EC Proposes New Audit Directive

by Ulrika Lomas, for LawAndTax-News.com, Brussels

18 March 2004

The European Commission announced on Tuesday that it has put forward plans for a new Directive on statutory audit in the EU, which aims to ensure that investors and other interested parties can rely fully on the accuracy of audited accounts and to enhance the EU's protection against the type of scandals that recently occurred in companies such as Parmalat and Ahold.

The proposed Directive clarifies the duties of statutory auditors and sets out certain ethical principles to ensure their objectivity and independence, for example where audit firms are also providing their clients with other services.

It introduces a requirement for external quality assurance, to ensure robust public oversight over the audit profession and improve co-operation between regulatory authorities in the EU, and allows for swift European regulatory responses to new developments by creating an audit regulatory committee of Member State representatives, so that detailed measures implementing the Directive can 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).

Speaking following the unveiling of the proposed directive, Internal Market Commissioner Frits Bolkestein explained that:

"Auditors are our major line of defence against crooks who want to cook the books. Parmalat was a reminder of what happens when that defence fails. Faith in financial reporting and in the markets is destroyed. Unless it is swiftly restored, investment, jobs and growth will be lost. We cannot let that happen."

He continued:

"No-one is naive enough to think any Directive will stop accounting fraud at a stroke - you cannot abolish crime - but what we are proposing would inject more rigour and a stronger dose of ethics into the audit process, bolstering that defence on which all market economies rely. At the same time it will remove some unnecessary restrictions on ownership and management of EU audit firms and lay the foundations for agreements to limit red tape for European audit firms working outside the EU."

The proposal will now be sent to the EU's Council of Ministers and the European Parliament for adoption under the so-called co-decision procedure.

However, the Institute of Chartered Accountants in Ireland has expressed concerns regarding the likely impact of the new rules on firms providing audit services in and from the Republic. In a statement, the ICAI explained that an audit exemption threshold for European companies excluded firms with sales of less than EUR7 million. However, the Irish threshold is much lower than this, at EUR1.5 million.

"This is an issue to which the Irish government will have to give serious consideration," the accounting industry body suggested.

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