# C_2005157EN.01011501.xml

| 28.6.2005 | EN | Official Journal of the European Union | C 157/115 |
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28.6.2005

EN

Official Journal of the European Union

C 157/115

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Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC’

(COM(2004) 177 final — 2004/0065 (COD))

(2005/C 157/21)

On 21 April 2004 the Council decided to consult the European Economic and Social Committee, under Article 44(2)(g) of the Treaty establishing the European Community, on the abovementioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 8 September 2004. The rapporteur was Mr Frank von Fürstenwerth.

Mr Frank von Fürstenwerth

At its 413th plenary session on 15 and 16 December 2004 (meeting of 15 December 2004), the European Economic and Social Committee adopted the following opinion by 86 votes to three, with one abstention:

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1.   Introduction

| 1.1 | The proposal of the European Commission for a Directive of the European Parliament and of the Council on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC should be seen in the wider context of EU actions included in the Financial Services Action Plan. Particularly important in this respect are the Commission Communication on Modernising Company Law and Enhancing Corporate Governance in the EU — A plan to Move forward (COM(2003) 284), the move to international accounting standards from 2005 onwards, and the market abuse and prospectus Directives. |
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1.1

The proposal of the European Commission for a Directive of the European Parliament and of the Council on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC should be seen in the wider context of EU actions included in the Financial Services Action Plan. Particularly important in this respect are the Commission Communication on Modernising Company Law and Enhancing Corporate Governance in the EU — A plan to Move forward (COM(2003) 284), the move to international accounting standards from 2005 onwards, and the market abuse and prospectus Directives.

| 1.2 | Since 1996 the European Commission has been working towards the objective of improving and harmonising the quality of statutory auditing in the European Union. In May 2003, a step towards this objective was taken with the presentation of a ten-point action plan (Commission Communication on reinforcing the statutory audit in the EU; COM/2003/286). One of the points in the action plan concerns modernising the Eighth Directive on Company Law, 84/253/EEC. The current proposal for a directive is intended to replace the Eighth Directive on Company Law. |
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1.2

Since 1996 the European Commission has been working towards the objective of improving and harmonising the quality of statutory auditing in the European Union. In May 2003, a step towards this objective was taken with the presentation of a ten-point action plan (Commission Communication on reinforcing the statutory audit in the EU; COM/2003/286). One of the points in the action plan concerns modernising the Eighth Directive on Company Law, 84/253/EEC. The current proposal for a directive is intended to replace the Eighth Directive on Company Law.

| 1.3 | The measures proposed in the directive are intended to restore confidence in accounting procedures and financial markets. Although the proposal is a reflection of policies on statutory audit which have been in place since 1996 and not a direct response to the recent accounting scandals, these were taken into consideration. |
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1.3

The measures proposed in the directive are intended to restore confidence in accounting procedures and financial markets. Although the proposal is a reflection of policies on statutory audit which have been in place since 1996 and not a direct response to the recent accounting scandals, these were taken into consideration.

2.   Proposals of the Commission

| 2.1 | The proposal for a directive contains provisions on the approval, continuous education, and mutual international recognition of statutory auditors and audit firms. |
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2.1

The proposal for a directive contains provisions on the approval, continuous education, and mutual international recognition of statutory auditors and audit firms.

| 2.2 | All statutory auditors and audit firms must be subject to principles of professional ethics, which should cover the overall responsibility of the statutory auditor or audit firm towards the public, their integrity and objectivity, and their professional competence and due care. |
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2.2

All statutory auditors and audit firms must be subject to principles of professional ethics, which should cover the overall responsibility of the statutory auditor or audit firm towards the public, their integrity and objectivity, and their professional competence and due care.

| 2.3 | Member States should ensure that statutory auditors and audit firms which have been approved are registered in a public register. |
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2.3

Member States should ensure that statutory auditors and audit firms which have been approved are registered in a public register.

