30.3.2004 EN C 80/17 Official Journal of the European Union
Opinion of the European Economic and Social Committee on the ‘Communication from the
Commission to the Council and the European Parliament Reinforcing the statutory audit in the
EU’
(COM(2003) 286 final)
(2004/C 80/06)
On 22 May 2003, the European Commission decided to consult the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, on the above-
mentioned communication.
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 12 November 2003. The rapporteur wasMr Byrne.
At its 404th plenary session of 10 and 11 December 2003 (meeting of 10 December), the European
Economic and Social Committee adopted the following opinion unanimously.
1. Introduction
1.1. The Commission’s Communication Reinforcing the
Statutory Audit in the EU should be seen both in the contextof the Commission’s Financial Services Action Plan and theCommission’s reaction to the collapse of Enron and other
financial scandals.
1.2. This Communication and the linked Communication
on Modernising Company Law and Enhancing Corporate
Governance in the EU are key steps in the essential task ofrestoring investor confidence in capital markets.
2. The Commission proposals
2.1. The Commission’s vision for a modern regulatory
framework for the statutory audit in the EU includes:
(a) a modernised and principles-based 8th Directive;
(b) creation of an Audit Regulatory Committee with rep-
resentation for the Member States.
2.2. The Commission envisages that the EU should adopt
International Standards on Auditing (ISAs) with effect from2005.
2.3. The Commission proposes that public oversight should
be a major element in the maintenance of confidence in the
audit function. It also stresses other key requirements e.g. theimportance of ethical guidelines for auditors, establishing anappropriate level of auditor independence, provision for
quality assurance, education and training and a system ofdisciplinary sanctions.
2.4. The Commission indicates that it has considered the
profession’s concerns about the concept of joint and several
liability. Its initial conclusion is that auditor liability is a key
driver for audit quality, however it acknowledges there may bea need to examine the broader economic impact of presentliability regimes.
2.5. The Commission details its negotiations to date with
United States’ regulators in relation to the implications of the
Sarbanes-Oxley Act and records its disappointment that asatisfactory resolution has not yet been achieved.
2.6. The Commission summarises its proposed actions to
achieve the Communication’s objective of strengthening the
statutory audit in the EU in a 10-point action plan.
3. General comments
3.1. The EESC welcomes the publication of this Communi-
cation. It recognises that it is vital to restore investor confidence
and encourage the further development of the EU’s capital
markets and that a strengthened audit regime will be animportant element in achieving this.
C 80/18 EN 30.3.2004 Official Journal of the European Union
3.2. The EESC also acknowledges that this Communication
is a continuation of a major programme of work in relation to
the statutory audit undertaken by the Commission which
commenced with the publication of the 1996 Green Paper‘The Role, Position and Liability of the Statutory Auditor in theEU’. Other more recent initiatives include the recommen-
dations on ‘Quality Assurance for the Statutory Auditor in the
EU’ in November 2000 and ‘Statutory Auditors’ Independencein the EU’ in May 2002 both of which are being implemented
by the Member States.
3.3. However recent events have fully justified the Com-
mission in accelerating further steps to reinforce the quality ofaudits in the EU. The EESC therefore welcomes the 10-pointaction plan put forward by the Commission. In particular it
supports the proposals for protecting the public interest by
introducing independent oversight of the profession.
3.4. Once this framework, including the new 8th Directive,
has been established at EU level the EESC believes thatmonitoring of compliance can best be implemented by
Member States. Further it must be borne in mind that the issue
here is a quality one — the quality of and therefore the reliancewhich can be placed on the statutory audit which in turn is
based on the appropriateness of assumptions underlying
accounts.
4. Specific comments
4.1. The Committee supports the Commission’s proposal
that the introduction of ISAs be a requirement for all EU
statutory audits. This follows the precedent set in adoptingInternational Accounting Standards (now renamed Inter-national Financial Reporting Standards) for all listed companies
from 2005. However whereas the introduction of International
Accounting Standards is initially limited to c. 7 000 listedcompanies, this Communication affects over a million statu-
tory audits in the EU.
