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
Date: 2004-03-17
Institutions: European Commission
Subjects: account, audit, auditing, consolidated account, financial control, organisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.3.2004 
COM(2004) 177 final 

2004/0065 (COD) 

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 

(presented by the Commission) 

EN 

   EN 

 
 
 
  
  
EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL  

1.1. 

Grounds and objectives 

The recent spate of scandals in the US and the EU have emphasised that statutory audit is an 
important  element  in  ensuring  the  credibility  and  reliability  of  companies’  financial 
statements. Significant economic damage to the capital markets and the economy has resulted. 

Recent  scandals  also  confirm  the  urgency  and  the  need  for  the  envisaged  EU  initiatives  on 
statutory  audit  outlined  in  the  May  2003  Commission  Communication  “Reinforcing  the 
statutory  audit  in  the  EU”.  This  proposal  is  one  of  the  most  important  initiatives  of  this 
Communication.  It  considerably  broadens  the  scope  of  the  former  Eighth  Council  Directive 
by clarifying the duties of statutory auditors, their independence and ethics, by introducing a 
requirement for external quality assurance, by ensuring robust public oversight over the audit 
profession and by improving co-operation between oversight bodies in the EU.  

The  proposal  also  provides  a  basis  for  effective  and  balanced  international  regulatory  co-
operation with oversight bodies of third countries such as the US Public Company Accounting 
Oversight  Board  (PCAOB).  This  is  crucial  because  capital  markets  today  are  globally 
interconnected.  

This  proposal  is  not  a  knee-jerk  reaction  to  recent  corporate  scandals.  It  is  the  logical 
consequence  of  a  reorientation  of  the  EU  policy  on  statutory  audit  started  back  in  1996. 
However,  the  initial  thinking  has  been  adapted to  take  account  of  the  most  recent  scandals. 
For  example,  the  proposal  now  states  that  the  group  auditor  bears  full  responsibility  for  the 
audit  report  on  the  consolidated  accounts  of  a  group  of  companies  and  it  requires  an 
independent audit committee in all public interest entities. 

1.2. 

General context and history 

The Fourth Council Directive 78/660/EEC of 25 July 19781 on the annual accounts of certain 
types  of  companies,  the  Seventh  Council  Directive  83/349/EEC  of  13  June  1983  on 
consolidated  accounts2,  Council  Directive  86/635/EEC  of  8  December  1986  on  the  annual 
accounts  and  consolidated  accounts  of  banks  and  other  financial  institutions3 and  Council 
Directive  91/674/EEC  of  19  December  1991  on  the  annual  accounts  and  consolidated 
accounts of insurance undertakings4 require that the annual accounts or consolidated accounts 
are audited by one or more persons entitled to carry out such audits. 

The  Eighth  Council  Directive  84/253/EEC  of  10  April  19845 on  the  approval  of  persons 
responsible for carrying out the statutory audits of accounting documents deals primarily with 
the  approval  of  statutory  auditors  in  Member  States.  Although  the  Directive  contains  some 
requirements  on  registration  and  professional  integrity,  it  does  not  include  requirements  on 

1 
2 
3 
4 
5 

OJ L 222, 14.8.1978, p. 11 
OJ L 193, 18.7.1983, p. 1 
OJ L 372, 31.12.1986, p. 1 
OJ L 374, 31.12.1991, p.7 
OJ N° L 126, 12.5.1984, p. 20 

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how  a  statutory  audit  should  be  conducted  and  the  degree  of  public  oversight  or  external 
quality assurance which is needed to ensure a high audit quality.  

The  lack  of  a  harmonised  approach  to  statutory  auditing  in  the  EU  was  the  main  reason 
behind the Commission’s organisation in 1996 of a wide-ranging reflection on the scope and 
need  for  further  action  at  EU  level  on  statutory  audit.  This  reflection  was  initiated  by  the 
Commission’s  1996  Green  Paper 6  on  “The  Role,  Position  and  Liability  of  the  Statutory 
Auditor  in  the  EU”.  Responses  to  the  Green  Paper  suggested  a  need  for  action  at  EU  level 
beyond  that  laid  down  in  the  Eighth  Council  Directive.  The  policy  conclusions  which  the 
Commission  drew  from 
the  1998  Commission 
these  reflections  were 
Communication “The Statutory Audit in the European Union, the way forward”7. 

included 

in 

The  1998  Communication  proposed  the  creation  of  an  EU  Committee  on  Auditing,  which 
would  develop  further  action  in  close  co-operation  between  the  accounting  profession  and 
Member States. The objective of the Committee was to discuss ways and means to improve 
audit  quality,  where  possible  by  agreeing  on  non-binding  measures.  Key  subjects  on  its 
agenda have been external quality assurance, auditing standards and auditor independence.  

On  the  basis  of  the  preparatory  work  by  the  EU  Committee  on  Auditing,  the  Commission 
issued  a  Recommendation  on  “Quality  Assurance  for  the  Statutory  Auditor  in  the  EU”8 in 
November  2000  and  a  Recommendation  on  Statutory  Auditors’  Independence  in  the  EU  in 
May 20029. Preparatory work on the use of international standards on auditing (ISAs) has also 
been carried out. 

This  proposal  maintains  the  basic  conditions  on  education  and  training  from  the  existing 
Directive. This means that the conditions for approval of statutory auditors and audit firms are 
not fundamentally changed. However, the proposal broadens the scope of application of EU 
legislation by introducing new requirements concerning the manner in which an audit should 
be carried out and the structures needed to ensure audit quality as well as ensure trust in the 
audit function. 

Whilst  statutory  audit  is  of  major  importance  in  ensuring  proper  financial  reporting,  it  is  of 
course not the only factor under scrutiny following recent financial reporting scandals. Audit 
is  an  element  of  a  larger  system  of  actors  and  regulators  involved  in  transparent  financial 
reporting for the EU capital market such as the management of the reporting entity, securities 
markets supervisors and other sector specific supervisors. The proposed Directive on statutory 
audit  should  therefore  be  seen  in  the  wider  context  of  EU  actions  included  in  the  Financial 
Services  Action  Plan.  Particularly 
the  Commission 
Communication  of  21  May  2003  on  ‘Modernising Company  Law  and  Enhancing Corporate 
Governance  in  the  EU  –  A  plan  to  Move  forward’10;  the  move  to  international  accounting 
standards  from  2005  onwards;  and  the  market  abuse  (2003/6/EC  on  insider  dealing  and 
market  manipulation)  and  prospectus  (2003/71/EC  on  the  prospectus  to  be  published  when 
securities  are  offered  to  the  public  or  admitted  to  trading)  Directives  agreed  recently  in 
codecision. 

this  respect  are 

important 

in 

6 
7 
8 
9 
10 

OJ N° C 321, 28.10.1996, p. 1 
OJ N° C 143, 8.5.1998, p. 12 
OJ N° L 91, 31.3.2001, p. 91 
OJ N° L 191, 19.7.2002, p. 22 
COM(2003) 284 final 

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2. 

CHAPTER BY CHAPTER ANALYSIS  

Chapter I 

Subject matter and Definitions (Articles 1 and 2) 

In accordance with Article 1, this Directive only deals with statutory audit in so far as such 
audit  is  required  by  Community  law  (for  instance  by  the  Fourth  and  Seventh  Council 
Directives). 

Statutory  auditor  and  audit  firm are separately defined. This provides more clarity in the 
precise  scope  of  regulation  and  takes  account  of  the  fact  that  a  number  of  provisions  deal 
specifically  with  audit  firms.  This  reflects  the  fact  that  since  the  adoption  of  the  Eighth 
Council Directive in 1984 audit firms have grown in size and importance.  

Statutory audit is defined as the audit of annual or consolidated accounts of entities covered 
by  Community  law  Directives.  Member  States  may  also  require  statutory  audits  in  other 
situations and where they do so make them subject to the same requirements.  

Public interest entities is a concept that was discussed and developed during the preparation 
of the Recommendations on quality assurance and auditor independence in the EU Committee 
on Auditing. Criteria used to define public relevance are having securities listed, the nature of 
the business (for example banks and insurance companies) or the size of the business (number 
of  people  employed).  Recent  scandals  show  the  importance  of  further  strengthening 
requirements  concerning  audits  in  public  interest  entities.  However,  it  would  be  overly 
burdensome and disproportionate to extend these enhanced requirements to the large majority 
of other statutory audits. Chapter XI contains the specific requirements for statutory audits in 
public  interest  entities.  For  example,  public  interest  entities  shall  have  an  independent  audit 
committee;  the  audit  firms  of  public  interest  entities  shall  be  subject  to  more  stringent 
independence requirements; and their auditors should publish an annual transparency report. 

All listed companies whose securities are admitted to trading on a regulated market, all banks 
and insurance undertakings are by definition considered to be public interest entities. Member 
States may want to enlarge the scope by including for instance hospitals or pension funds into 
the definition. 

Chapter II  Approval,  Continuous  Education  and  Mutual  Recognition  (Articles  3  to 
14) 

This  section  basically  repeats  the  present  requirements  of  the  Eighth  Directive.  For  the 
approval of audit firms, Article 3 (3) (b) and (c) no longer allows a Member State to require 
that  the  majority  of  the  voting  rights  and  the  majority  of  the  administrative  or  management 
body should be only in the hands of statutory auditors or audit firms that are approved in that 
specific Member State. The proposal removes restrictions on ownership and management that 
are  currently  possible  under  the  Eighth  Council  Directive.  The  proposal  states  very  clearly 
that the majority ownership of an audit firm should be held by statutory auditors or audit firms 
approved in any Member State. This change enhances compatibility with internal market rules 
and will also allow for the creation of more fully integrated EU audit firms.  

In this chapter, an aptitude test is prescribed for the approval of statutory auditors from other 
Member  States.  This  departure  from  the  recent  proposal  for  a  Directive  on  Services  in  the 
internal  market  (COM(2004)2  final.13.1.2004)  is  justified  because  of  the  need  for  statutory 
auditors to be fully aware of the specific legislation of Member States (such as company law, 
fiscal law and social security law) that is relevant for statutory audit. The theoretical training 

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now specifically covers international standards in the fields of accounting (IAS) and auditing 
(ISA). 

Chapter III  Registration (Articles 15 to 20) 

Interested parties need to be able to determine rapidly whether a statutory auditor or an audit 
firm has been approved, where it is officially located and how (in the case of firms) they are 
organised.  This  will  be  facilitated  through  registration  in  a  public  electronic  register.  The 
information  to  be  included  in  the  register  is  limited  to  what  is  essential  and  access  to  such 
information is facilitated through the requirement that it must be accessible electronically.  

