Communication from the Commission on the statutory audit in the European Union: the way forward
C 143/12 EN Official Journal of the European Communities 8. 5. 98 Communication from the Commission on the statutory audit in the European Union: the way forward (98/C 143/03) 1. INTRODUCTION AND SUMMARY to have requirement should enhance 1. 1. Ú The the annual and consolidated accounts of certain companies audited by a qualified professional, which was introduced for the Community as a whole by the Accounting Directives, is designed to protect the public interest. The assurance offered by audited accounts the confidence of all parties that have dealings with the companies concerned. Audited financial statements of a company established in one Member State are used by third parties in other Member States, such as investors, increased transparency creditors and employees. The resulting financial the the harmonisation of information published by companies, together with the increased reliability of that information as a result of the audit by an independent and qualified professional, are an important contribution to the establishment and the functioning of the Single Market. from 1. 2. Ú These objectives are undermined if third parties cannot assume a certain level of reliability and a certain coverage of the audit. The regulatory framework which surrounds the statutory audit at EU level is however incomplete. There is no common view at EU level on the role, the position and the liability of the statutory auditor. The absence of such a common view has a negative impact on audit quality and hence on the confidence that is placed in audited accounts, as well as on the freedom of establishment and freedom to provide services in the audit field. lack of a harmonised view at EU 1. 3. Ú The level concerning the statutory audit could become a serious handicap in the negotiations that are taking place at international level with a view of improving the access of European companies to the international capital market. There the accounts and consolidated accounts prepared by European companies will not be accepted in international capital markets unless these accounts have been audited by an indeÜ pendent and qualified professional in accordance with auditing standards which are accepted worldwide. is a significant risk that opment of these standards can be assured and a high level of respect for these standards throughout the EU be guaranteed. Discussions will also concern the subjects of auditor control, professional competence, the position of the statutory auditor within the company and the role of internal audit. independence, quality the freedom of establishment and 1. 5. Ú With the possible exception of a sectoral Directive concerning the freedom to provide services in the audit field, it may be possible to carry out this reform without proposing new legislation or legislative change at EU level. However, the Commission will not hesitate to propose legislation if the need for this becomes apparent in the course of the ongoing discussions. 2. BACKGROUND 2. 1. Ú In accordance with the Fourth Council Directive 78/660/EEC of 25 July 1978 on the annual accounts of certain types of companies, all companies covered by the Directive must have their annual accounts audited by a qualified professional. The statutory auditor must also see to it that the annual report is consistent with the annual accounts for the same financial year. Member States may exempt small companies as defined in the Directive from the obligation to have their accounts audited. entities to all requirement 2. 2. Ú The Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts extended the audit that draw up consolidated accounts on the basis of the Directive. the Council Directives 86/635/EEC of Similarly, the annual accounts and 18 December 1986 on consolidated accounts of banks and other financial instiÜ tutions and 91/674/EEC of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings introduced a requirement for all entities their annual covered by accounts and consolidated accounts audited by a qualified professional. those Directives to have 1. 4. Ú The approach proposed in the present communiÜ cation consists of institutionalising a discussion of auditing matters at EU level. An important task will be the review of the existing international standards on auditing developed by the International Federation of Accountants (IFAC). The EU will have to decide whether it wants to support these standards and if so, how and on what basis European influence in the develÜ 2. 3. Ú Member States may only approve as auditors the persons who satisfy the conditions of the Eighth Council Directive 84/253/EEC of 10 April 1984 on the approval of persons responsible for carrying out the statutory audits of accounting documents. The conditions of approval concern professional qualifications on the one hand and personal integrity and independence on the other. 8. 5. 98 EN Official Journal of the European Communities C 143/13 the issues, such as the statutory auditor, 2. 