions of people", he told Accounting Today. Ward, who was elected president of the institution in November last year, explained that the global upgrading of auditing standards would benefit "jobs, personal financial prosperity, growth and economic stability. Economic development is an effective weapon to combat poverty."
Specifically for Europe, Ward embraced the directive, as "investors anywhere in the world will have more confidence in statements from European companies."
It will be particularly important for improving access to international capital markets, notably for new and growing industries in the new member states, especially in Eastern Europe, he added.
Ward emphasized the importance of having auditing standards based on principles as found in the directive. "You can never write rules that will cover every eventuality."
John Kellas, chairman of the IAASB, which is an independent standard-setter under the auspices of IFAC, agreed that the audit move significantly improved the EU's international credentials for capital investment. Though not identical to the U.S. standards, for all practical needs they were close enough, said Kellas. He took the position that with the U.S. and EU rules more or less in union, and other countries such as South Africa, Australia and New Zealand also on board, this was a good omen for an eventual single set of global standards.
A minor difference between the auditing directive and the Sarbanes-Oxley Act is that the American act specifies procedures for complaints from whistleblowers. In Europe, the directive will require group auditors to bear full responsibility for the audit of the consolidated accounts, with this responsibility extending to the work of other audit firms.
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