The  public  register  must  also  contain  the  name  and  address  of  the  competent  authorities  in 
charge  of  oversight,  quality  assurance  and  investigations  and  sanctions  in  order  to  allow 
interested parties to contact these authorities if necessary. 

Individual statutory auditors may be employed by an audit firm, they may be self-employed or 
otherwise associated with an audit firm, for example as a partner. The register must indicate 
the status of the statutory auditor in this respect. 

For audit firms, the register must also show the size of the audit firm by indicating the number 
of  all  statutory  auditors  employed  by  or  associated  as  partners  or  otherwise  with  the  audit 
firm.  Furthermore,  the  listing  of  individual  statutory  auditors  clarifies  who  is  related  to  the 
audit  firm  and  via  the  registration  number  additional  information  is  available.  The  register 
must contain information on the owners and members of the management of the audit firm. 
Furthermore,  the  register  must  also  comprise  information  on  the  membership  of  a  network. 
Information  on  the  network  indicates  with  which  other  audit  firms/affiliates  the  audit  firm 
cooperates and, by doing so, makes these networks more transparent to interested parties.  

The registration information must be updated without undue delay and must be drawn up in 
the language permitted by the language rules in the Member State where the statutory auditor 
or  audit  firm  has  its  seat.  The  registration  information  may  also  voluntarily  be  submitted  in 
any other official language of the Community. 

Chapter IV  Professional ethics and professional secrecy (Articles 21 to 22) 

Statutory auditors and audit firms must be subject to robust professional ethics. The starting 
point  will  be  the  code  of  ethics  adopted  by  the  Ethics  Committee  of  the  International 
Federation  of  Accountants  (IFAC).  However,  further  specific  rules  may  be  necessary  to 
elaborate the principles established in Article 21.  

Rules on confidentiality and professional secrecy must not stand in the way of enforcement of 
financial reporting requirements or the exchange of relevant information between competent 
authorities of Member States.  

Chapter V 

Independence (Articles 23 to 25) 

The basic principle of auditor independence included in the Commission Recommendation on 
Auditor Independence is incorporated into Article 23. The Directive establishes the principle 
that a statutory auditor or an audit firm must be independent from the audited entity and shall 
in  no  way  be  involved  in  management  decisions  of  the  audited  entity.  This  means  that  the 
auditor  must  not  be  able  to  accept  any  audit  engagement  which  would  endanger  his 
independence.  An  auditor  must  also  refuse  any  non-audit  engagement  which  might 
compromise his independence as an auditor. The auditor must document all significant threats 

5 

 
 
  
 
to  his  independence  as  well  as  the  safeguards  applied  to  mitigate  those  treats.  The  ultimate 
safeguard  is  of  course  to  resign  from  the  audit  or  to  not  accept  a  non-audit  service.  As 
announced in its 2003 Communication, the Commission intends to organise a study in order 
to examine whether further measures are necessary that might lead to the total prohibition for 
an auditor to offer non-audited services to his audit client.  

Following from the 2003 Commission Recommendation on Statutory Auditors’ Independence 
in the EU, it is made clear that the fee for a statutory audit should be adequate to allow proper 
audit quality, that the fee cannot be based on any form of contingency and that the fee cannot 
be influenced by the provision of additional services to the audited entity. The respect of these 
principles,  together  with  that  of  independence  will  be  the  subject  of  audit  quality  assurance 
reviews. 

Chapter VI  Auditing Standards and Audit Reporting (Articles 26 to 28) 

As  stated  in  the  2003  Communication,  the  Commission  proposes  that  all  statutory  audits 
prescribed  by  Community  law  should  be  carried  out  in  accordance  with  International 
Standards  on  Auditing  (ISA).  At  present,  ISAs  (International  Standards  on  Auditing)  are 
established by the International Auditing and Assurance Standards Board (IAASB), a private 
organisation.  In  order  to  be  able  to  endorse  international  standards  on  auditing,  the 
Commission needs to examine whether the standards are accepted internationally and whether 
they  have  been  developed  with  proper  due  process,  public  oversight  and  transparency. 
Furthermore, the standards must be of high quality and contribute to the annual accounts and 
the  consolidated  accounts  showing  a  true  and  fair  view.  Finally,  the  standards  must  be 
conducive  to  the  European  public  good.  The  Commission  is  reflecting  on  a  final  decision 
whether  and  to  what  extent  to  endorse  ISAs.  This  will  largely  depend  on  satisfactory 
governance arrangements relating to the operation of the IAASB being established. 

In order to avoid Member States from introducing new requirements or from imposing further 
audit  requirements  that  go  beyond  the  procedures  provided  under  ISA’s,  Article  26  (3) 
indicates  that  Member  States  may  only  impose  additional  audit  procedures  if  these  follow 
from  specific  requirements  relating  to  the  scope  of  the  statutory  audit.  In  accordance  with 
Article  28  (2),  the  Commission  may  adopt  a  common  standard  audit  report  for  annual  or 
consolidated  accounts  which  have  been  prepared  in  accordance  with  adopted  international 
accounting standards. 

Article 27 introduces the principle that the group auditor bears full responsibility for the audit 
report in relation with the consolidated accounts. This principle implies that the group auditor 
needs  to  ensure  that  he  maintains  sufficient  documentation  of  the  review  performed  by 
another auditor or audit firm which audits part of the group and that he obtains copies of the 
audit documentation if that auditor or audit firm has not been approved in a Member State.  

Chapter VII  Quality Assurance (Article 29) 

Article 29 introduces the requirement for all statutory auditors and audit firms to be subject to 
a system of quality assurance. The criteria to be applied for such a quality assurance system 
are  those  identified  in  the  Commission’s  Recommendation  of  November  2000  on  ‘Quality 
Assurance  for  the  Statutory  Auditor  in  the  EU’.  A  review  of  the  implementation  of  this 
Recommendation in late 2003 has shown that all Member States have introduced systems on 
quality assurance, or are in the process of doing so. A legal underpinning of the principles of 
the  Recommendation  will  ensure  that  Member  States  apply  these  principles.  Article  29 

6 

 
 
  
 
strengthens the aspect of public oversight and independent funding and the follow up of the 
recommendations from quality reviews. 

Chapter VIII Investigations and sanctions (Article 30) 

Member States’ systems of investigations and sanctioning still vary to a large extent. Article 
30  sets  up  the  general  principle  that  Member  States  shall  organise  effective  systems  of 
investigation  and  effective  and  dissuasive  sanctions,  which  may  be  civil,  administrative  or 
criminal.  Member  States’  shall  provide  for  appropriate  disclosure  to  the  public.  Sanctions 
must include the withdrawal of approval of statutory auditors or audit firms. 

Chapter IX  Public  oversight  and  regulatory  arrangements  between  Member  States 
(Articles 31 to 34) 

Effective public oversight over the audit profession is a vital element in the maintenance and 
enhancement  of  confidence  in  the  audit  function.  The  current  lack  of  confidence  is  partly 
based on a public perception that a self-regulating profession runs a serious risk of conflicts of 
interests  in  dealing  with  its  shortcomings.  Therefore,  a  credible  element  of  public  oversight 
over the audit profession is crucial.  

Article  31  sets  out  principles  of  public  oversight.  The  public  oversight  requirement  will 
ensure that oversight has sufficient public integrity and independence. However, there is no 
blueprint  on  how  to  set  up  an  effective  public  oversight  mechanism.  The  common  EU 
principles  proposed  on  public  oversight  represent  a  minimum  requirement  for  an  adequate 
public oversight at Member State level.  

Credible supervision of the audit profession requires a clear majority of non-practitioners to 
oversee the audit profession. For public interest entities, the oversight of  auditors should  be 
carried  out  exclusively  by  non-practitioners.  Nonetheless,  those  who  govern  the  public 
oversight system should be sufficiently knowledgeable about accounting and auditing. Recent 
corporate  scandals  have  proven  that  swift  and  effective  investigations  by  public  oversight 
systems  are  needed  to  ensure  the  efficient  functioning  of  the  capital  markets.  Nonetheless 
basic requirements on adequate and transparent due process must be respected. 

In  the  light  of  the  emerging  EU  capital  market  there  is  a  need  for  an  EU  co-ordination 
mechanism  to  bring  together  the  national  systems  into  a  cohesive,  efficient  pan-European 
network.  This  should  serve  to  encourage  convergence  of  principles  and  practice.  Article  33 
establishes  the  principle  that  Member  States  shall  recognise  each  other’s  oversight  and 
regulatory systems. For the audit of consolidated accounts and for the purpose of listings in 
another  Member  States  no  further  requirements  beyond  those  in  the  home  country  may  be 
imposed. 

Article 34 sets out the rules for effective cooperation between Member States in investigations 
of audit firms.  

Chapter X  Appointment, dismissal and communication (Articles 35 to 37) 

The  procedures  for  appointment  of  the  statutory  auditor  or  audit  firm  shall  ensure  that  the 
statutory auditor or audit firm is independent from those who prepare the financial statements 
of  the  audited  entity.  Some  Member  States  require  the  involvement  of  the  supervisory 
authorities,  courts  or  other  organisations  designated  by  law  (e.g.  for  cooperatives)  in  the 
appointment of the statutory auditor or audit firm. The Directive takes does not prejudice this.  

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With regard to the dismissal and resignation of auditors, the Directive introduces the principle 
that the statutory auditor or audit firm can only  be dismissed if  there is a significant reason 
why the statutory auditor cannot finalise the audit. The reasons for dismissal and resignation 
shall be disclosed to the responsible oversight authorities. 

Effective communication between the statutory auditor/audit firm and the audited entity is of 
significant importance for high quality audits. It should lead to the audited entity drawing the 
necessary  conclusions.  Due  to  the  different  corporate  governance  structures,  it  is  the 
responsibility  of  Member  States  to  establish  effective  detailed  rules  in  this  regard.  As  a 
minimum,  communication  shall  be  recorded  by  the  audited  entity  in  order  to  allow 
independent  directors  of  the  entity  to  get  an  overview  of  the  relationship  with  the  statutory 
auditor/audit firm.  