4. Ú While the Eighth Directive defines the minimum it does not qualifications of indeÜ contain any specific guidance concerning pendence the requirement. Other appointment and dismissal of the statutory auditor, the audit fee, the audit report and the liability of the statutory auditor are dealt with in the Proposed Fifth Directive concerning the structure of public limited companies and the powers and obligations of their organsØ(˛), which remains however unadopted by the Council. Some of these issues are regulated at national level or are the subject of self regulation through the accountancy profession, inevitably differences in the way they are dealt with and there is often no legislative backing. there but are launched by the Commission, 2. 5. Ú Several studies notably on "Competition in European accounting’ (1992) and on the "Role, the position and the liability of the statutory auditor’ (1996), have shown that there is not yet a European market in audit services and that important differences remain between the national laws and regulations of Member States which deal with the statutory audit. this background, 2. 6. Ú Against the Commission considered it useful to organise a wide ranging reflection on the scope and the need for further action at EU level on the statutory audit. As a first step, the Commission published a Green PaperØ(ˇ) on the "Role, the position and the liability of the statutory auditor within the EU’, which was the awareness of all to raise interested parties concerning the issues at stake and to elicit their comments. The Commission received over 100 written contributions in response to the Green Paper. Most commentators welcomed the Green Paper and expressed the view that action at EU level was necessary. intended this consultation process, 2. 7. Ú To complete the Commission organised on 5 and 6 December 1996 a Conference on the role, the position and the liability of the statutory auditor within the EU. The objective of this Conference, which gathered some 200 representatives of professional institutes and public authorities responsible for the audit profession, was to discuss the future of auditing in Europe and the role of the EU. There was general agreement at the Conference that the EU should have a common framework for auditing and that such a framework should preferably take as its base the interÜ national standards on auditing. The tentative conclusions that the Commission drew at the final session of the Conference were discussed and broadly supported at a meeting of the Contact Committee for the Accounting Directives on 10 March 1997. (˛) OJ C 240, 9. 9. 1983, p. 2. (ˇ) OJ C 321, 28. 10. 1996, p. 1. 2. 8. Ú On 26 February 1997, the Economic and Social Committee adopted an opinion on the Green Paper. The Committee welcomed the Green Paper as provoking much needed discussion on the way forward, with a view to ensuring high and compatible standards in auditing and providing the basis for the EU’s approach towards international standard setting. The Committee urged the Commission to establish priorities and an action plan in the EU. The terms of minimum requirements Commission should encourage as far as possible the accounting profession itself to unify its procedures across the EU through effective self regulation, but a wider range of interested parties such as shareholders and company directors should be involved in the discussion, which should be carefully monitored by the Commission. for in giving credibility 2. 9. Ú On 15 January 1998, the European Parliament approved a resolution broadly supporting the Green Paper. The Parliament stressed the important role of the auditor to companies’ financial reports, something that is an essential underpinning of the Single Market. The Parliament also stressed the importance of removing any barriers at national level that may be restricting auditors’ freedom of estabÜ lishment and their freedom to provide cross border services. 2. 10. Ú The main issues raised by the Parliament were: - auditor independence requirements. The Green Paper calls for the establishment of a common core of essential principles on independence, which would be formulated by the profession itself. The European Parliament’s resolution calls for the definition of non audit services in the context of the need for the introduction of Community rules on independence, - the need for new legislation. The Green Paper envisages achieving the required changes as far as possible without new legislation. The European Parliament calls on the Commission to consider whether or not it will be necessary to introduce new legislation to achieve greater harmonisation. 3. PROPOSED ACTION preparing the 3. 1. Ú In Commission has paid particular attention to respecting the principles of subsidiarity and proportionality, as enshrined in the Treaty. New legislation or amendment proposed actions, its C 143/14 EN Official Journal of the European Communities 8. 5. 98 level legislation at EU the European Parliament, of existing is not necessarily envisaged. However, in response in particular to the recommendation of the Commission confirms that it will not hesitate to propose new legislation where it believes it is necessary. It is also desirable to avoid the creation of an additional layer of standards on top of those already existing or in prepÜ aration, at national and international level. A flexible is needed which can respond rapidly to framework current and future developments. Priority must be given to areas where current national legislation and practice is an obstacle to the operation of the Single Market. Committee on auditing auditing, 3. 