| 2.4 | A statutory auditor or an audit firm must be independent from the audited entity and cannot be involved in any way in management decisions of the audited entity. A statutory auditor or an audit firm should not carry out a statutory audit if there is any financial, business, employment or other relationship with the audited entity that might compromise the statutory auditor's or audit firm's independence. |
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2.4

A statutory auditor or an audit firm must be independent from the audited entity and cannot be involved in any way in management decisions of the audited entity. A statutory auditor or an audit firm should not carry out a statutory audit if there is any financial, business, employment or other relationship with the audited entity that might compromise the statutory auditor's or audit firm's independence.

| 2.5 | All statutory audits prescribed by Community law should be carried out in accordance with international auditing standards, when these standards are adopted by Community law. |
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2.5

All statutory audits prescribed by Community law should be carried out in accordance with international auditing standards, when these standards are adopted by Community law.

| 2.6 | Member States should organise effective public oversight of statutory auditors and audit firms. Oversight should comply with certain principles (e.g. in relation to appointment of suitable individuals, responsibility, and transparency). |
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2.6

Member States should organise effective public oversight of statutory auditors and audit firms. Oversight should comply with certain principles (e.g. in relation to appointment of suitable individuals, responsibility, and transparency).

| 2.7 | The statutory auditor or audit firm should be appointed by the general meeting of shareholders of the audited entity. In accordance with national law, Member States may provide that such appointment is subject to prior approval by a competent supervisory authority or that the appointment is made by a court or another organisation designated by national law. |
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2.7

The statutory auditor or audit firm should be appointed by the general meeting of shareholders of the audited entity. In accordance with national law, Member States may provide that such appointment is subject to prior approval by a competent supervisory authority or that the appointment is made by a court or another organisation designated by national law.

| 2.8 | Statutory auditors or audit firms may only be dismissed where there are proper grounds; divergence of opinions on accounting treatments or audit procedures cannot be a proper ground for dismissal. |
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2.8

Statutory auditors or audit firms may only be dismissed where there are proper grounds; divergence of opinions on accounting treatments or audit procedures cannot be a proper ground for dismissal.

| 2.9 | The Commission proposes that Member States should ensure that adequate rules are in place which provide for an effective communication between the statutory auditor or audit firm and the audited entity, and that such communication is properly recorded by the audited entity. |
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2.9

The Commission proposes that Member States should ensure that adequate rules are in place which provide for an effective communication between the statutory auditor or audit firm and the audited entity, and that such communication is properly recorded by the audited entity.

| 2.10 | The proposal for a directive envisages special provisions for the statutory audit of public interest entities. Public interest entities are companies which, due to the nature of their business, size, or number of employees are of significant public relevance, in particular companies whose securities are admitted to trading on a regulated market of a Member State, such as banks, other financial companies, and insurance undertakings. One of the requirements for these companies is to set up an audit committee composed of non-executive members of the administrative body or members of the supervisory body of the audited entity with at least one independent member with competence in accounting and/or auditing. In addition, there are more stringent requirements for independence, quality assurance, public oversight, and appointment of the statutory auditor or audit firm. |
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2.10

The proposal for a directive envisages special provisions for the statutory audit of public interest entities. Public interest entities are companies which, due to the nature of their business, size, or number of employees are of significant public relevance, in particular companies whose securities are admitted to trading on a regulated market of a Member State, such as banks, other financial companies, and insurance undertakings. One of the requirements for these companies is to set up an audit committee composed of non-executive members of the administrative body or members of the supervisory body of the audited entity with at least one independent member with competence in accounting and/or auditing. In addition, there are more stringent requirements for independence, quality assurance, public oversight, and appointment of the statutory auditor or audit firm.

| 2.11 | On the condition of reciprocity, the competent authorities of a Member State may approve an auditor from a third country as statutory auditor if the person has furnished proof of being approved as an auditor, theoretical knowledge, practical skills and integrity equivalent to the provisions of the Directive, and legal knowledge relevant for the statutory audit in the Member State. Other possibilities for international collaboration and exchange of information are also proposed. |
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2.11