Chapter XI  Special  provisions  for  the  statutory  audit  of  public  interest  entities 
(Articles 38 to 43) 

It  is  appropriate  that  more  stringent  requirement  should  govern  the  statutory  audit  of  public 
interest entities. Article 38 requires the audit firms that carry out statutory audit(s) of public 
interest entities to provide a detailed report to the public that gives an insight into the audit 
firm  and  the  network  to  which  it  belongs.  The  audit  firm  shall  provide  a  governance 
statement,  a  description  of  the  Internal  Quality  Control  System  and  a  statement  on  the 
effectiveness  of  its  functioning  by  the  administrative  or  management  body.  The  report  shall 
include  the  date  of  the  last  quality  assurance  review,  policies  on  continuous  education 
requirements and a break-down of fees. 

The  requirement  to  set  up  an  audit  committee  in  Article  39  will  strengthen  monitoring  the 
financial  reporting  process  and  the  statutory  audit  and  help  to  prevent  any  possible  undue 
influence  of  the  executive  management  on  the  financial  reporting  of  the  audited  entity.  In 
order  to  fulfil  its  tasks  effectively,  the  audit  committee  shall  have  at  least  one  independent 
member who is competent in accounting and/or auditing.  

An  effective  internal  control  system  minimises  financial,  operational  and  compliance  risks, 
and  enhances  the  quality  of  financial  reporting.  Such  a  system  requires  the  maintenance  of 
appropriate policies and processes that ensure a prompt dissemination of reliable information 
and  compliance  with  applicable  laws  and  regulations,  and  safeguard  the  proper  use  of  the 
company’s assets. The function of the audit committee is to monitor that control activities are 
performed  and  communication  and  reporting  processes  are  in  place  for  breaches  of  internal 
control policies and applicable laws and regulations. This should by no means undermine the 
fact  that  the  responsibility  for  the  operation,  review  and  disclosure  of  the  internal  control 
system lies with the board of directors collectively. 

In order to enhance the quality of financial reporting, the statutory auditor or audit firm and 
the  audit  committee  should  cooperate  in  the  fields  of  audit  and  of  the  financial  reporting 
process.  To  this  extent,  the  statutory  auditor  or  audit  firm  should  communicate  on  a  timely 
basis  with  the  audit  committee  on  those  matters  of  governance  interest  that  arose  from  the 
audit of the financial statements. Such key matters may include information about the audit, 
significant  changes  in  accounting  policies,  significant  risks  and  exposures  facing  the 
company,  material  audit  adjustments  and  uncertainties,  disagreements  with  management, 
going  concern  issues,  expected  modifications  to  the  auditor’s  report,  fraud  involving 
management, and material weaknesses in internal control in relation to the financial reporting 
process.  Because  internal  control  is  fundamental  to  the  quality  of  the  external  financial 

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reporting, the communication towards the audit committee should be emphasised through the 
requirement of a report on these material weaknesses in the Directive. 

Article 40 gives the audit committee a central role in guarding auditor independence. Article 
43  foresees  that  the  audit  committee  shall  assist  in  the  nomination  process  for  the  statutory 
auditor  or  audit  firm  by  selecting  the  statutory  auditor  or  audit  firm  for  the  proposal  for 
appointment to the general meeting of the audited entity. 

Article 41 shortens quality review cycles to every three years. 

Article 42  sets stricter  requirements for public oversight by excluding  any practitioner from 
the governance of public oversight systems. 

Chapter XII  International Aspects (Articles 44 to 47) 

The measures proposed in this Directive will help to ensure high quality audits within the EU 
and hence underpin the confidence in the functioning of the EU capital market. This should 
not be undermined by possible poor audit quality from third country auditors who issue audit 
reports  in  relation  to  securities  traded  in  the  EU.  Auditors  and/or  audit  firms  from  third 
countries  that  issue  audit  reports  in  relation  to  securities  traded  in  the  EU,  need  to  be 
registered  in  the  EU  on  the  basis  of  Article  45  and  be  subject  to  Member  State  systems  of 
oversight, quality assurance and investigations and sanctions. The requirements of Article 45 
warrant that only auditors or audit firms that meet quality criteria equivalent to this Directive 
can be registered.  

In  order  to  prevent  unnecessary  international  regulatory  overlap  Article  46  allows  for 
exemption from registration, oversight, quality assurance and investigations and sanctions if 
audit  firms  from  third  countries  are  subject  to  equivalent  systems  of  registration  and 
oversight. Exemption from  the  registration  and oversight requirement is only possible if  the 
third country audit firm is subject to an equivalent system of oversight as defined by articles 
29, 30 and 31. Another important obligation is reciprocal treatment of Member States by the 
third  country.  To  have  a  common  EU  assessment  and,  thus,  secure  equal  treatment  of  third 
countries  throughout  the  EU,  the  Commission  will  perform  this  assessment  at  EU  level  in 
cooperation with Member States.  

The  European  capital  market  is  strongly  interrelated  with  other  capital  markets.  As  recent 
scandals have shown, the loss of confidence in the functioning in one market affects the trust 
in  the  functioning  of  the  other  market.  It  is  therefore  important  that  international  regulators 
and supervisors co-operate on the basis of a true partnership and confidence. Several Articles 
of  this  Directive  include  appropriate  requirements  for  registration,  public  oversight,  quality 
assurance,  investigations  and  sanctions  on  audit  firms  and  could  underpin  reciprocal  co-
operative arrangements with third country regulators and supervisors.  

These  activities  will  include  the  need  for  access  to  audit  working  papers  which,  under  a 
cooperative  approach,  will  be  possible  if  they  are  transferred  by  national  competent 
authorities.  Such  a  transfer  requires  reciprocal  cooperation  by  the  third  country.  Again,  to 
have a common EU assessment and, thus, secure equal treatment of third countries throughout 
the  EU,  the  Commission  will  perform  this  assessment  at  EU  level  in  cooperation  with 
Member  States.  As  the  exchange  of  audit  working  papers  remains  a  sensitive  matter  for  all 
parties involved, Article 47 imposes some additional requirements in comparison to the intra-
EU  cooperation  in  investigations  as  defined  in  Article  34.  Namely,  the  purpose  of  the 
exchange  shall  be  justified.  The  request  shall  respect  professional  secrecy  requirements  and 

9 

 
 
  
 
the working papers shall only be used for the oversight on auditors. In general, such requests 
shall  not  challenge  the  sovereignty,  security  and  public  policy  of  Member  States  or  their 
judicial proceedings and shall conform with Community law. 

Chapter XIII Transitional and final provisions (Articles 48 to 55) 

Article  49  introduces  a  new  audit  regulatory  committee  composed  of  representatives  of 
Member  States  and  chaired  by  a  representative  of  the  Commission  which  will  assist  the 
Commission  in  establishing  the  implementing  measures  under  the  comitology  procedures 
foreseen  in  this  article.  Without  doubt,  the  technical  expertise  of  the  audit  profession  is 
needed to ensure high quality audit regulation. The new audit regulatory committee will have 
to  consider  how  the  audit  profession  can  continue  to  provide  its  technical  expertise  in  an 
effective and efficient manner in order to support the EU’s regulatory activities. 

Furthermore, Article 50 introduces changes to the 4th and 7th Council Directives by requiring 
audited companies to disclose fees paid to the statutory auditor or audit firm broken down by 
fees for audit services, other assurance services, tax services and other non-audit services. 

Due  to  the  repeal  of  the  present  8th  Council  Directive  in  Article  51,  Article  52  secures  the 
approval  of  statutory  auditors  and  audit  firms  approved  under  the  repealed  Directive.

10 

 
 
  
 
2004/0065 (COD) 

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 

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 44(2) (g) thereof, 

Having regard to the proposal from the Commission1, 

Having regard to the opinion of the European Economic and Social Committee2,  

Acting in accordance with the procedure laid down in Article 251 of the Treaty3, 

Whereas: 

(1) 

Currently, the Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 
54(3)(g)  of  the  Treaty  on  the  annual  accounts  of  certain  types  of  companies 4,  the 
Seventh Council Directive 83/349/EEC of 13 June 1983 based on Article 54(3)(g) of 
the  Treaty  on  consolidated  accounts5,  Council  Directive  86/635/EEC  of  8  December 
1986  on  the  annual  accounts  and  consolidated  accounts  of  banks  and  other  financial 
institutions6 and  Council  Directive  91/674/EEC  of  19  December  1991  on  the  annual 
accounts and consolidated accounts of insurance undertakings7 require that the annual 
accounts or consolidated accounts are audited by one or more persons entitled to carry 
out such audits. 

(2) 

The  conditions  for  the  approval  of  persons  responsible  for  carrying  out  the  statutory 
audit  have  been  laid  down  in  the  Eighth  Council  Directive  84/253/EEC  of  10  April 
1984  based  on  Article  54(3)(g)  of  the  Treaty  on  the  approval  of  persons  responsible 
for carrying out the statutory audits of accounting documents8. 

1 
2 
3 
4 

5 
6 
7 
8 

OJ C […], […], p. […]. 
OJ C […], […], p. […]. 
OJ C […], […], p. […]. 
OJ L 222, 14.8.1978, p. 11; Directive as last amended by Directive 2003/51/EC of the European 
Parliament and of the Council (OJ L 178, 17.7.2003, p. 16). 
OJ L 193, 18.7.1983, p. 1, Directive as last amended by Directive 2003/51/EC. 
OJ L 372, 31.12.1986, p. 1; Directive as last amended by Directive 2003/51/EC. 
OJ L 374, 31.12.1991, p. 7; as amended by Directive 2003/51/EC. 
OJ L 126, 12.5.1984, p. 20. 

11 

 
 
  
 
                                                 
(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

The  lack  of  a  harmonised  approach  to  statutory  auditing  in  the  Community  was  the 
reason why the Commission proposed in its  1998 Communication  on  ‘The Statutory 
Audit  in  the  European  Union,  the  way  forward’ 9 the  creation  of  a  Committee  on 
Auditing  which  could  develop  further  action  in  close  cooperation  between  the 
accounting profession and Member States. 

the  basis  of 

the  work  of 

On 
issued  a 
Recommendation  on  ‘Quality  Assurance  for  the  Statutory  Auditor  in  the  EU’10 in 
November 2000 and a Recommendation on ‘Statutory Auditors’ Independence in the 
EU’ in May 200211. Both these Recommendations are being implemented by Member 
States. 

the  Commission 

this  Committee, 

Audit  qualifications  obtained  by  statutory  auditors  on  the  basis  of  this  Directive  are 
considered equivalent. It should therefore no longer be possible for Member States to 
insist  that  a  majority  of  the  voting  rights  in  an  audit  firm  must  be  held  by  locally 
approved  auditors  or  that  a  majority  of  the  members  of  the  administrative  or 
management body of an audit firm must be locally approved.  