4. Ú Through the the Committee on profession will be continuously challenged to live up to its commitment to deal with auditing matters on the basis of self regulation. Ideally, the Committee on auditing will be able to recommend endorsement of the results of the profession’s work. The profession will be expected to provide much of the raw material which will be the basis of the Committee’s deliberations. The principal tasks of the Committee on auditing will include: - a review of existing international standards on auditing and their application in an EU context with the objective of determining whether the application of these standards meets the full need for auditing standards in the EU or whether there are gaps to be filled, line with the new approach 3. 2. Ú In successfully followed in the area of accounting since 1995Ø(˛), the Commission intends to set up a Committee on auditing, which will have special responsibilities for auditing matters. The Committee on auditing will be composed of government experts nominated by the Member States. The Commission would welcome the presence of representatives of the bodies that elaborate auditing standards at national level. Moreover, it is important that the accounting profession, which has the primary responÜ sibility for the technical aspects of auditing standards and which shares with public authorities the responsibility for for auditing ensuring (professional qualifications and independence) are met, the Committee’s work. The be closely European accounting profession should therefore be represented in the Committee on auditing. requirements the basic involved that in for the Committee on auditing the 3. 3. Ú The European Parliament also calls Commission to study the role that internal audit can play in relation to external audit, and the Commission will welcome the participation of the European internal audit profession in the Committee on auditing. The European Parliament and the Economic and Social Committee call for to have a wide involvement of audit report users. The Commission proposes that the Accounting Advisory Forum should be associated with the work of the Committee on auditing to ensure that a wide range of end users is involved. The Accounting Advisory Forum was set up in 1991 as an advisory body comprising representatives of accounting standard setting bodies and users and preparers of accounts. (˛) Communication from harmonisation: A new harmonisation, COM(95) 508, November 1995. the Commission on accounting international strategy visÜ{ vis - contributing to International the work of Auditing Practices Committee of the International Federation of Accountants, including coordination of views on exposure drafts, the - an examination of the audit quality monitoring the Member States and of possible systems proposals for improvement, in - an examination of a set of core principles on indeÜ pendence developed by the European accounting profession. 3. 5. Ú On all matters the Committee on auditing will report to the Contact Committee on the Accounting Directives. This is particularly the case for issues of a more political nature, such as the definition of the statutory audit and the contents of the audit report. 3. 6. Ú The Commission proposes holding meeting of the Committee on auditing in May 1998. the first Auditing standards 3. 7. Ú The review of existing international standards on auditing (ISA) in an EU context will be undertaken as a matter of priority, on the basis of papers prepared by the Commission in consultation with the auditing profession at the European is to have a first level. The aim substantive discussion at the second meeting of the Committee on auditing in the latter part of 1998. 8. 5. 98 EN Official Journal of the European Communities C 143/15 3. 8. Ú One issue to be addressed is the extent to which current ISAs provide adequate guidance to European auditors to help them with the issues raised by the significant developments in accounting standard setting. As accounting standard setting develops it may be that auditing standards will naturally need to evolve further. In particular, guidance may be required on how auditors satisfy themselves that financial statements comply with relevant laws, where the statements have been prepared using accounting standards different from those normally applicable under national law. Quality control for compliance with standards and the independence principle 3. 9. Ú In accordance with the Eighth Directive, Member States must ensure that auditors carry out their tasks with due care and in full independence. Although it is necessary that the supervision of the audit profession is carried out in the first instance by the profession itself, the ultimate responsibility for ensuring respect for these fundamental public interest requirements, enshrined in Community the governments of Member States. Not all Member States have set up systems of quality control. Some Member States have sytems that tend to make supervision more a matter of form than of substance. law, remains with 3. 