WRITTEN QUESTION E-3049/02 by Wolfgang Ilgenfritz (NI) to the Commission. Effectiveness of the peer review procedure.
Date: 2002-10-24
Institutions: European Parliament, Provisional data
Subjects: Austria, EU Member State, accountant, auditing, business ethics, consultancy, restriction on competition

C 242 E/36

Official Journal of the European Union

EN

9.10.2003

In this regard, the Commission fully shares the concern of the Honourable Member over recent restrictions
on freedom of religion affecting the Catholic and other churches in Russia. Since April 2002, at least five
Catholic priests (three Polish, one Italian and one Slovak) have been expelled from Russia following a
decision by the Vatican to seek to upgrade the four temporary church structures in Russia to permanent
Roman Catholic dioceses. Other churches have also been the target of restrictions, including a Swedish
Protestant pastor and a number of Protestant missionaries which were similarly expelled. Furthermore, in
2001 the Moscow branch of the Salvation Army was disbanded, the Moscow office of the Jehovah’s
Witnesses is engaged in a four year long court case which could lead to its closure in Russia, and the
Moscow Department of the Justice Ministry has recently filed a lawsuit against an association belonging to
the Pentecostals. These restrictions cannot be easily reconciled with Russian commitments on human
rights. In particular, the Joint Statement of the last European Union-Russia Summit in Moscow (29 May
2002), states its common goal of strengthening a society based on respect for democratic principles and
human rights.

Within the framework of its intensive political dialogue with Russia, the Union has repeatedly raised its
concerns regarding freedom of religion in Russia. In this context, the Commission will continue actively to
promote the principle of religious freedom as part of its dialogue on human rights issues with Russian
authorities. Furthermore, the Commission will continue to press the message that the effective partnership
that the Union and Russia are trying to establish necessarily has to be based on a series of fundamental
core values, which include full respect for Human Rights. In accordance with the major international and
European Human Rights conventions that Russia has ratified,
for Human Rights and
fundamental liberties includes freedom of religion or belief. In parallel, the promotion of Human Rights in
Russia will continue to be a priority in the framework of the European Initiative for Democracy and
Human Rights (EIDHR). Russia is among the ‘focus countries’ that have been identified for 2002-2004.

this respect

(1) Oral reply, 22.10.2002.

(2003/C 242 E/038)

WRITTEN QUESTION E-3049/02

by Wolfgang Ilgenfritz (NI) to the Commission

(24 October 2002)

Subject: Effectiveness of the peer review procedure

The European Commission recommends that all persons who draw up annual accounts on behalf of firms
should be covered by a quality control system designed to guarantee a uniformly high standard in the
preparation of statutory end-of-year accounts. Two arrangements are regarded as appropriate to this
purpose: either monitoring by the relevant authorities, or the peer review procedure, under which the
quality checks are carried out practising auditors, the peers. The Commission has given the Member States
three years in which to introduce systems of this kind and regards a ten-year interval between checks as
acceptable for small auditing firms.

At present, quality checks of this kind are mandatory in only a very few European countries. In Austria,
auditors who draw up annual accounts for firms quoted on the stock market, credit institutions or
insurance companies have been subject since 2002 to a peer review procedure carried out at four-year
intervals. As from 2003, this arrangement will apply to auditors who draw up annual accounts for major
corporations. It is not yet clear whether the original proposal to extend peer review procedures to cover all
other auditors as from 2004 will be implemented.

The professional association representing Austrian auditors has quite rightly criticised the fact that the
mandatory introduction of overly strict quality control systems generates disproportionately high costs for
small auditing firms, placing them at a serious disadvantage vis-à-vis their larger competitors. Many smaller
firms may be forced to close, thereby automatically increasing the market share enjoyed by the bigger
companies. The smaller firms would merely be forced to take on extra administrative staff and the
additional costs they incur in connection with each auditing exercise would increase enormously, whereas
the peers would enjoy a steadily increasing turnover.

9.10.2003

EN

Official Journal of the European Union

C 242 E/37

The peer review procedure does not eliminate the real causes of errors or shortcomings in the auditing of
firms’ accounts, i.e. the lack of independence enjoyed by auditors vis-à-vis the firm whose books they are
checking, since the auditors are frequently also tax advisers or management consultants, and the poor
qualifications of the low-cost staff often used to carry out the relevant audits. The peer review procedure
will thus merely serve to force highly reputable small and medium-sized auditing firms from the market,
without establishing guarantees of quality.

This argument is now gaining ground in the light of developments in the USA, where peer review has
been employed for decades. The auditing firms caught up in the recent scandals in the USA involving
balance sheet manipulations, the so-called Big Five (now reduced to the Big Four), have been subject to
peer review procedures for many years. The Steuer und Wirtschaftskanzlei (Tax and Business Journal), one
of the oldest and most respected specialist publications in Austria, has reported that the USA is responding
by implementing fundamental reforms:
in late July the peer review procedure was abolished, on the
grounds of its blatant ineffectiveness, and replaced by strict governmental supervision of auditing firms.

1. What conclusions will the Commission draw from the abolition of the peer review procedure in the
USA?

2.

Does this development also mark the beginning of the end for peer review in the EU?

Answer given by Mr Bolkestein on behalf of the Commission

(5 December 2002)

Quality assurance is the audit profession’s principal means of reassuring the public and regulators that
auditors and audit firms are performing at a level that meets the established auditing standards and ethical
rules. Quality assurance also allows the profession to encourage quality improvements.

The Commission Recommendation of 15 November 2000 (1) recognises both basic forms of quality
assurance systems, the ‘Monitoring’ and the ‘Peer Review’, to be in general equivalent.

The Sarbanes-Oxley Act which came into force at the end of July 2002 resulted in the end of self-
regulation in the American audit profession. This included an end to what used to be the usual practice of
peer reviews. Instead the Sarbanes-Oxley Act foresees for the auditors of listed companies the introduction
of an inspection program by the newly created board, the PCAOB. This is close to the idea of monitoring.
Sarbanes-Oxley only contains framework provisions. The members of
the PCAOB appointed on
28 October 2002 will have to fill in the details of the Sarbanes-Oxley Act by making concrete rules on
inspection mechanisms.

This clearly represents developments in the United States that do not have a prejudicial effect on the
Union. The Commission Recommendation includes all auditors (cid:1) i.e. listed and non-listed companies (cid:1),
whereas the Sarbanes-Oxley Act affects only auditors providing services for listed companies. The
Recommendation does not impose such far reaching requirements on statutory auditors not auditing
public interest companies.

The implementation of the Recommendation on quality assurance will be reviewed after a three year
period. This review will take place in 2003. Preparations for this will be discussed in the Community
Committee on Auditing. The further applicability of the peer review methodology in the Community will
be subject to a closer examination during this review.

According to the Recommendation, possible concerns over the missing independence of the peer reviewer
shall be prevented by sufficient public oversight on the administration, execution and presentation of the
results of peer reviews. The actual application of such measures will play an important role in the
assessment of peer review methodology which will take place in 2003.

The Commission is also planning to bring forward a wider communication on the statutory audit function
in the near future.

(1) OJ L 91, 31.3.2001.