The  statutory  audit  requires  adequate  knowledge  of  matters  such  as  company  law, 
fiscal law and social law. Such knowledge should be tested before a statutory auditor 
from another Member State can be approved. 

In  order  to  protect  third  parties,  all  approved  auditors  and  audit  firms  should  be 
registered  in  a  register  which  is  accessible  to  the  public  and  which  contains  basic 
information about the statutory auditor or the audit firm. 

Statutory  auditors  should  adhere  to  the  highest  ethical  standards.  They  should 
therefore be subject to professional ethics.  

It  is  important  that  statutory  auditors  and  audit  firms  respect  the  privacy  of  their 
clients.  They  should  therefore  be  bound  by  strict  rules  on  confidentiality  and 
professional  secrecy  which,  however,  should  not  impede  proper  enforcement  of 
accounting standards. 

(10)  Statutory auditors and audit firms should be independent when carrying out a statutory 
audit. If they find themselves in a situation that might lead to an impairment of their 
independence, they should resign from the audit engagement. They should also refuse 
to undertake any non-audit service that might constitute a threat to their independence. 

(11) 

It  is  important  to  ensure  a  consistent  high  quality  of  all  statutory  audits  required  by 
Community  law.  All  statutory  audits  should  therefore  be  carried  out  on  the  basis  of 
international  auditing  standards.  Member  States  should  only  be  allowed  to  impose 
additional audit  procedures  if these follow from specific requirements relating to the 
scope of the statutory audit. 

9 
10 
11 

OJ C 143, 8.5.1998, p. 12 
OJ L 91, 31.3.2001, p. 91 
OJ L 191, 19.7.2002, p. 22  

12 

 
 
  
 
                                                 
(12)  To  adopt  an  international  auditing  standard  for  application  in  the  Community,  it  is 
necessary  that  it  is  generally  accepted  internationally  and  that  it  has  been  developed 
with  full  participation  of  all  interested  parties  following  an  open  and  transparent 
procedure, that it adds to the credibility of annual accounts and consolidated accounts 
and that it is conducive to the European public good. 

(13) 

(14) 

In the case of consolidated accounts, it is important that there is a clear definition of 
responsibilities  between  the  statutory  auditors  who  audit  components  of  the  group. 
This can best be assured when the group auditor bears full responsibility for the audit 
report.  

In  order  to  increase  comparability  between  companies  applying  the  same  accounting 
standards, the Commission should be able to adopt a common audit report for the audit 
of  annual  accounts  or  consolidated  accounts  prepared  on  the  basis  of  approved 
international accounting standards. 

(15)  Regular inspections are a good means to achieve a consistent high quality of statutory 
audits.  Statutory  auditors  and  audit  firms  should  therefore  be  subject  to  a  system  of 
quality  assurance  that  is  organised  in  a  manner  which  is  independent  from  the 
reviewed statutory auditors and audit firms. 

(16) 

Investigations  and  appropriate  sanctions  contribute  to  preventing  and  correcting 
inadequate execution of a statutory audit. 

(17)  Member  States  should  organise  an  effective  system  of  public  oversight  for  statutory 
auditors  and  audit  firms  on  the  basis  of  home  country  control.  The  regulatory 
arrangements  for  public  oversight  should  enable  an  effective  co-operation  at 
Community  level  between  oversight  activities  of  Member  States.  Competent 
authorities  of  Member  States  should  co-operate  with  each  other  whenever  necessary 
for  the  purpose  of  carrying  out  their  oversight  duties  on  statutory  auditors  or  audit 
firms  approved  by  them.  Such  co-operation  can  make  an  important  contribution  to 
ensuring a consistent high quality of the statutory audit in the Community. 

(18)  The  statutory  auditor  or  audit  firm  should  be  appointed  by  the  general  meeting  of 
shareholders of the audited entity. In order to protect the independence of the auditor it 
is important that dismissal is only possible where there are proper grounds and if these 
grounds  are  communicated  to  the  authority  or  authorities  responsible  for  public 
oversight. 

(19)  Public interest entities have a higher visibility and are economically more important, 
stricter  requirements  should  apply  in  the  case  of  a  statutory  audit  of  their  annual  or 
consolidated accounts.  

(20)  Audit  committees  and  effective  internal  control  system  contribute  to  minimise 
financial,  operational  and  compliance  risks,  and  enhance  the  quality  of  financial 
reporting. 

(21)  The  interrelation  of  capital  markets  emphasises  the  need  to  ensure  also  high  quality 
work  performed  by  auditors  from  third  countries  in  relation  with  the  Community 
capital  market.  The  auditors  concerned  should  therefore  be  registered  so  as  to  make 
them  subject  to  quality  assurance  reviews  and  to  the  system  of  investigations  and 
sanctions.  Derogations  on  the  basis  of  reciprocity  should  be  possible  subject  to  an 

13 

 
 
  
 
equivalence testing to be performed by the Commission in co-operation with Member 
States.  

(22)  The complexity of international group audits requires a good co-operation between the 
competent  authorities  of  Member  States  and  those  of  third  countries.  Member  States 
should  therefore  ensure  that  access  to  audit  working  papers  and  other  documents  to 
competent  authorities  of  third  countries  is  made  possible  through  the  national 
competent authorities. In order to protect the rights of the parties concerned and at the 
same time facilitate the access to these papers and documents, Member States should 
be allowed to grant direct access to the competent authorities of third countries subject 
to the agreement of the national competent authority. 

(23)  The measures necessary for the implementation of this Directive should be adopted in 
accordance with Council Decision 1999/468/EC of 1999 laying down the procedures 
for  the  exercise  of  implementing  powers  conferred  to  the  Commission  and  with  due 
regard  to  the  declaration  made  by  the  Commission  in  the  European  Parliament  on  5 
February  2002  concerning  the  implementation  of  financial  services  legislation.  For 
that purpose a committee which assists the Commission shall be set up.  

(24)  Since the measures necessary for the implementation of this Directive are measures of 
general scope within the meaning of Article 2 of the Council Decision 1999/468/EC, 
they should be adopted by use of the regulatory procedure provided for in Article 5 of 
that Decision.  

(25) 

In  accordance  with  the  principles  of  subsidiarity  and  proportionality  as  set  out  in 
Article  5  of  the  Treaty,  the  measures  provided  for  in  this  Directive,  in  requiring  the 
application  of  a  single  set  of  international  auditing  standards,  the  update  of  the 
educational  requirements,  the  definition  of  professional  ethics,  and  the  technical 
implementation of the co-operation between competent authorities of Member States 
and  between  those  authorities  and  the  authorities  of  third  countries,  are  necessary  to 
achieve  the  objectives  of  further  enhancing  and  harmonising  the  quality  of  statutory 
audit in the Community and facilitating cooperation between Member States and with 
third countries in order to strengthen confidence in the statutory audit. 

(26)  With  a  view  to  provide  more  transparency  on  the  relationship  between  the  statutory 
auditor  or  audit  firm  and the  audited  entity,  Directives  78/660/EEC  and  83/349/EEC 
should be amended so as to require the disclosure of the audit fee and the fee paid for 
non-audit services in the notes to the annual accounts and the consolidated accounts. 

(27)  Council  Directive  84/253/EEC  should  be  repealed  because  it  lacks  a  comprehensive 
set  of  elements  for  ensuring  an  appropriate  audit  infrastructure,  such  as  public 
oversight,  disciplinary  systems  and  systems  of  quality  assurance  and  because  it  does 
not provide specific rules concerning regulatory co-operation between Member States 
and  third  countries.  In  order  to  ensure  legal  certainty  it  is  however  necessary  that  is 
clearly indicated that statutory auditors and audit firms that have been approved under 
Directive 84/253/EEC are considered as approved under this Directive. 

14 

 
 
  
 
HAVE ADOPTED THIS DIRECTIVE: 

Chapter I 

Subject matter and Definitions 

Article 1 
Subject matter  

This  Directive  establishes  rules  concerning  the  statutory  audit  of  annual  and  consolidated 
accounts in so far as such audits are required by Community law.  

Article 2 
Definitions 

For the purpose of this Directive, the following definitions shall apply: 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

"Statutory  audit"  means  an  audit  of  annual  accounts  or  consolidated  accounts  in  so 
far as required by Community law and carried out in accordance with the provisions 
of this Directive;  

"Statutory auditor" means a natural person who is approved in accordance with the 
provisions of this Directive by the competent authorities of a Member State to carry 
out statutory audits;  

"Audit firm" means an entity that is approved in accordance with the provisions of 
this Directive by the competent authorities of a Member State to carry out statutory 
audits regardless of its legal form;  

"Group  auditor"  means  the  statutory  auditor  or  audit  firm  that  carries  out  the 
statutory audit of the consolidated accounts;  

"Network"  means  the  larger  structure  to  which  a  statutory  auditor  or  an  audit  firm 
belongs  and  which  makes  use  of  a  common  brand-name  or  through  which 
professional resources are shared;  

“Affiliate  of  an  audit  firm"  means  any  undertaking,  regardless  of  its  legal  form, 
which  is  connected  to  the  audit  firm  by  means  of  common  ownership,  control  or 
management; 

”Audit report" means the report referred to in Article 51 (a) of Directive 78/660/EEC 
and Article 37 of Directive 83/349/EEC issued by the statutory auditor or audit firm.  

“Competent  authorities”  means  authorities  or  bodies  designated  by  law  that  are 
responsible for the regulation and supervision of statutory auditors and audit firms;  

"International  auditing  standards"  means  International  Standards  on  Auditing  (ISA) 
and  related  International  Audit  Practice  Statements,  in  so  far  as  relevant  to  the 
statutory audit;  

15 

 
 
  
 
 
(10) 

(11) 

"International  accounting  standards"  means  International  Accounting  Standards 
(IAS), International Financial Reporting Standards (IFRS) and related Interpretations 
(SIC-IFRIC interpretations), subsequent amendments  to those standards and related 
interpretations, future standards and related interpretations issued or adopted by the 
International Accounting Standards Board (IASB);  

"Public  interest  entities"  means  entities  that  are  of  significant  public  relevance 
because  of  the  nature  of  their  business,  their  size  or  their  number  of  employees,  in 
particular  companies  governed  by  the  law  of  a  Member  State  whose  securities  are 
admitted to trading on a regulated market of any Member State within the meaning 
of  Article  1(13)  of  Council  Directive  93/22/EEC 12 ,  banks  and  other  financial 
institutions and insurance undertakings. 