10. Ú In order to ensure equivalent and high audit quality, it is important first to do further research in this area and to examine how the systems of quality control in the auditing field operate in practice. The European accounting profession has agreed to carry out this examÜ ination as a matter of priority and to report their findings to the technical subcommittee. It is expected that at least a first report will be ready for discussion by the subcommittee in May 1998. On the basis of the report of the Committee on auditing to the Contact Committee, the Commission will consider whether any further initiative at EU level is required in this area. Corporate governance 3. 12. Ú The role of the auditor must be seen in the wider context of corporate governance. There is general agreement that there is scope for strengthening the position of the statutory auditor within the corporate structure. Suggestions the creation of audit include committees and the institutionalisation of the internal audit function. There is also general agreement that corporate entities themselves should place more emphasis on their own systems of control for managing and reporting risk. In this context it is particularly relevant inherent to related that companies manage the risks party transactions. 3. 13. Ú At the same time, it is necessary to keep in mind the wide differences that exist in corporate structures across the Member States and the difficulties which previous efforts to arrive at a common view in this area have encountered. This aspect of the statutory audit will be pursued in the light of the follow up to the consulÜ tation that the Commission’s services launched in 1997 on company law. Professional liability 3. 14. Ú A large majority of the respondents to the Green Paper expressed the view that harmonisation of the rules on the professional liability of the statutory auditor is impossible and unnecessary. The Commission however received strong representations the accounting profession to initiate action on this matter. It was argued that, from a Single Market point of view, it is important to ensure that different national rules and practices on liability do not create barriers between Member States and that unreasonable claims do not endanger the audit function. from 3. 15. Ú The Commission will examine in more detail the various concepts that play a role in the determination of the civil liability of the statutory auditor in Member States. Once the results of this examination are known, the Commission will be in a better position to judge whether an initiative in this area is necessary. 3. 11. Ú The profession has undertaken to review its earlier work on independence with a view to establishing a set of core principles for the guidance of auditors in the EU. The results of this work will also be examined by the Committee on auditing with the objective of enhancing the reliability of accounts through a stronger assurance of independence on the part of the auditor. the European recommendation of Following Parliament, the Commission will ensure that particular attention is paid to determining which non audit services do or do not risk impairing auditor independence. the Professional qualifications to ensure that 3. 16. Ú The Eighth Directive aims auditors are highly qualified professionals. The further development of the competence requirements listed in the Directive could help to ensure higher and more closely equivalent standards. To this end it is proposed to organise a closer coordination of the curricula for the training of auditors. This should be primarily a task for the accounting profession and for those who are directly involved in the educational process. The Commission C 143/16 EN Official Journal of the European Communities 8. 5. 98 will provide a platform for discussion of this issue, making appropriate use of existing programmes, notably Socrates and Leonardo da Vinci. Freedom to provide auditing services recognitionØ(˛) implementation in practice of in 3. 17. Ú The European Parliament strongly supports the the general effective Directive on mutual to relation auditing. The Commission believes that the promotion of the freedom of establishment and the freedom to provide services is particularly important for smaller firms of auditors and individual practitioners. The Commission will discuss with Member States and the Contact Committee on the Accounting Directives the practical difficulties that have arisen in the context of freedom of establishment and freedom to provide services in the auditing field. The European accounting profession will be closely associated with this exercise, in particular to report on the practical difficulties they have encountered with the implementation of existing mutual recognition legislation. The group of coordinators for the general system of mutual recognition will also be consulted. the freedom sectoral Directive 3. 18. Ú The Commission regards the effective implemenÜ tation of the general Directive on mutual recognition as to provide an essential component of auditing services. The Commission will also further examine with the accounting profession the feasibility of a for auditors. This would be envisaged if it becomes clear that it would constitute an improvement over the general Directive for both audit firms and individual practitioners, and that it would have the support of the profession and the Member States. As regards the Commission has suggested to the European accounting profession to agree on a rule which would ease or even exempt from the aptitude test that Member States individual practioners, improvement for (˛) OJ L 19, 24. 