On the condition of reciprocity, the competent authorities of a Member State may approve an auditor from a third country as statutory auditor if the person has furnished proof of being approved as an auditor, theoretical knowledge, practical skills and integrity equivalent to the provisions of the Directive, and legal knowledge relevant for the statutory audit in the Member State. Other possibilities for international collaboration and exchange of information are also proposed.

| 2.12 | A committee composed of representatives of the Member States (the audit regulatory committee) is to be set up to assist the Commission in establishing implementing measures. |
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2.12

A committee composed of representatives of the Member States (the audit regulatory committee) is to be set up to assist the Commission in establishing implementing measures.

| 2.13 | Directives 78/660/EEC and 83/349/EEC are amended to require disclosure of the fees for the financial year paid to the statutory auditor or audit firm for the statutory audit of annual accounts and the fees paid for other assurance services, tax advisory services and other non-audit services. |
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2.13

Directives 78/660/EEC and 83/349/EEC are amended to require disclosure of the fees for the financial year paid to the statutory auditor or audit firm for the statutory audit of annual accounts and the fees paid for other assurance services, tax advisory services and other non-audit services.

| 2.14 | Member States are to adopt and publish before 1 January 2006 the provisions necessary to comply with the Directive. |
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2.14

Member States are to adopt and publish before 1 January 2006 the provisions necessary to comply with the Directive.

3.   General comments

| 3.1 | The European Economic and Social Committee welcomes the proposed directive, which ensures that investors and other interested parties can place reliance on the accuracy of audited accounts. |
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3.1

The European Economic and Social Committee welcomes the proposed directive, which ensures that investors and other interested parties can place reliance on the accuracy of audited accounts.

| 3.2 | The new directive creates a unified European legal framework for statutory audit. The Committee welcomes this development. |
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3.2

The new directive creates a unified European legal framework for statutory audit. The Committee welcomes this development.

| 3.3 | The Committee acknowledges that the Commission is taking further initiatives in response to the Parmalat case. These initiatives concern speedier implementation of the proposals submitted in the May 2003 action plan to modernise company law and enhance corporate governance. These proposals relate to (1) defining the role of non-executive directors, (2) clarifying the responsibility of board members for financial and non-financial information, (3) improved disclosure of intra-group transactions and transactions with associated entities, and (4) full disclosure of offshore companies in annual accounts and much more stringent monitoring of such companies by auditors dealing with consolidated accounts. |
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3.3

The Committee acknowledges that the Commission is taking further initiatives in response to the Parmalat case. These initiatives concern speedier implementation of the proposals submitted in the May 2003 action plan to modernise company law and enhance corporate governance. These proposals relate to (1) defining the role of non-executive directors, (2) clarifying the responsibility of board members for financial and non-financial information, (3) improved disclosure of intra-group transactions and transactions with associated entities, and (4) full disclosure of offshore companies in annual accounts and much more stringent monitoring of such companies by auditors dealing with consolidated accounts.

| 3.4 | The Committee again picks up on the view expressed by the Commission in its communication on reinforcing the statutory audit that auditor liability is a driver for audit quality. (1) However, it continues to maintain (2) that liability should be proportionate, as regards any losses incurred by the company being audited and by the shareholders. The Commission's intention to review the economic impact of auditor liability regimes is to be welcomed. The Committee would therefore encourage the Commission to press ahead with the studies it has launched on this issue without delay. |
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3.4

The Committee again picks up on the view expressed by the Commission in its communication on reinforcing the statutory audit that auditor liability is a driver for audit quality. (1) However, it continues to maintain (2) that liability should be proportionate, as regards any losses incurred by the company being audited and by the shareholders. The Commission's intention to review the economic impact of auditor liability regimes is to be welcomed. The Committee would therefore encourage the Commission to press ahead with the studies it has launched on this issue without delay.