Chapter II 

Approval, Continuous Education and Mutual Recognition 

Article 3 
Approval of statutory auditors and audit firms 

1. 

2. 

3. 

Each Member State shall designate competent authorities which are responsible for 
approving statutory auditors and audit firms.  

The  competent  authorities  may  be  professional  associations  provided  that  they  are 
subject to public oversight as referred to in Articles 31 and 42. 

Statutory audits shall be carried out only by statutory auditors or audit firms which 
are approved by the Member State where the statutory audit is carried out. 

The  competent  authorities  of  the  Member  States shall approve as statutory auditors 
natural persons who satisfy at least the conditions laid down in Articles 4 to 10. 

They  shall  approve  as  audit  firms  only  those  entities  which  satisfy  the  following 
conditions: 

(a) 

(b) 

(c) 

the  natural  persons  who  carry  out  statutory  audits  on  behalf  of  the  audit  firm 
must  at  least  satisfy  the  conditions  imposed  in  Articles  4  to  10  and  must  be 
approved as statutory auditors in the Member State of the audit firm; 

the  majority  of  the  voting  rights  must  be  held  by  statutory  auditors  or  audit 
firms which are approved in a Member State; 

the majority of the members of the administrative or management body of the 
audit  firm  must  be  statutory  auditors  or  audit  firms  that  are  approved  in  any 
Member  State.  Where  such  a  body  has  no  more  than  two  members,  one  of 
those  members  must  be  a  statutory  auditor  or  an  audit  firm  approved  in  any 
Member State. 

12 

OJ L 141, 11.6.1993, p. 27 

16 

 
 
  
 
 
                                                 
Article 4 
Good repute 

The competent authorities of a Member State shall grant approval only to natural persons or 
firms  of  good  repute  who  are  not  engaging  in  any  activity  which  is  incompatible  with  the 
statutory audit function. 

Article 5 
Withdrawal of approval 

1. 

2. 

Approval of a statutory auditor or an audit firm shall be withdrawn if the good repute 
of that person or firm has been seriously compromised.  

Approval  of  an  audit  firm  shall  be  withdrawn  if  any  of  the  conditions  imposed  in 
Article 3 is no longer fulfilled. Member States may, however, provide for a period of 
grace of not more than six months for the purpose of meeting those requirements.  

Article 6 
Educational qualifications 

A  natural  person  may  be  approved  to  carry  out  a  statutory  audit  only  after  having  attained 
university  entrance  level,  then  completed  a  course  of  theoretical  instruction,  undergone 
practical  training  and  passed  an  examination  of  professional  competence  of  university  final 
examination level, organized or recognized by the State. 

Article 7 
Examination of professional competence  

The  examination  of  professional  competence  referred  to  in  Article  6  shall  guarantee  the 
necessary level of theoretical knowledge of subjects relevant to statutory audit and the ability 
to apply such knowledge in practice. Part at least of that examination must be written. 

Article 8 
Test of theoretical knowledge 

1. 

The  test  of  theoretical  knowledge  included  in  the  examination  shall  cover  the 
following subjects in particular:  

(a) 

general accounting theory and principles, 

(b) 

legal  requirements  and  standards  relating  to  the  preparation  of  annual  and 
consolidated accounts,  

(c) 

international accounting standards, 

(d) 

financial analysis, 

(e) 

cost and management accounting, 

17 

 
 
  
 
(f) 

risk management and internal control, 

(g) 

auditing,  

(h) 

legal  requirements  and  professional  standards  relating  to  statutory  audit  and 
statutory auditors, 

(i) 

international auditing standards, 

(j) 

professional skills, 

(k)  professional ethics and independence. 

2. 

It shall also cover the following subjects in so far as they are relevant to auditing:  

(a) 

company law and corporate governance, 

(b) 

the law of insolvency and similar procedures,  

(c) 

tax law,  

(d) 

civil and commercial law,  

(e) 

social-security law and law of employment,  

(f) 

information technology and computer systems,  

(g)  business, general and financial economics,  

(h)  mathematics and statistics,  

3. 

1. 

2. 

(i) 

basic principles of the financial management of undertakings. 

The Commission may in accordance with the procedure referred to in Article 49 (2) 
adapt the list of subjects to be included in the test of theoretical knowledge referred 
to in paragraph 1. 

Article 9 
Exemptions 

By  way  of  derogation  from  Articles  7  and  8,  a  Member  State  may  provide  that  a 
person who has passed a university or equivalent examination or holds a university 
degree or equivalent qualification in one or more of the subjects referred to in Article 
8 may be exempted from the test of theoretical knowledge in the subjects covered by 
that examination or degree.  

By way of derogation from Article 7, a Member State may provide that a holder of a 
university degree or equivalent qualification in one or more of the subjects referred 
to in Article 8 may be exempted from the test of the ability to apply in practice his 
theoretical knowledge of such subjects if he has received practical training in them 
attested by an examination or diploma recognized by the State.  

18 

 
 
  
 
Article 10 
Practical training 

1. 

In  order  to  ensure  the  ability  to  apply  theoretical  knowledge  in  practice,  a  test  of 
which  is  included  in  the  examination,  a  trainee  shall  complete  a  minimum  of  three 
years'  practical  training  in  inter  alia  the  auditing  of  annual  accounts,  consolidated 
accounts or similar financial statements. At least two-thirds of such practical training 
shall  be  completed  with  a  statutory  auditor  or  audit  firm  approved  in  any  Member 
State. 

2. 

Member  States  shall  ensure  that  all  training  is  carried  out  with  persons  providing 
adequate guarantees regarding training.  

Article 11 
Qualification through long term practical experience 

Member States may approve a person who does not satisfy the conditions laid down in Article 
6 as a statutory auditor, if he can show either: 

(a) 

(b) 

1. 

2. 

that he has, for 15 years, engaged in professional activities which have enabled him 
to acquire sufficient experience in the fields of finance, law and accountancy and has 
passed the examination of professional competence referred to in Article 6, or 

that he has, for seven years, engaged in professional activities in those fields and has, 
in addition, undergone the practical training referred to in Article 10 and passed the 
examination of professional competence referred to in Article 6. 

Article 12 
Combination of practical training and theoretical instruction 

Member  States  may  provide  that  periods  of  theoretical  instruction  in  the  fields 
referred to in Article 8 count towards the period of professional activity referred to in 
Article 11, provided that such instruction is attested by an examination recognized by 
the  State.  Such  instruction  must  last  not  less  than  one  year,  nor  may  it  reduce  the 
period of professional activity by more than four years. 

The  period  of  professional  activity  as  well  as  the  practical  training  must  not  be 
shorter than the course of theoretical instruction and the practical training required in 
Article 6. 

Article 13 
Continuous education 

Member States shall ensure that statutory auditors are subject to appropriate programmes of 
continuous education in order to maintain sufficient theoretical knowledge, professional skills 
and  values,  and  that  failure  to  respect  the  continuous  education  requirements  is  subject  to 
appropriate sanctions as referred to in Article 30.  

19 

 
 
  
 
Article 14 
Approval of statutory auditors from other Member States 

The competent authorities of the Member States shall establish procedures for the approval of 
statutory auditors which have been approved in other Member States. These procedures shall 
not go beyond a requirement to pass an aptitude test in accordance with Article 4 of Council 
Directive  89/48/EEC13.  The  aptitude  test  shall  only  cover  the  statutory  auditor's  adequate 
knowledge of the laws and regulations of the Member State concerned in so far as relevant for 
the statutory audit. 

Chapter III 

Registration 

Article 15 
Public register 

1. 

2. 

3. 

4. 

Member States shall ensure that statutory auditors and audit firms which have been 
approved are registered in a public register in accordance with Articles 16 and 17. 

Member States shall ensure that each statutory auditor and audit firm is identified in 
the public register by an individual number. Registration information shall be entered 
and  kept  in  the  register  in  electronic  form  and  shall  be  electronically  accessible  by 
the public. 

The  public  register  shall  also  contain  the  name  and  address  of  the  competent 
authorities in charge of quality assurance as referred to in Article 29, investigations 
and sanctions on statutory auditors and audit firms as referred to in Article 30, and 
public oversight as referred to in Article 31. 

Member States shall ensure that the public register referred to in paragraph 1 of this 
Article is fully operational not later than one year after the date referred to in Article 
53(1).  

Article 16 
Registration of statutory auditors 

As  regards  statutory  auditors,  the  public  register  shall,  at  least,  contain  the  following 
information:  

(a) 

(b) 

name, address and registration number; 

if applicable, the name and address of the audit firm by which the statutory auditor is 
employed, or with whom he is associated as a partner or otherwise. 

13 

OJ L 19, 24.1.1989, p. 16. 

20 

 
 
  
 
 
                                                 
Article 17 
Registration of audit firms 

As regards audit firms, the public register shall, at least, contain the following information:  

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

(g) 

(h) 

name, address and registration number; 

legal form; 

contact  information,  the  primary  contact  person  and,  where  applicable,  the  website 
address; 

address of each office in the Member State;  

name and registration number of all statutory auditors employed by or associated as 
partner or otherwise with the audit firm; 

names and business addresses of all owners and shareholders; 

names and business addresses  of  all members of the administrative or management 
body; 

if applicable, the membership of a network and a list of the names and addresses of 
member firms and affiliates or an indication of the place where such information is 
publicly available.  

Article 18 
Update of registration information 

Member States shall ensure that statutory auditors and audit firms notify without undue delay 
the  competent  authorities  in  charge  of  the  public  register  about  any  change  of  information 
contained  in  the  public  register.  The  register  shall  be  updated  without  undue  delay  after 
notification. 

Article 19 
Responsibility for registration information 

The information entered into the public register in accordance with Articles 16 and 17 shall be 
signed  by  the  statutory  auditor  or  audit  firm.  This  can  be  done  by  means  of  an  electronic 
signature  within  the  meaning  of  Article  2  (2)  of  Directive  1999/93/EC  of  the  European 
Parliament and of the Council14. 

Article 20 
Language 

1. 

The  information  entered  into  the  public  register  shall  be  drawn  up  in  one  of  the 
languages permitted by the language rules applicable in the Member State. 

14 

OJ L 13, 19.1.2000, p. 12. 

21 

 
 
  
 
                                                 
2. 

