Passage of a forthcoming European Union directive that would tighten auditing standards - but which does permit, under specified conditions, the European profession to supply customers with some other services - could lie behind a survey that reveals that the principles-based approach to auditor independence is now widely used throughout Europe.The survey was conducted by the European Federation of Accountants on the regulation of auditor independence, and follows the implementation of a 2002 EU "recommendation" on auditor independence.

The survey carried out by the Brussels-based federation, which represents the accountancy profession in Europe, found that 85 percent of the countries (which include 25 in the EU, plus Norway) now have in place a principles-based approach to independence. Even rules-based systems "now generally had some reference to principles, or attempt to do so in devising rules."

In other words, much of the EU's recommendation, the principles of which will be given legal underpinning by the forthcoming revised version of the 8th Directive on Statutory Auditing, is already in place.

FEE president David Devlin, a partner in the Dublin office of PricewaterhouseCoopers, commented that with auditor independence now widely used throughout Europe, "It is important that there be a regulatory pause to allow this new approach to audit independence time to prove its worth to users of audit reports."

The FEE pointed out that the advantage of a principles-based approach to independence was that it combines tough responsiveness in a way that is largely unattainable with a rules-based approach. It also allows for many variations in circumstances that arise in practice, while coping with the rapid changes of the modern business environment. A principles-based system also prevents the use of legal tactics to avoid compliance, and it requires auditors to be ready to demonstrate the efficacy of guidelines to safeguard independence.

The FEE survey comes on the heels of the EU's upgrade of the 1984 EU auditor independence directive that has now cleared most hurdles in Brussels. Following its translation into 21 official languages, the directive is most likely to be published in May or June this year. EU member nations will be given 24 months for enactment of the legislation.

In areas in which auditing firms may undertake other work, the directive's wording includes various protective phrases to combat "threats to the independence of a statutory auditor." Such threats might include "a direct or indirect financial interest in the audited entity" and "the provision of additional non-audit services."

Nevertheless, the position in Europe remains more relaxed than in the U.S., where the Public Company Accounting Oversight Board has comprehensively listed services that auditors of listed companies may supply.

The EU legislation does note that, "The level of fees received from one audited entity and/or the structure of the fees can threaten the independence of a statutory auditor or audit firm. Statutory auditors and audit firms should refuse to undertake any additional non-audit service that compromises their independence."

The FEE poll recommended that the statutory auditor be independent from audit clients "both in mind and in appearance." It excluded the possibility of "any financial, business, employment or other relationships between the statutory auditor and his client (including certain non-audit services provided to the audit client)."

Fees, which have to be publicly disclosed, have to be broken down into four categories: statutory audit services, further assurance services, tax advisory services, and other non-audit services.

The FEE, however, said that the recitals to the EU directive made clear that, "This should not lead to a situation where member states have a general duty to prevent statutory auditors from providing non-audit services to their audit clients. The directive aims to make sure that there is sufficient emphasis on auditor independence and careful consideration of it, but clearly is not intended to bring about a general prohibition on non-audit services."

However, a "sunset clause" in the directive could allow modifications in the future. Theoretically, there could be a clampdown on the present concessions, recommended by an audit regulatory committee comprised of government officials from the EU countries.

The system of audit regulation within Europe currently varies substantially. In some countries, the professional body of accountants has responsibility for promulgation of standards in the area of ethics and independence, and in others it is the government or a public body. The system of audit regulation also has an impact on the legal form of the regulation.

In the countries where the professional body of accountants is the standard-setter, the independence regulation has been issued as a professional standard, based on the International Federation of Accountants' Code of Ethics and other applicable material, such as the EU recommendation. In countries where the government or a public body is the regulator, the independence rules have been laid down in law or regulation.

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