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4.   Specific comments

| 4.1 | One of the aims of the proposed provisions for the approval and continuous education of statutory auditors or audit firms is to ensure that the auditing profession has the necessary expertise. For this reason, the provisions are to be welcomed. |
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4.1

One of the aims of the proposed provisions for the approval and continuous education of statutory auditors or audit firms is to ensure that the auditing profession has the necessary expertise. For this reason, the provisions are to be welcomed.

| 4.2 | The proposals on professional ethics are generally seen as positive. The Commission proposes that it should be able to adopt implementing measures on professional ethics. These should be of the highest quality and, in the Committee's view, be in line with recognised international norms (Code of Ethics of the International Federation of Accountants) or European declarations (European Commission Recommendation of 16 May 2002 on statutory auditors' independence in the EU (3)). |
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4.2

The proposals on professional ethics are generally seen as positive. The Commission proposes that it should be able to adopt implementing measures on professional ethics. These should be of the highest quality and, in the Committee's view, be in line with recognised international norms (Code of Ethics of the International Federation of Accountants) or European declarations (European Commission Recommendation of 16 May 2002 on statutory auditors' independence in the EU (3)).

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| 4.3 | In the opinion of the Committee, the independence of the statutory auditor or the audit firm is crucial. It therefore supports, in principle, the Commission's proposal to ensure the independence of the statutory auditor or audit firm by laying down standards for all companies being audited, with particular reference to those of general interest, bearing in mind that these companies are also obliged to be more transparent vis-à-vis their shareholders and their future investors. |
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4.3

In the opinion of the Committee, the independence of the statutory auditor or the audit firm is crucial. It therefore supports, in principle, the Commission's proposal to ensure the independence of the statutory auditor or audit firm by laying down standards for all companies being audited, with particular reference to those of general interest, bearing in mind that these companies are also obliged to be more transparent vis-à-vis their shareholders and their future investors.

| 4.4 | The fact that the Commission refers to International Standards on Auditing is to be welcomed. In view of the obligation from 2005 of publicly traded companies to prepare consolidated financial statements based on the IAS (International Accounting Standards) or IFRS (International Financial Reporting Standards) (4), application of the International Standards on Auditing is a logical next step. International auditing standards should be developed in compliance with certain principles, and the quality of such standards should meet rigorous requirements. The Committee is therefore generally in favour of the procedure suggested by the Commission for endorsement of standards. However, in order to develop internationally recognised audit standards, the interests of all stakeholders and of the general public need to be taken into account through a transparent ‘due process’ for setting standards. Therefore, the Commission must act firmly and at an early stage to bring its proposals to bear in the standardisation process. |
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4.4

The fact that the Commission refers to International Standards on Auditing is to be welcomed. In view of the obligation from 2005 of publicly traded companies to prepare consolidated financial statements based on the IAS (International Accounting Standards) or IFRS (International Financial Reporting Standards) (4), application of the International Standards on Auditing is a logical next step. International auditing standards should be developed in compliance with certain principles, and the quality of such standards should meet rigorous requirements. The Committee is therefore generally in favour of the procedure suggested by the Commission for endorsement of standards. However, in order to develop internationally recognised audit standards, the interests of all stakeholders and of the general public need to be taken into account through a transparent ‘due process’ for setting standards. Therefore, the Commission must act firmly and at an early stage to bring its proposals to bear in the standardisation process.