Member  States  may  allow  the  information  to  be  entered  into  the  public  register 
additionally in any other official language(s) of the Community. Member States may 
require the translation of the information to be certified. 

In  all  cases,  the  Member  State  shall  ensure  that  the  register  indicates  whether  the 
translation is certified or not. 

1. 

2. 

1. 

2. 

1. 

Chapter IV 

Professional ethics and professional secrecy  

Article 21 
Professional ethics 

Member States shall ensure that all statutory auditors and audit firms are subject to 
principles of professional ethics which at least 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. 

The  Commission  may  adopt  implementing  measures  on  professional  ethics,  in 
accordance with the procedure referred to in Article 49 (2). 

Article 22 
Confidentiality and professional secrecy 

Member States shall ensure that all information and documents to which the statutory 
auditor or audit firm has access when carrying out a statutory audit are protected by 
adequate rules on confidentiality and professional secrecy.  

Confidentiality  and  professional  secrecy  rules  relating  to  statutory  auditors  or  audit 
firms  shall  not  impede  enforcement  of  the  application  of  accounting  standards  by 
national  competent  authorities  or  the  exchange  of  relevant  information  with  other 
auditors or the competent authorities of other Member States as referred to in Article 
34, in case of international group audits.  

Chapter V 

Independence 

Article 23 
Independence and objectivity 

Member  States  shall  ensure  that  when  carrying  out  a  statutory  audit,  a  statutory 
auditor or the audit firm is independent from the audited entity and is not in any way 
involved  in  management  decisions  of  the  audited  entity.  A  statutory  auditor  or  an 
audit  firm  shall  not  carry  out  a  statutory  audit  if  there  is  any  financial,  business, 
employment or other relationship, including the provision of additional services, with 
the  audited  entity  that  might  compromise  the  statutory  auditor's  or  audit  firm's 
independence.  

22 

 
 
  
 
 
 
2. 

Member States shall ensure that the statutory auditor or audit firm documents in the 
audit  working  papers  all  threats  to  their  independence  as  well  as  the  safeguards 
applied to mitigate those threats. 

Article 24 
Independence and objectivity of the statutory auditors carrying out the statutory audit on 
behalf of audit firms 

Member  States  shall  ensure  that  the  owners  or  shareholders  of  an  audit  firm  as  well  as  the 
members  of  the  administrative,  management  and  supervisory  bodies  of  such  a  firm,  or  an 
affiliated  firm  do  not  intervene  in  the  execution  of  a  statutory  audit  in  any  way  which 
jeopardizes  the  independence  and  objectivity  of  the  statutory  auditor  who  carries  out  the 
statutory audit on behalf of the audit firm. 

Article 25 
Audit fees 

Member States shall ensure that adequate rules are in place which provide that fees for 
statutory audits:  

(a) 

(b) 

are adequate to allow proper audit quality;  

are  not  influenced  or  determined  by  the  provision  of  additional  services  to  the 
audited entity;  

(c) 

cannot be based on any form of contingency. 

Chapter VI 

Auditing Standards and Audit Reporting 

Article 26 
Auditing standards 

1. 

2. 

Member States shall require statutory auditors and audit firms to carry out statutory 
audits 
the 
Commission in accordance with the procedure referred to in Article 49 (2).  

international  auditing  standards  adopted  by 

in  accordance  with 

The  Commission  shall  adopt  international  auditing  standards  for  application  in  the 
Community only if they:  

(a) 

are  generally  accepted  internationally  and  are  developed  with  proper  due 
process, public oversight and transparency; 

(b)  provide  a  high  level  of  credibility  to  the  annual  or  consolidated  accounts  in 
conformity with the principles set out in Article 2 (3) of Directive 78/660/EEC 
and in Article 16 (3) of Directive 83/349/EEC;  

(c) 

are conducive to the European public good 

23 

 
 
  
 
 
3. 

Member  States  may  only  impose  additional  audit  procedures  if  these  follow  from 
specific requirements relating to the scope of the statutory audit. Member States shall 
communicate these additional procedures to the Commission.  

Article 27 
Statutory audit of consolidated accounts  

Member States shall ensure that in the case of a statutory audit of consolidated accounts of a 
group of undertakings: 

(a) 

(b) 

(c) 

1. 

2. 

the group auditor bears the full responsibility for the audit report in relation with the 
consolidated accounts; 

when  a  component  of  the  group  is  audited  by  a  statutory  auditor  or  audit  firm 
approved in a Member State other than that of the group auditor, the group auditor 
maintains  documentation  of  his  review  of  the  audit  work  performed  by  the  other 
statutory auditor or audit firm;  

when  a  component  of  the  group  is  audited  by  an  auditor  or  audit  firm  that  is  not 
approved in a Member State, the group auditor retains a copy of the documentation 
of the audit work performed by the other auditor or audit firm, including a copy of 
the audit working papers, solely for the purpose of the group audit.  

Article 28 
Audit reporting 

Where an audit firm carries out the statutory audit, the audit report shall be signed by 
the statutory auditor(s) carrying out the statutory audit on behalf of the audit firm.  

The Commission may, in accordance with the procedure referred to in Article 49 (2) 
adopt  a  common  standard  audit  report  for  annual  or  consolidated  accounts  which 
have been prepared in accordance with approved international accounting standards. 

Chapter VII 

Quality Assurance 

Article 29 
Quality Assurance Systems 

1. 

Member States shall ensure that all statutory auditors and audit firms are subject to a 
system of quality assurance which meets at least the following criteria: 

a) 

the  quality  assurance  system  must  be  organised  in  a  manner  that  it  is 
independent from the reviewed statutory auditors and audit firms and subject to 
public oversight as described in Chapter IX;  

(b) 

the funding for the quality assurance system must be secure and free from any 
possible undue influence by statutory auditors or audit firms; 

24 

 
 
  
 
 
(c) 

the quality assurance system must have adequate resources; 

(d)  persons  who  carry  out  the  quality  assurance  reviews  must  have  appropriate 
professional education and relevant experience in statutory audit and financial 
reporting combined with specific training on quality assurance reviews;  

(e) 

(f) 

the  selection  of  reviewers  for  specific  quality  assurance  review  assignments 
must  be  made  under  an  objective  procedure  so  as  to  ensure  that  there  are  no 
conflicts  of  interest  between  the  reviewers  and  the  statutory  auditor  or  audit 
firm under review; 

the  scope  of  the  quality  assurance  review  must  include  an  assessment  of  the 
internal quality control system of the audit firm supported by adequate testing 
of  selected  audit  files  on  whether  they  comply  with  applicable  auditing 
standards and independence requirements; 

(g) 

the quality assurance review must result in the establishment of a report which 
contains the main conclusions of the quality assurance review; 

(h)  quality assurance reviews must take place at least every six years;  

(i) 

the overall results of the quality assurance system must be published annually; 

(j) 

recommendations  of  quality  reviews  shall  be  followed  up  by  the  statutory 
auditor or audit firm within a reasonable period. 

In case the recommendations referred to in point j) of the first subparagraph are not 
followed up, the statutory auditor or audit firm shall be subject to disciplinary actions 
or sanctions as referred to in Article 30.  

2. 

The Commission may adopt, in accordance with the procedure referred to in Article 
49 (2), implementing measures on systems of quality assurance.  

Chapter VIII 

Investigations and sanctions 

Article 30 
Systems of investigations and sanctions 

1. 

2. 

3. 

Member  States  shall  ensure  that  there  are  effective  systems  of  investigations  and 
sanctions to detect, correct and prevent inadequate execution of the statutory audit. 

Without  prejudice  to  Member  States’  civil  liability  regimes,  Member  States  shall 
provide  effective,  proportionate  and  dissuasive  civil,  administrative  or  criminal 
penalties in respect of statutory auditors and audit firms, where  statutory  audits  are 
not carried out in conformity with this Directive. 

Member  States  shall  provide  that  every  measure  taken  or  sanction  imposed  on 
statutory auditors and audit firms is appropriately disclosed to the public. Sanctions 
should include the possibility to withdraw the approval of statutory auditors and of 
audit firms. 

25 

 
 
  
 
 
Chapter IX 

Public oversight and regulatory arrangements between Member States 

Article 31 
Principles of public oversight 

Member  States  shall  organise  an  effective  system  of  public  oversight  for  statutory 
auditors and audit firms based on principles set out in paragraphs 2 to 7. 

All statutory auditors and audit firms must be subject to public oversight. 

The  system  of  public  oversight  must  be  governed  by  non-practitioners  who  are 
knowledgeable in the areas relevant to statutory audit. Member States may however 
allow  a  minority  of  practitioners  to  be  involved  in  the  governance  of  the  public 
oversight  system.  Persons  involved  in  public  oversight  must  be  selected  under  an 
independent and transparent nomination procedure. 

The  system  of  public  oversight  must  have  the  ultimate  responsibility  for  the 
oversight of : 

(a) 

the approval and registration of statutory auditors and audit firms, and 

(b) 

(c) 

the adoption of standards on ethics, internal quality control of audit firms and 
auditing, and 

continuous  education,  quality  assurance  and  investigative  and  disciplinary 
systems. 

The  system  of  public  oversight  must  have  the  right,  where  necessary,  to  conduct 
investigations  on  statutory  auditors  and  audit  firms  and  must  have  the  right  to  take 
appropriate action.  

The  system  of  public  oversight  must  be  transparent.  This  shall  include  the 
publication of annual work programmes and activity reports. 

The  system  of  public  oversight  must  be  adequately  funded.  The  funding  for  the 
public oversight system must be secure and free from any possible undue influence 
by statutory auditors or audit firms.  

1. 

2. 

3. 

4. 

5. 

6. 

7. 

Article 32 
Cooperation between public oversight systems at Community level 

Member  States  shall  ensure  that  regulatory  arrangements  for  systems  of  public  oversight 
enable  effective  cooperation  at  Community  level  between  oversight  activities  of  Member 
States.  To  that  extent,  Member  States  shall  make  one  entity  specifically  responsible  for 
ensuring the co-operation. Such cooperation shall include the possibility for a review of the 
system of public oversight of each Member State by other Member States. 

26 

 
 
  
 
 
1. 

2. 

3. 

1. 

2. 

Article 33 
Mutual recognition of regulatory arrangements between Member States 

Regulatory  arrangements  of  Member  States  shall  respect  the  principle  of  home 
country regulation and oversight by the Member State in which the statutory auditor 
or audit firm is approved and the audited entity has its registered office. 

