Barring the wrangling that is inevitable when 25 diverse countries try to work together, the European Union is moving along with a new packet of legislation to unify the auditing of company accounts.
The International Standards on Auditing package would complement Europe's international accounting standards regulation, which goes into effect on Jan. 1, 2005.
What amounts to a new auditing directive takes the form of a completely revised version of the Eighth Company Law Directive on auditing of 1984. The update is likely to come into force in the national legislation of the EU member states by 2007.
The proposed directive aims at reinforcing the statutory audit function in the EU to help underpin trust in Europe's capital markets.
"Auditors are our major line of defense against crooks who want to cook the books," explained Frits Bolkestein, Europe's internal market commissioner. "[Italian dairy firm] Parmalat was a reminder of what happens when that defense fails. Unless [faith] is swiftly restored, investment, jobs and growth will be lost."
Similar sentiments came from the representatives of European investors. Gregor Pozniak, of the Federation of European Securities Exchanges, added that now is a logical time to introduce a uniform system of auditing in the EU.
An official in the European Commission said that, by taking care of the interests of investors, more people would want to invest in the European market, which would subsequently achieve improved market liquidity. Normally, more liquidity brings the cost of capital down. Lower cost of capital results in increased industrial activity, and more and better jobs.
Papers from the commission stated that the new directive's principle aims are to clarify the duties of statutory auditors, their independence and ethics. The current proposal broadens the scope of the existing directive for the more than 1 million audits required each year in the EU.
This will be achieved by introducing a requirement for external quality assurance and by ensuring robust public oversight over the audit profession. In this way, it broadens the scope of its predecessor, which dealt only with the approval of statutory auditors.
The new directive intends to: clarify the duties of statutory auditors, including their independence and ethics; introduce a requirement for external quality assurance; ensure robust public oversight over the audit profession; and improve co-operation between competent authorities in the EU.
It should also provide for international cooperation between regulators in the EU and with regulators in third countries, such as the Public Company Accounting Oversight Board in the U.S.
Other details of the contents of the directive include an update of the educational standards for auditors, which would have to cover both IAS and ISA. It specifies liberalization of the ownership and the management of audit firms, opening the ownership and the management across the EU.
It would introduce an electronic registration system for auditors and audit firms, and define the basic principles of professional ethics. It would also cover the performing of other work by auditors for the companies that they audit, and oblige EU member states to set rules for audit fees that ensure audit quality and prevent "low-balling." That is, it would prevent firms from offering the audit service for a marginal fee and compensating for this with the fee income from other non-audit services.
A European Commission official gave details of the timing of the proposal as it goes through the Brussels legislative mill. The present version of the text for the directive will be presented to the European Council (comprised of the finance ministers from the 25 EU member states) in mid-November.
Discussions within the European Parliament had already started at the beginning of October. If all went according to plan, the directive would gain adoption by the EU, under a fast-track system, by summer 2005. It would then come into force, in the form of legislation by the 25 national governments, 18 months after adoption.
James S. Turley, chairman and chief executive of Big Four firm Ernst & Young, wrote that the new directive to European business is what Sarbanes-Oxley is to Securities and Exchange Commission registrations in the U.S.
However, directors should appreciate that in Europe there was some latitude at the individual country level.
Another difference between the Eighth Directive and Sarbanes-Oxley was that the American act specified procedures for complaints from whistleblowers. In Europe, the directive would 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.
The directive's field of application would be broad.
Jeremy Jennings, partner for EU government relations at Ernst & Young Global, said that it would apply to statutory auditors and auditing firms, but not to public section accounting. It would apply to non-EU auditors - to companies outside the EU but affiliated with EU-based companies. Thus, it would apply to affiliated firms in the U.S., which have to register with any one of the EU member states' oversight bodies.
Objections to the present wording of the proposed legislation include some from lobbyists for the corporate sector, who are against the proposed mandatory creation of an auditing committee. Such committees would be required for all listed companies, other "large" companies (such as those over 250 employees), and banks and insurance companies.
Henri Olivier, secretary general of the European Federation of Accountants, or FEE, told Accounting Today that FEE is voicing opposition to the proposed mandatory rotation of accountancy firms every seven years. FEE supports the Government Accountability Office's stance that audit firm rotation may not be the most efficient way to strengthen auditor independence. (Under Sarbanes-Oxley, there is no requirement for audit firm rotation.)
Olivier said that auditing practices across the EU were less of a hodgepodge than accounting practices. Differences that did exist involved the education of auditors, and in oversight systems. On oversight, FEE supported the strengthening of oversight systems at the national level, coupled with a European-level coordination mechanism.
The comparative regularity of auditing systems across the EU was due to the existence of the 1984 directive, which had been followed by at least two recommendations from the European Commission.
He added that FEE supported mandatory audit committees in one form of another, insisting that there should at least be an audit committee function in listed companies.
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