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European Commission proposes new audit and governance rules

  • European Union (old) Image

17 Mar 2004

The European Commission is proposing major revisions to its rules in the areas of auditing standards, auditor oversight, and related corporate governance.

The proposals, which are somewhat along the lines of the Sarbanes-Oxley Act in the US, are set out in a proposed Directive on Statutory Audit of Annual Accounts and Consolidated Accounts. The new Directive would replace the current 8th Directive and amend the 4th and 7th Directives. Some of the proposals in the new Directive are:

PROPOSALS IN DRAFT EU DIRECTIVE ON AUDITING

  • Require registration of all statutory auditors and audit firms. Non-EU auditors of companies listed in Europe will have to register in the EU.
  • Create an EU-wide, publicly accessible, electronic database of registered statutory auditors and audit firms.
  • Require that statutory auditors and audit firms be subject to a code of professional ethics at least as rigorous as the code adopted by the Ethics Committee of IFAC.
  • Adopt International Standards on Auditing throughout the EU. The proposed Directive notes that the Commission may adopt a common standard audit report for use throughout the EU.
  • Require that the group auditor assume full responsibility for financial statements.
  • Define "public interest entities" to include all listed companies plus other entities that are publicly accountable because of the nature of their business (such as banks and insurance companies) or because of their size (number of people employed).
  • Require that boards be established in each EU member state (something like the PCAOB in the US) to oversee the auditing profession:
    • The board overseeing audit firms that do not audit public interest entities should comprise a "clear majority" of non-practitioners.
    • The board overseeing audit firms that audit public interest entities must be 100% non-practitioners.
    • In overseeing audit firms from outside the EU, an EU-wide system will be established to decide whether and to what extent the quality assurance systems in other countries should be recognised.
  • Form an EU-wide audit regulatory committee to co-ordinate oversight (details have not yet been agreed).
  • Require each "public interest entity" to form an audit committee of non-executive directors to oversee the audit.
  • Establish principles of auditor independence, with more stringent independence requirements for auditors of public interest entities.
  • Require annual transparency reports of statutory auditors and firms that audit public interest entities. These would be publicly available.
  • Require companies and audit firms to explain to national authorities the reasons for all auditor changes.
  • Require disclosure of audit and non-audit fees paid by listed companies.
  • Give member states the following options regarding auditor rotation: (a) require rotation of the lead audit partner on an engagement every five years or (b) require rotation of the entire audit firm every seven years.
  • Mandate mutual recognition in a number of areas, including auditor licensing, oversight, quality assurance, and registration. An EU member state would be allowed to impose an "aptitude test" for statutory auditors registered in other member states or other countries.
  • Update education requirements for auditors, adding a requirement for continuous education.
The Commission has asked the European Parliament and the Council to consider the proposal in detail in the second half of 2004 with the aim of "fasttrack" adoption by mid-2005. There would then be a period of 18 months for member states to implement it in national law. Click to download:

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