In the case of a statutory audit of consolidated accounts, the Member State requiring 
the  statutory  audit  of  the  consolidated  accounts,  may  not  impose  additional 
requirements  in  relation  to  the  statutory  audit  concerning  registration,  quality 
assurance review, auditing standards, ethics and independence on a statutory auditor 
or  audit  firm  carrying  out  a  statutory  audit  of  a  subsidiary  established  in  another 
Member State.  

In the case of a company whose securities are traded on a regulated market in another 
Member  State  than  where  the  company  has  its  registered  office,  the  Member  State 
where  the  securities  are  traded  may  not  impose  any  additional  requirements  in 
relation  to  the  statutory  audit  concerning  registration,  quality  assurance  review, 
auditing  standards,  ethics  and  independence  on  a  statutory  auditor  or  audit  firm 
carrying  out  the  statutory  audit  of  the  annual  or  consolidated  accounts  of  the 
company. 

Article 34 
Regulatory co-operation between Member States in investigations  

Competent authorities of Member States shall co-operate with each other whenever 
necessary for the purpose of carrying out their duties of oversight regarding statutory 
auditors  or  audit  firms  approved  by  them.  Competent  authorities  shall  render 
assistance to competent authorities of other Member States. In particular, they shall 
exchange  information  and  co-operate  in  investigation  activities  with  regard  to 
statutory audits. 

Competent  authorities  shall,  on  request,  immediately  supply  any  information 
required for the purpose referred to in paragraph 1. Where necessary, the competent 
authorities receiving any such request shall immediately take the necessary measures 
in  order  to  gather  the  required  information.  If  the  requested  competent  authority  is 
not able to supply the required information immediately it shall notify the requesting 
Competent Authority of the  reasons. Information thus supplied shall be covered by 
the  obligation  of  professional  secrecy  to  which  the  persons  employed  or  formerly 
employed by the competent authorities that received the information are subject.  

The competent authorities may refuse to act on a request for information where: 

(a) 

(b) 

communication might adversely affect the sovereignty, security or public order 
of the State addressed,  

judicial proceedings have already been initiated in respect of the same actions 
and against the same statutory auditors and audit firms before the authorities of 
the State addressed, or  

(c)  where  final  judgement  has  already  been  passed  on  such  persons  for  the  same 

actions by the competent authorities of the State addressed.  

27 

 
 
  
 
 
3. 

4. 

Without prejudice to the obligations to which they are subject in judicial proceedings 
under criminal law, the authorities which receive information pursuant to paragraph 
1 may use it only for the exercise of their functions within the scope of this Directive 
and in the context of administrative or judicial proceedings specifically related to the 
exercise of those functions.  

Where a competent authority is convinced that activities contrary to the provisions of 
this Directive are being or have been carried out on the territory of another Member 
State, it shall communicate and notify this in as specific a manner as possible to the 
competent authority of the other Member State. The competent authority of the other 
Member State shall take appropriate action. It shall inform the notifying competent 
authority  of  the  outcome  and,  to  the  extent  possible,  of  significant  interim 
developments.  

A competent authority of one Member State may also request that an investigation be 
carried  out  by  the  competent  authority  of  another  Member  State,  on  the  latter’s 
territory.  

It may further request that some of its own personnel be allowed to accompany the 
personnel of the competent authority of that other Member State during the course of 
the investigation. 

The  investigation  shall  be  subject  throughout  to  the  overall  control  of  the  Member 
State on whose territory it is conducted.  

The  competent  authorities  may  refuse  to  act  on  a  request  for  carrying  out  an 
investigation  as  provided  for  in  the  first  subparagraph,  or  on  a  request  for  its 
personnel  to  be  accompanied  by  another  Member  State  competent  authority 
personnel  as  provided  for  in  the  second  subparagraph,  where  such  an  investigation 
might  adversely  affect  the  sovereignty,  security  or  public  order  of  the  State 
addressed, or where judicial proceedings have already been initiated in respect of the 
same  actions  and  against  the  same  persons  before  the  authorities  of  the  State 
addressed or where final judgement has already been passed on such persons for the 
same actions by the competent authorities of the State addressed. 

5. 

The Commission may adopt, in accordance with the procedure referred to in Article 
49  (2),  implementing  measures  on  the  procedures  of  exchange  of  information  and 
modalities for cross-border investigations provided for in paragraphs 2 to 4. 

Chapter X 

Appointment, dismissal and communication  

Article 35 
Appointment of statutory auditors or audit firms 

The statutory auditor or audit firm shall 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. 

28 

 
 
  
 
 
Article 36 
Dismissal and resignation of statutory auditors or audit firms 

1. 

2. 

Member  States  shall  ensure  that  statutory  auditors  or  audit  firms  may  only  be 
dismissed  where  there  are  proper  grounds;  divergence  of  opinions  on  accounting 
treatments or audit procedures shall not be a proper ground for dismissal.  

Both  the  audited  entity  and  the  statutory  auditor  or  audit  firm  shall  inform  the 
authority  or  authorities  responsible  for  public  oversight  about  the  dismissal  or 
resignation and shall give an adequate explanation of the reasons thereof.  

Article 37 
Communication between the audited entity and the statutory auditor or audit firm 

Member  States  shall  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.  

Chapter XI 

Special provisions for the statutory audit of public interest entities 

Article 38 
Transparency report  

1. 

Member States shall ensure that audit firms that carry out statutory audit(s) of public 
interest entities publish on their website an annual transparency report that includes 
at least the following : 

(a) 

a description of the legal structure and ownership; 

(b)  where the audit firm belongs to a network, a description of the network and the 

legal and structural arrangements in the network; 

(c) 

a statement on the governance structure of the audit firm; 

(d) 

a  description  of  the  internal  quality  control  system  of  the  audit  firm  and  a 
statement by the administrative or management body on the effectiveness of its 
functioning;  

(e) 

an indication of when the last quality assurance review took place; 

(f) 

(g) 

(h) 

a listing of public interest entities for which a statutory audit has been carried 
out during the last year by the audit firm; 

a statement about the audit firm's independence practices which also confirms 
that an internal review of independence compliance has been conducted;  

a  statement  on  the  policy  followed  by  the  audit  firm  concerning  continuous 
education of statutory auditors referred to in Article 13;  

29 

 
 
  
 
 
(i) 

financial information showing the importance of the audit firm such as the total 
turnover divided into fees from the statutory audit of annual and consolidated 
accounts, and fees charged for other assurance services, tax advisory services 
and other non-audit services; 

(j) 

information about the basis for the partner remuneration. 

The transparency report shall be signed by the audit firm. This can be done by means 
of  an  electronic  signature  within  the  meaning  of  Article  2  (2)  of  Directive 
1999/93/EC of the European Parliament and of the Council. 

Article 39 
Audit committee 

Public  interest  entities  shall  have  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. 

2. 

1. 

2. 

The audit committee shall inter alia: 

(a)  monitor the financial reporting process; 

(b)  monitor  the  effectiveness  of  the  company’s  internal  control,  internal  audit 

where applicable, and risk management systems; 

(c) 

oversee the statutory audit of the annual and consolidated accounts; 

(d) 

review and monitor the independence of the statutory auditor or audit firm and 
in particular the provision of additional services to the audited entity; 

(e) 

perform the function set out in article 43. 

3. 

The statutory auditor or audit firm must report to the audit committee on key matters 
arising  from  the  statutory  audit,  in  particular  on  material  weaknesses  in  internal 
control  in  relation  to  the  financial  reporting  process,  and  shall  assist  the  audit 
committee in fulfilling its tasks.  

Article 40 
Independence  

In addition to the provisions laid down in Articles 23 and 24 Member States shall ensure that:  

(a) 

(b) 

the  statutory  auditor  or  audit  firm  shall  annually  disclose  to  and  discuss  with  the 
audit committee of the audited entity threats to their independence and the safeguards 
applied to mitigate those threats, as well as the additional services provided;  

the  statutory  auditor  or  audit  firm  shall  also  annually  confirm  in  writing  their 
independence to the audit committee of the audited entity; 

30 

 
 
  
 
(c) 

(d) 

the statutory auditor or the key audit partner responsible for carrying out the statutory 
audit  on  behalf  of  the  audit  firm,  shall  rotate  from  the  statutory  audit  engagement 
within  a  maximum  period  of  five  years,  or  alternatively,  the  audit  firm  shall  rotate 
within a maximum period of seven years;  

the  statutory  auditor  or  the  key  audit  partner  who  carries  out  the  statutory  audit  on 
behalf of the audit firm shall not be allowed to take up a key management position in 
the audited entity before a period of at least two years has elapsed since he resigned 
as a statutory auditor or key audit partner from the audit engagement. 

Article 41 
Quality Assurance 

The quality review referred to in Article 29 must be carried out at least every three years for 
statutory auditors or audit firms that carry out statutory audits of public interest entities.  

Article 42 
Public oversight 

The option provided for in Article 31 (3), to allow a minority of practitioners to participate in 
the  governance  of  the  system  of  public  oversight,  shall  not  apply  to  the  governance  of  the 
public oversight system concerning statutory auditors and audit firms that carry out statutory 
audits on public interest entities.  

Article 43 
Appointment of the statutory auditor or audit firm 

In public interest entities, the proposal of the administrative body or supervisory board for the 
appointment  of  a  statutory  auditor  or  audit  firm  shall  be  based  on  a  selection  made  by  the 
audit committee.  

Chapter XII 

International aspects 

Article 44 
Approval of auditors from third countries 

On the condition of reciprocity, the competent authorities of a Member State may approve, 
auditors from a third country as statutory auditor if the person has furnished proof of: 

(a) 

(b) 

being approved as an auditor;  

theoretical  knowledge,  practical  skills  and  integrity  equivalent  to  the  provisions  of 
this Directive; 

31 

 
 
  
 
 
(c) 

legal knowledge relevant in that Member State in so far as relevant for the statutory 
audit in the Member State. 

Article 45 
Registration of auditors and audit firms from third countries 

1. 

The  competent  authorities  of  a  Member  State  shall  register  in  accordance  with 
Articles 15 to 17 all auditors and audit firms from third countries which provide an 
audit report concerning:  

(a) 

(b) 

the  annual  or  consolidated  accounts  of  a  company  established  outside  the 
Community whose securities are admitted to trading on a regulated market of 
that  Member  State  within  the  meaning  of  point  13  of  Article  1  of  Directive 
93/22/EEC ; 

the  consolidated  accounts  of  a  larger  body  of  undertakings  drawn  up  by  a 
parent  undertaking  not  governed  by  the  law  of  a  Member  State,  to  which  the 
parent  undertaking,  governed  by  the  law  of  the  Member  State  belongs,  when 
the  latter  is  exempted  from  drawing  up consolidated  accounts  on  the  basis  of 
Article 11 of Directive 83/349/EEC.  

