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New Auditing Directive adopted in the EU

  • European Union (old) Image

27 Apr 2006

On 25 April 2006, the Council of the European Union adopted a new directive on the audit of company accounts.

The directive broadens the scope of application of existing EU legislation (directive 84/253/EEC) by specifying the duties of statutory auditors, their independence, and ethics. It introduces requirements for external quality assurance and public oversight of the auditing profession. The new law also amends directives 78/660/EEC and 83/349/EEC on accounting. The directive's main provisions are as follows. Click for (PDF 123k):

  • Statutory auditor and audit firm. Clear definition of 'audit firm'. Many of the new provisions deal specifically with audit firms.
  • Public reports of audit firms. Firms that audit public interest entities must provide a detailed public report that gives an insight into the audit firm and the network to which it belongs, including information about quality assurance reviews, policies on continuing education, and a fee break-down.
  • Independent audit committees. Required. They must monitor the financial reporting process and the statutory audit.
  • Registration of auditors and audit firms. Member states must ensure that each statutory auditor and audit firm is identified in an electronic public register and that the registration information is kept updated. For audit firms, the register must show size of the firm and owners and members of the management of the audit firm.
  • Independence. Clearly defined. Auditor/firm can not be involved in any way in decision-making of the audited entity.
  • Quality assurance and auditing standards. All statutory auditors and audit firms are subject to a system of quality assurance and subject to public oversight.
  • Audit standards. Statutory audits must be carried out in accordance with international standards on auditing.
  • Investigations and sanctions. Member states must organise effective systems of investigation and sanctions, which may be civil, administrative, or criminal.
  • Competent authorities. Member states must designate competent authorities responsible for approval, registration, quality assurance, inspection, and discipline for the purposes stipulated by the directive. They must cooperate with each other.
  • Public oversight. Member states must handle this with integrity and independence.
  • Appointment, dismissal, and communication. Various principles established, including one whereby the statutory auditor or audit firm can only be dismissed if there is a significant reason why the statutory auditor cannot finalise the audit. The reasons for dismissal or resignation must be disclosed.
  • Registration of non-EU audit firms. Auditors and/or audit firms from non-EU countries that issue audit reports in relation to securities traded in the EU must be registered in the EU and be subject to member state systems of oversight, quality assurance, and investigations and sanctions. Only auditors or audit firms that meet quality criteria equivalent to the directive can be registered. The directive allows for exemption from registration, oversight, quality assurance, and investigations and sanctions only if audit firms from non-EU countries are subject to equivalent systems of registration and oversight.
  • Fees. Audited companies must disclose total fees paid to the statutory auditor or audit firm, broken down by fees for audit services, other assurance services, tax services and other non-audit services.
  • Local adoption. Member states are required to adopt provisions to comply with the new directive within two years of its entry into force. The directive comes into force 20 days after its publication in the Official Journal of the EU.

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