4.2. The Committee agrees that IFAC (The International
Federation of Accountants) should be encouraged to look at
ways of working with other bodies in the process of developing
ISAs to secure proper public interest — as was done in thecase of IAS via the International Accounting Standards Board.4.3. The EESC accepts the need to validate ISAs for use in
the EU. However it repeats its comments in the case of the
Commission’s power not to endorse IAS, that this is a provision
which if actually used would undermine the internationalcomparability of standards and be potentially damaging toinvestors.
4.4. The EESC believes therefore that the Commission
should focus its efforts on strengthening the standard setting
process and that a continuous dialogue should be maintainedwith the standard setter by the Audit Regulatory Committee
to seek to iron out any problems in advance. The Committee
is encouraged to learn that the Commission’s work to datesuggests a high degree of convergence with ISAs already existsin the EU.
4.5. The Committee believes that in a specialist area like
auditing the expertise of the professionals must be available to
the Audit Regulatory Committee. It welcomes therefore theproposal to retain the existing involvement of the auditingprofession in the EU Committee on Auditing within the Audit
Advisory Committee.
4.6. The Committee believes that the highest standards of
auditor ethics are required. In this context the Committeesupports the Commission’s proposal to analyse the work of
the IFAC Ethics Committee which develops principles-based
global standards for auditor ethics including independence.
4.6.1. However regulations and codes of behaviour must
be backed by appropriate sanctions if they are to be effective.As required by the existing 8th Directive the professional
auditor bodies have systems of disciplinary sanctions for those
who breach the codes. Best practice now dictates that thissystem of self-regulation (the ultimate sanction being exclusionfrom membership and therefore the ability to carry out audits)
become more transparent and subject to external public
oversight. The Committee notes the Commission intends thatthese requirements will be reinforced in the new Directive.
4.7. The Committee notes the Commission’s view that
auditor liability is an important driver for audit quality but
believes that such liability should be proportionate. It therefore
welcomes the Commission’s recognition that it should examinethe economic impact of present liability regimes.
30.3.2004 EN C 80/19 Official Journal of the European Union
4.7.1. It is vital that people of the right calibre are attracted
into the auditing profession nor is it in the public interest that
following the collapse of Andersen there should be any further
reduction in the number of major firms which can undertakethe audit of the largest international companies, and thus areduction in competition. These considerations need to be
borne in mind when assessing the urgency of reforming
auditor-liability regimes.
4.8. The Committee is aware that IFAC is making it
mandatory for auditors to undertake continuing educationto maintain their professional skills and suggests that the
Commission might consider including a similar requirement
in the new 8th Directive.
5. International aspects
5.1. The Committee has noted the report of the Com-
mission on the dialogue with the US authorities in relation to
the Sarbanes-Oxley Act. The Act has introduced into the US a
more restrictive and rules-based approach which is neither inline with the EU’s principles-based, risks-safeguard approach
also followed by IFAC (and which is recommended by IOSCO
— the International Organisation for Securities Commission.)
5.2. Despite the representations made by the Commission
the SEC in the US has refused so far to grant the exemption
Brussels, 10 December 2003.
The President
of the European Economic and Social Committee
Roger BRIESCHsought by the Commission from the unnecessary outreach
effects of the Act for EU companies and EU auditors.
5.3. The Committee agrees that the present situation is
unacceptable and urges the Commission to continue its
dialogue with other major regulators including the US SECand PCAOB with a view to achieving the acceptance by all
parties of the equivalence of arrangements in terms of quality
and related enforcement in both jurisdictions, for corporategovernance, financial reporting and auditing.
6. Conclusions
6.1. The Commission has set out a ten-point action plan;
as indicated in this opinion the Committee expresses its general
support for the action plan and has set down specificcomments and suggestions on various aspects of it. Overall
the Committee believes the Commission’s proposals are com-
prehensive and if fully executed will lead to a significantstrengthening as well as greater harmonisation of statutory
audits in the EU.
6.2. At this stage obviously the precise outcome of the
work programme is not known nor for example the extent of
the changes to the 8th Directive which will eventually beproposed. The EESC looks forward to giving its opinion on
these when it will be possible to comment in more detail.