The European Commission said it would recognize the equivalence of the audit oversight systems of the United States and nine other countries, laying the foundation for greater international cooperation on the supervision of auditors and auditing firms.

The decision paves the way for reinforced cooperation between member states of the European Union and third-party countries so they can mutually rely on inspections of each other’s audit firms. The Public Company Accounting Oversight Board in the U.S. has pressed for greater cooperation by audit regulators in Europe, Asia and other parts of the world. The other countries recognized by the EU include Australia, Canada, China, Croatia, Japan, Singapore, South Africa, South Korea, Switzerland and the U.S.

The PCAOB had a cautious reaction to the announcement. "Our understanding is that the EC's recent 'equivalency' decision relates to EU audit regulators being able to rely on the oversight and work of non-EU audit regulators," said PCAOB spokesperson Colleen Brennan. "While the PCAOB certainly has no objection to other regulators relying on its oversight of registered firms, the PCAOB has long maintained that foreign audit regulators are welcome to come to the United States to inspect U.S. firms that are within their regulatory jurisdiction and that the PCAOB stands ready to assist them to the extent of its authority if they so desire."

Wednesday’s decision by the Eureopan Commission also grants a transitional period to auditors from another 20 countries allowing them to continue their audit activities in the E.U. while further assessments are carried out of their audit regulatory systems. Those outside countries include Abu Dhabi, Bermuda, Brazil, the Cayman Islands, the Dubai International Financial Center, Egypt, Guernsey, Hong Kong, India, Indonesia, the Isle of Man, Israel, Jersey, Malaysia, Mauritius, New Zealand, Russia, Taiwan, Thailand and Turkey.

“This decision comes at a time when the commission is considering improvements within the audit market more generally, and so must be seen within this broader context,” said EU Internal Market and Services Commissioner Michel Barnier in a statement. “Today’s decision is an important step towards closer international cooperation on the supervision of auditors and audit firms. International cooperation on auditor oversight is crucial to avoiding the overburdening of audit firms and duplicating supervisory work, and above all, to promoting a high degree of investor protection by ensuring high-quality audits.”

As the demand for companies to operate globally increases, so too does the need for their auditors to do the same, Barnier’s office noted. With auditing now moving beyond national borders, there is a need for effective global auditor oversight, which requires extensive international cooperation. For this reason, the commission said it supports international mutual reliance on the supervision of auditors that is carried out by their home country audit overseer.

Mutual reliance means that EU member states and outside countries can rely on each other’s inspections of audit firms, allowing for a more effective and efficient oversight of global audit firms.

With the commission decision now in place, EU member states can choose to rely on the supervisory work of one of the 10 third-country oversight systems that have been assessed as equivalent. The extent to which a member state will rely on and cooperate with one of these third-party countries is determined by the cooperative arrangements that have been signed by the member state and the third country.

For the 20 third-party countries that are in the process of establishing their own independent public oversight systems for auditors, the European Commission said that further information about the overall function and rules governing such systems would be required before an equivalence decision could be made. For this reason, the commission has established a transitional period for the activities of auditors from the 20 third-party countries.

During the transitional period, which lasts until July 31, 2012, auditors from those 20 countries are allowed to perform audit activities in the EU without EU oversight and without registering with the competent authorities in the EU However, the transition will only be granted to third-country audit firms if they comply with the minimum information requirements necessary for maintaining investor protection levels in Europe. This could include presenting the results of the last inspection or a description of the internal quality control system of the audit firm.

Since 2008, more than 20 third-party countries have established public bodies to supervise the work of auditors and at least another 10 are in the process of establishing one, according to the commission. In most cases, such bodies are inspired by the European supervision model on auditors, the commission noted.

For more information on the commission’s decision, visit http://ec.europa.eu/internal_market/auditing/relations/index_en.htm. A paper on the commission’s audit policy is available at
http://ec.europa.eu/internal_market/auditing/otherdocs/index_en.htm.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access