A new Directive on statutory audit in the EU has been proposed by the European Commission. Its objective is to ensure that investors and other interested parties can rely fully on the accuracy of audited accounts. It also aims to enhance the EU’s protection against the type of scandals that recently occurred in companies such as Parmalat and Ahold.
The proposed Directive would clarify the duties of statutory auditors and set out certain ethical principles to ensure their objectivity and independence. It would introduce a requirement for external quality assurance, ensure robust public oversight over the audit profession and improve co-operation between regulatory authorities in the EU.
Swift regulatory response
To permit a swift European regulatory response to new developments the draft Directive presented on 16 March proposes the creation of an audit regulatory committee of Member State representatives, so that detailed measures implementing the Directive could be rapidly taken or modified.
The proposal also foresees the use of international standards on auditing for all statutory audits conducted in the EU and provides a basis for balanced and effective international regulatory co-operation with third country regulators such as the US Public Company Accounting Oversight Board (PCAOB).
Helping auditors to resist pressure
Some of the provisions in the proposed Directive would help auditors to resist inappropriate pressure from managers of the company they are auditing. Audited companies would have to set up an audit committee, with independent members, which would oversee the audit process, communicating directly with the auditor without going through management. That committee would also select the auditor and propose the appointment to shareholders. In addition, if a company dismissed an auditor it would need to explain the reasons to the relevant authority in the Member State concerned.
A clear chain of responsibilities
The proposed Directive would also set out a clear chain of responsibilities in situations where groups of companies are audited by several different firms in a large number of locations worldwide (as was the case with Parmalat). The proposed Directive would specifically require that the group auditor of the consolidated accounts of a group of companies take full responsibility for the audit of those consolidated accounts. In doing this, the group auditor would be obliged to review and document the work of other auditors.
Audit firms which audit listed companies, banks or insurance companies, would have to publish annual transparency reports allowing an insight into the audit firm, its international network and other non-audit services provided by it.
The proposed Directive would also establish procedures for the exchange of information between oversight bodies of Member States in investigations.
New opportunities for audit firms
As well as cracking down hard on malpractice and negligence, the proposal would provide new opportunities for the vast majority of honest, conscientious and competent auditors. It would, for example, allow auditors from any Member State to own and manage audit firms in all the others. This would facilitate further integration of European audit firms and help open up the market.
Internal Market Commissioner Frits Bolkestein said: “Auditors are our major line of defence against crooks who want to cook the books....No-one is naive enough to think any Directive will stop accounting fraud at a stroke ...but what we are proposing would inject more rigorousness and a stronger dose of ethics into the audit process, .”
Further details at: http://ec.europa.eu/internal_market/auditing/index_en.htm
- Full group auditor responsibility for consolidated accounts of a group of companies;
- Obligatory independent audit committees for listed companies;
- Stricter auditor rotation requirements;
- Strengthened sanctions.
Erik Van Der Plaats
TEL: +32 (0) 2.296 61 21
FAX: +32 (0) 2.299 30 81
“Some of the provisions in the proposed Directive would help auditors to resist inappropriate pressure from managers of the company they are auditing.”