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| 4.5 | The Committee is generally in favour of the Commission's proposal for Member States to organise public oversight of statutory auditors and audit firms based on certain principles. |
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4.5

The Committee is generally in favour of the Commission's proposal for Member States to organise public oversight of statutory auditors and audit firms based on certain principles.

| 4.6 | Concerning the dismissal of statutory auditors or audit firms, the Commission proposes that divergence of opinions on accounting treatments or audit procedures should not be a proper ground for dismissal. However, it is conceivable that a company might use a recognised accounting treatment which is not accepted by an auditor. The question arises of how to proceed in such cases, if statutory auditors or audit firms cannot be dismissed. |
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4.6

Concerning the dismissal of statutory auditors or audit firms, the Commission proposes that divergence of opinions on accounting treatments or audit procedures should not be a proper ground for dismissal. However, it is conceivable that a company might use a recognised accounting treatment which is not accepted by an auditor. The question arises of how to proceed in such cases, if statutory auditors or audit firms cannot be dismissed.

| 4.7 | The Committee is generally in favour of the proposed provision for communication between the audited entity and the statutory auditor or audit company. |
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4.7

The Committee is generally in favour of the proposed provision for communication between the audited entity and the statutory auditor or audit company.

| 4.8 | The Committee is in favour of the Commission's proposal to introduce special provisions for the statutory audit of public interest entities. However, the special requirements must be proportionate to the accompanying additional costs, which are ultimately borne by the company's clients and shareholders. |
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4.8

The Committee is in favour of the Commission's proposal to introduce special provisions for the statutory audit of public interest entities. However, the special requirements must be proportionate to the accompanying additional costs, which are ultimately borne by the company's clients and shareholders.

| 4.9 | The Commission proposes that fees for the financial year paid to the statutory auditor or audit firm for the statutory audit of annual accounts and the fees paid for other assurance services, tax advisory services and other non-audit services should be disclosed. In principle, an increase in transparency is to be welcomed. However, it should also be borne in mind that compulsory disclosures of this kind do not necessarily imply higher quality audits. It is possible that increased transparency could increase pressure to adjust fees for statutory auditing services. |
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4.9

The Commission proposes that fees for the financial year paid to the statutory auditor or audit firm for the statutory audit of annual accounts and the fees paid for other assurance services, tax advisory services and other non-audit services should be disclosed. In principle, an increase in transparency is to be welcomed. However, it should also be borne in mind that compulsory disclosures of this kind do not necessarily imply higher quality audits. It is possible that increased transparency could increase pressure to adjust fees for statutory auditing services.

| 4.10 | The Commission proposes that individual Member States should be responsible for ensuring that adequate rules are in place which provide that fees for statutory audits are adequate to allow proper audit quality, are not influenced by the provision of additional services to the audited entity and are not based on any form of contingency. The Committee acknowledges that this provision is designed as a key approach to preventing ‘dumping prices’ being charged for audit services. However, the question arises of how this provision should be implemented. The Committee strongly feels that this provision should not result in audit fees being set by the Member States. |
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4.10

The Commission proposes that individual Member States should be responsible for ensuring that adequate rules are in place which provide that fees for statutory audits are adequate to allow proper audit quality, are not influenced by the provision of additional services to the audited entity and are not based on any form of contingency. The Committee acknowledges that this provision is designed as a key approach to preventing ‘dumping prices’ being charged for audit services. However, the question arises of how this provision should be implemented. The Committee strongly feels that this provision should not result in audit fees being set by the Member States.

| 4.11 | The Committee is in favour of the procedure proposed by the Commission for adopting implementing measures and setting up an audit regulatory committee, provided that such implementing measures do not run counter to the international and European norms and declarations mentioned in point 4.2. |
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4.11

The Committee is in favour of the procedure proposed by the Commission for adopting implementing measures and setting up an audit regulatory committee, provided that such implementing measures do not run counter to the international and European norms and declarations mentioned in point 4.2.

