WRITTEN QUESTION E-2058/02

by Charles Tannock (PPE-DE) to the Commission

(11 July 2002)

Subject: The Enron and WorldCom scandals and the role of accountancy firms

What lessons does the Commission believe should be learned from the series of financial scandals that have recently rocked Wall Street if investor confidence and the assets of millions of pensioners and shareholders throughout the European Union are to be protected? In particular, bearing in mind the extraordinary role played by Arthur Andersen in both the Enron and WorldCom scandals, has the Commission discussed with Member States the possibility of separating auditing and consultancy roles for accountancy firms to prevent any future conflict of interest?

Answer given by Mr Bolkestein on behalf of the Commission

(9 September 2002)

The core of the Commission's approach to regulating financial services is implementing the Financial Services Action Plan (FSAP) by 2005 in line with the European Council conclusions. This means agreeing to European rules in many different areas, ensuring appropriate levels of investor protection which is at the heart of those measures.

The Commision published on 18 April a first response to Enron related policy issues(1). This paper outlines the main policy actions in 5 key areas to help to prevent similar catastrophies in the Union. Several of those actions were already being prepared in the light of the FSAP.

In particular, as early as in 2000 the Commission had proposed a pension fund Directive including the prudent person principle for asset allocation which is further clarified by some general quantitative rules, such as an investment ceiling of no more than 5 % of the sponsoring undertaking's portfolio as a whole. The Ecofin Council has recently agreed politically on the main contours of this proposal in line with the first reading in the Parliament.

One of the particular post-Enron policy actions was the adoption, on 16 May 2002 and following a 2-year-preparation, of a Commission Recommendation on auditor's independence. In the light of Enron's collapse the draft version of the Recommendation was re-discussed at the Union's Committee on Auditing which includes representatives of all Member States regulators. A large majority of this Committee expressed the view that a strict prohibition of the provision of any additional service to the audit client would not be in line with the comprehensive and innovative approach chosen to regulate auditor's independence.

The basic principle outlined in the Recommendation is that the auditor cannot conduct an audit if he/she has any relationship or provides any service to the audit client that would compromise his/her independence. In particular, the auditor cannot provide any additional service that would include participation in decision-making on behalf of the audit client. Furthermore, the Recommendation suggests that whenever the auditor provides additional services to the audit client, horizontal safeguards must be put in place. These include: a declaration in writing to the governance body of the audit client that none of the provided services could compromise the auditor's independence as well as a detailed public disclosure of audit and non-audit fees.

The Recommendation contains descriptions of circumstances where prohibition is the only adequate safeguard. For example, the auditor should not provide valuation services involving a significant degree of subjectivity where the amount at stake would have a material impact on the financial statements, participate in the preparation of accounting records and financial statements for listed companies or provide a short list of candidates for key financial and administrative posts in the case of public interest entities.

Where Member States believe there is a need to go beyond the approach set out in the Recommendation, both the nature of the instrument and the its minimum harmonisation requirements would allow this.

It is important to emphasise that current corporate governance systems in virtually all Member States allow individual companies, their governance bodies or their shareholders to act in a manner that would adequately address further possible concerns about auditor's independence. For example, under several national laws an individual company could decide to stop buying additional services from its auditors or to (rotate them) subject them to a rotation system.

Finally, given recent circumstances, the Commission is following with interest the on-going debate on these issues in the United States, including recently adopted legislation. In the light of the forthcoming report of the Winter group on corporate governance issues (expected by October), the Commission will consider whether any further measures are necessary at European level.

(1) http://www.europa.eu.int/comm/internal_market/fr/company/index.htm.