Brussels (March 19, 2004) -- In the wake of accounting scandals such as Parmalat and Royal Ahold, the European Commission has proposed tougher audit rules, including mandatory auditor rotation and disclosure by public companies of the audit and non-audit fees paid to their auditors.

The proposals would, among other things, require disclosure by companies in the notes to their financial statements of the audit fee and other fees for non-audit services delivered by the auditor, but would not bar audit firms from providing consulting and other non-audit services. However, member states would be required to set rules for audit fees to prevent low-balling.

The proposed rules would also require audit firms outside the European Union that provide audits for foreign companies whose securities are traded on a regulated market in the EU to register in the EU state where they do business. The proposed rules would also require auditor rotation, by way of either a change of the key audit partner dealing with an audited company every five years, if the same audit firm keeps the work, or a change of audit firm every seven years. Another measure would require the establishment at public companies of audit committees that would be responsible for appointing the audit firm.

The commission said the proposals provides a basis "for balanced and effective international regulatory cooperation with third-country regulators" such as the Public Company Accounting Oversight Board. The proposals would allow reciprocal co-operation with third countries on the basis of "home country control" -- with regulators in the country where an audit firm is established responsible for supervising it.

In contrast to the United States, where the CEO and CFO are required to sign off on a company's financials, in cases where groups of companies are audited by several firms in a multiple locations worldwide (as was the case with Parmalat), the proposed rules would make the group auditor of the consolidated accounts of a group of companies responsible for the audit. The group auditor would be required to review the work of other auditors.

The proposals, which would also open up the ownership and the management of audit firms to auditors of all member states, will be sent to the EU's Council of Ministers and the European Parliament for adoption.

-- WebCPA staff

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