5.   International aspects

| 5.1 | The Commission's proposals to regulate international cooperation are seen in a positive light, particularly in relation to cooperation with the United States. The Committee would, however, emphasise the need for compliance with existing national rules on confidentiality and data protection. |
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5.1

The Commission's proposals to regulate international cooperation are seen in a positive light, particularly in relation to cooperation with the United States. The Committee would, however, emphasise the need for compliance with existing national rules on confidentiality and data protection.

| 5.2 | The proposal for a directive envisages approving auditors from third countries on the basis of reciprocity, provided that they furnish certain proofs. A requirement for cooperation with third countries is equivalence of the system of public oversight in the third country with the European system. Equivalence is to be assessed by the Commission in cooperation with Member States and decided upon according to the procedure for adopting implementing measures. The Committee trusts that approval of statutory auditors from third countries will be subject to the same conditions as for auditors from EU Member States. |
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5.2

The proposal for a directive envisages approving auditors from third countries on the basis of reciprocity, provided that they furnish certain proofs. A requirement for cooperation with third countries is equivalence of the system of public oversight in the third country with the European system. Equivalence is to be assessed by the Commission in cooperation with Member States and decided upon according to the procedure for adopting implementing measures. The Committee trusts that approval of statutory auditors from third countries will be subject to the same conditions as for auditors from EU Member States.

| 5.3 | It is difficult to say conclusively whether the proposed model for international cooperation adequately addresses all the relevant issues, and the Committee therefore feels that there is a need for further reflection by the Commission as to how acceptable the proposed model might be, for the competent United States authorities in particular. |
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5.3

It is difficult to say conclusively whether the proposed model for international cooperation adequately addresses all the relevant issues, and the Committee therefore feels that there is a need for further reflection by the Commission as to how acceptable the proposed model might be, for the competent United States authorities in particular.

6.   Conclusions

| 6.1 | The Committee supports the Commission's proposal for a directive on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC. It believes that the proposal covers almost all the important aspects of statutory auditing. The full implementation of the directive will go a considerable way to meeting the Commission's objective of reinforcing and harmonising statutory audit. |
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6.1

The Committee supports the Commission's proposal for a directive on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC. It believes that the proposal covers almost all the important aspects of statutory auditing. The full implementation of the directive will go a considerable way to meeting the Commission's objective of reinforcing and harmonising statutory audit.

| 6.2 | The Committee has touched on selected aspects of the proposed directive in order, among other things, to give the Commission specific pointers and suggestions for further deliberations and analysis. In view of the importance which the Committee attaches to the proposed directive, it calls for a rapid legislative process. |
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6.2

The Committee has touched on selected aspects of the proposed directive in order, among other things, to give the Commission specific pointers and suggestions for further deliberations and analysis. In view of the importance which the Committee attaches to the proposed directive, it calls for a rapid legislative process.

Brussels, 15 December 2004

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

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(1)  OJ C 236/2-8, 2.10.2003, point 3.10.

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(2)  Cf. opinion of the European Economic and Social Committee of 10 December 2003 on the Communication from the Commission to the European Parliament and the Council on reinforcing the statutory audit in the EU (COM(2003) 286 final) (2004/C 80/06); OJ C 80/17-19, 30.3.2004, point 4.7.

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Communication from the Commission to the European Parliament and the Council on reinforcing the statutory audit in the EU

(3)  OJ L 191, 19.07.2002.

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(4)  In the opinion of the Committee, a consistent approach in interpreting the IAS and IFRS is essential for high-quality audits.

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APPENDIX

to the opinion of the European Economic and Social Committee

Over a quarter of votes were cast in favour of the following extract from the section opinion, which was replaced by an amendment adopted at the plenary session:

Point 4.3

‘However, the Committee is of the opinion that the introduction of external rotation of audit firms carrying out the statutory audit of public interest entities is not conducive to raising the quality of the audits, as the transfer of specific information on a client to a new auditor necessarily involves a loss of expertise and therefore a lower standard of audit than would be the case with an auditor who has several years' experience of working with the client. There is also a risk that such a requirement would result in a concentration of the market on big audit firms to the detriment of medium-sized companies.’

Result of vote:

Votes in favour: 50

Votes against: 21

Abstentions: 4

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