1. 1989, p. 16. require under the Directive, creating a general system for the recognition of diplomas in order to obtain the host professional title. These facilities would be granted by taking into consideration the experience that would be gained by the migrant in working under his home title with an auditor (accountant) having the host title. Small and medium sized companies system whereby 3. 19. Ú The Commission believes, and responses to the Green Paper confirm, that there is no need to change the present small companies may be exempted from the obligation to have their accounts audited by a qualified professional. The European Parliament supported this view. However, it would appear useful to examine to what extent the accounting profession can play a more active role in assisting SMEs. The Commission will ask the European accounting profession to come forward with proposals in this area. 4. CONCLUSION 4. 1. Ú The wide consultation which has taken place on the matter of the statutory audit has shown general agreement that the audit function is important, that the EU needs a framework of reference in the auditing field and that such a framework should be based as far as possible on existing international standards. 4. 2. Ú The overall goals of the approach which the Commission proposes are to contribute to a general raising of the quality of auditing in the EU, which will ultimately benefit all parties concerned with the life of companies and to improve the situation as regards the freedom to provide auditing services. 4. 3. Ú It is clear that this approach will require the active support of the Member States and of the European accounting profession if it is to be effective. The consulÜ tation exercise that has recently been concluded provides a strong assurance that this support will be forthcoming. 8. 5. 98 EN Official Journal of the European Communities C 143/17 ANNEX LIST OF RESPONSES TO THE GREEN PAPER In addition to the official comments of the Member States, the following organisations/institutions/ companies/private individuals have provided comments on the Green Paper. European/international organisations Association des chambres de commerce et d’industrie Centre for European Policy Studies Council of the Bars and Law Societies of the European Community EU Committee of the American Chamber of Commerce in Belgium European Confederation of Institutes of Internal Auditing European Contact Group European Federation of Accountants and Auditors for SMEs European Federation of Financial Executives Institutes European Savings Banks Group F~d~ration bancaire de l’Union europ~enne F~d~ration des experts comptables europ~ens International Auditing Practices Committee of the International Federation of Accountants Moores Rowland International Europe Union of European Accountancy Students Union of Industrial and Employers’ Confederations of Europe Commentators from Member States Austria Bundeskammer für Arbeiter und Angestellte Prof. Dkfm. Dr. Helmut Samer Wirtschaftskammer ˆsterreich Belgium Institut des experts comptables/Instituut der Accountants Institut des r~viseurs d’entreprises/Instituut der Bedrijfsrevisoren Denmark Anne Loft og Miles Gietzmann (HandelshÀjskolen i KÀbenhavn) Prof. HÀjsl v (HandelshÀjskole Syd) Ph. ØD. Bent WarmingÜRasmussen Finland HTM - Tilintarkastajat ry (Association of Approved Accountants) Sis…iset tarkastajat ry (Institute of Internal Auditors) France Compagnie nationale des commissaires aux comptes Germany Bundesverband der vereidigten Buchprüfer eV Bundesverband deutscher Banken eV Deutscher GenossenschaftsÜ und Raiffeisenverband eV Deutscher Gewerkschaftsbund Deutscher IndustrieÜ und Handelstag C 143/18 EN Official Journal of the European Communities 8. 5. 98 Deutscher SparkassenÜ und Giroverband Institut der Wirtschaftsprüfer Steuerberaterkammer RheinlandÜPfalz Wengert AG Wirtschaftsprüferkammer Greece Association of Certified Accountants and Auditors of Greece Hellenic Auditing Company AE Italy Consiglio nazionale dei dottori commercialisti Consiglio nazionale dei ragioneri e periti commerciali Instituto nazionale revisori contabili Associazione bancaria italiana Spain Comisiön nacional del mercado de Valores Ilustre Colegio de Abogados de Barcelona Prof. Fern‘ndez Rodròguez (Universidad Nacional de Educaciön a Distancia) Sweden Svenska Revisorsamfundet (Swedish Association of Approved Auditors) The Netherlands Drs. J. ØH. ØJ Achten RA Nederlandse Orde van AccountantsÜAdministratieconsulenten A. ØP. Schipper, Registeraccountant United Kingdom Auditing Practices Board Chartered Association of Certified Accountants Imperial Chemical Industries plc Institute of Chartered Accountants of England and Wales and Institute of Chartered Accountants of Scotland Law Society of England and Wales and Law Society of Scotland Christopher Humphrey and Josephine Maltby (Sheffield University) Prof. David Hatherly (University of Edinburgh) Prof. Ashley Burrowes (University of Glamorgan) Vivien Beattie (University of Stirling), Richard Brandt and Stella Fearnley (University of Portsmouth) Other countries Hungary Chamber of Hungarian Auditors Norway Norges Registerte Revisores Forening Switzerland Bundesamt für Justiz