Article 18 shall apply. 

Member  States  shall  subject  registered  audit  firms  from  third  countries  to  their 
system  of  oversight, 
their  systems  of 
investigations and sanctions. 

their  quality  assurance  system  and 

Without  prejudice  to  Article  46,  audit  reports  concerning  annual  accounts  or 
consolidated  accounts  referred  to  in  paragraph  1  issued  by  audit  firms  from  third 
countries  that  are  not  registered  in  the  Member  State  shall  not  have  legal  effect  in 
that Member State. 

2. 

3. 

4. 

5. 

Member States may only register audit firms from third countries, if:  

(a) 

(b) 

(c) 

(d) 

they  meet  requirements  which  are  equivalent  to  those  of  the  second 
subparagraph of Article 3(3); 

the majority of the members of the administrative or management body of the 
audit firm meet requirements which are equivalent to those of Articles 4 to 10; 

the  auditor  carrying  out  the  audit  on  behalf  of  the  audit  firm  meets  the 
requirements which are equivalent to those of Articles 4 to 10; 

the audits of the annual or consolidated accounts referred to in paragraph 1, are 
carried out in accordance with international auditing standards as referred to in 
Article 26, as well as the requirements laid down in Chapter V; 

(e) 

they publish on their website an annual transparency report which includes the 
information referred to in Article 38.  

32 

 
 
  
 
Article 46 
Derogation in the case of equivalence 

Member States may disapply or modify the requirements in Article 45 (1) and (3) on the basis 
of  reciprocity  only  if  these  audit  firms  are  subject  to  systems  of  public  oversight,  quality 
assurance  and  investigations  and  sanctions  in  the  third  country  that  meet  requirements 
equivalent  to  those  of  Articles  29,  30  and  31.  The  equivalence  shall  be  assessed  by  the 
Commission  in  co-operation  with  Member  States  and  shall  be  decided  upon  by  the 
Commission in accordance with the procedure referred to in Article 49 (2).  

Article 47 
Cooperation with competent authorities from third countries  

1. 

Member States may allow the transfer to the competent authorities of a third country 
of audit working papers or other documents held by statutory auditors or audit firms 
approved by them, provided that: 

(a) 

(b) 

these  audit  working  papers  or  other  documents  relate  to  audits  of  companies 
which have issued securities in that third country; 

the  transfer  takes  place  via  the  home  competent  authorities  to  the  competent 
authorities of that third country and upon their request; 

(c ) 

the  competent  authorities  of  the  third  country  concerned  meet  requirements 
which have been declared adequate according to paragraph 3; 

(d) 

there are working arrangements on the basis of reciprocity agreed between the 
competent authorities concerned. 

2. 

The working arrangements referred to in paragraph 1(d) shall ensure that: 

(a) 

(b) 

(c) 

justification  is  provided  by  the  competent  authorities  of  the  purpose  of  the 
request for audit working papers and other documents; 

the  persons  employed  or  formerly  employed  by  the  competent  authorities  of 
the  third  country  that  receive  the  information  are  subject  to  obligations  of 
professional secrecy; 

the  competent  authorities  of  the  third  country  may  use  audit  working  papers 
and  documents  only  for  the  exercise  of  their  functions  of  public  oversight, 
quality assurance and investigations that meet requirements equivalent to those 
of Articles 29, 30 and 31;(d)  the request from a competent authority of a third 
country for audit working papers or other documents held by a statutory auditor 
or  audit  firm  can  be  refused  where  the  provision  of  those  working  papers  or 
documents would adversely affect the sovereignty, security or public order of 
the  Community  or  of  the  Member  State  concerned,  or  where  judicial 
proceedings  have  already  been  initiated  in  respect  of  the  same  actions  and 
against the same persons before the authorities of the Member State concerned. 

33 

 
 
  
 
3. 

4. 

5. 

6. 

The  adequacy  referred  to  in  paragraph  1(c)  is  decided  upon  by  the  Commission  in 
accordance  with  the  procedure  referred  to  in  Article  49(2).  The  assessment  of 
adequacy shall be carried out in cooperation with Member States and be based on the 
requirements of Article 34 or essentially equivalent functional results. Member States 
shall take the measures necessary to comply with the Commission's decision. 

In  exceptional  cases  and  by  derogation  to  paragraph  1,  Member  States  may  allow 
statutory auditors and audit firms approved by them to transfer audit working papers 
and  other  documents  directly  to  the  competent  authorities  of  a  third  country, 
provided that: 

(a) 

(b) 

(c) 

(d) 

investigations  have  been  initiated  by  the  competent  authorities  in  that  third 
country; 

the transfer is not in contradiction with the obligations which statutory auditors 
and audit firms have to comply with in relation to the transfer of audit working 
papers and other documents to their home competent authority; 

there  are  working  arrangements  with  the  competent  authorities  of  that  third 
country  that  allow  the  competent  authorities  in  the  Member  State  reciprocal 
direct access to audit working papers and other documents of audit firms;  

the requesting competent authority of the third country informs in advance the 
home competent authority of the statutory auditor or audit firm of each direct 
request for information, indicating the reasons thereof; 

(e) 

the conditions referred to in paragraph 2 are respected. 

The Commission may, in accordance with the procedure referred to in Article 49 (2), 
define the exceptional cases referred to in paragraph 4. 

Member  States  shall  communicate  to  the  Commission  the  working  arrangements 
referred to in paragraphs 1 and 4. 

Chapter XIII 

Transitional and final provisions 

Article 48 
Implementing measures 

In  addition  to  the  other  implementing  measures  referred  to  in  this  Directive  and  in  order  to 
take  account  of  developments  in  and  related  to  statutory  audit  and  to  ensure  uniform 
application  of  this  Directive  in  the  Community,  the  Commission  may  adopt  implementing 
measures, in accordance with the procedure referred to in Article 49 (2).  

34 

 
 
  
 
 
Article 49 
Committee 

1. 

2. 

The  Commission  shall  be  assisted  by  an  audit  regulatory  committee  (hereinafter 
referred to as the Committee) composed of representatives of the Member States and 
chaired by a representative of the Commission.  

Where  reference  is  made  to  this  paragraph  the  regulatory  procedure  laid  down  in 
Articles  5  and  7  of  Decision  1999/468/EC  shall  apply,  having  regard  to  Article  8 
thereof. 

The period laid down in Article 5(6) of Decision 1999/468/EC shall be set at three 
months. 

3. 

The Committee shall adopt its Rules of Procedure. 

Article 50 
Amendment of Directive 78/660/EEC and Directive 83/349/EEC 

1. 

Directive 78/660/EEC is amended as follows: 

(a) 

In Article 43 the following point is added: 

"(15) 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."; 

(b) Article 44(1) shall be replaced by the following: 

“1.  Member  States  may  permit  the  companies  referred  to  in  Article  11  to  draw  up 
abridged notes on their accounts without the information required in Article 43(1)(5) 
to (12), (14)(a) and (15). However, the notes must disclose the information specified 
in Article 43(1) (6) in total for all the items concerned.” 

2. 

In Article 34 of Directive 83/349/EEC the following point is added: 

"(16) the fees for the financial year paid to the statutory auditor or audit firm for the 
statutory  audit  of  the  consolidated  accounts  and  the  fees  paid  for  other  assurance 
services, tax advisory services and other non-audit services.". 

Article 51 
Repeal of Directive 84/253/EEC 

Directive 84/253/EEC shall be repealed with effect from the date indicated in Article 54 (1). 
References to the repealed Directive shall be construed as references to this Directive. 

35 

 
 
  
 
Article 52 
Transitional provision 

Statutory  auditors  or  audit  firms  that  are  approved  by  the  competent  authorities  of  the 
Member States in accordance with the provisions of Directive 84/253/EEC before the entering 
into force of the provisions referred to in 53 (1), shall be considered as having been approved 
in accordance with the provisions of this Directive.  

Article53 
Transposition 

1. 

2. 

3. 

Member  States  shall  adopt  and  publish  before  1  January  2006  the  provisions 
necessary  to  comply  with  this  Directive.  They  shall  forthwith  inform  the 
Commission thereof. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

Member  States  shall  communicate  to  the  Commission  the  texts  of  the  main 
provisions of national law which they adopt in the field covered by this Directive. 

Article 54 
Entry into force 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 55 

This Directive is addressed to the Member States. 

Done at Brussels,  

For the European Parliament 
The President 
[…] 

For the Council 
The President 
[…] 

36 

 
 
  
 
LEGISLATIVE FINANCIAL STATEMENT 

Policy area(s): INTERNAL MARKET 

Activit(y/ies): AUDIT AND ACCOUNTING 

TITLE  OF  ACTION:  “PROPOSAL  FOR  A  DIRECTIVE  OF  THE  EUROPEAN  PARLIAMENT  AND  THE 
COUNCIL  ON  STATUTORY  AUDIT  OF  ANNUAL  ACCOUNTS  AND  CONSOLIDTATED 
ACCOUNTS AND AMENDING COUNCIL DIRECTIVES 78/660/EEC AND 83/349/EEC"  

1. 

BUDGET LINE(S) + HEADING(S) 

A0-7031, ABB 12.010211.01.03, "Expenditure on meetings of Committees" 
(Compulsory committees).  

2. 

OVERALL FIGURES  

2.1. 

Total allocation for action (Part B): € million for commitment 

€ 0 

2.2. 

Period of application: 

N.A. 

2.3. 

Overall multi-annual estimate of expenditure: 

(a) 

Schedule  of  commitment  appropriations/payment  appropriations 
intervention) (see point 6.1.1) 

(financial 

€ million (to three decimal places) 

[n+1]

[n+2] 

[n+3] 

[n+4] 

Year 
[n] 

Total 

[n+5 
and 
subs. 
Years
] 

Commitments 

Payments 

(b) 

Technical and administrative assistance and support expenditure(see point 6.1.2) 

Commitments 

Payments 

Subtotal a+b 

Commitments 

Payments 

37 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
  
 
 
  
(c) 

Overall  financial  impact  of  human  resources  and  other  administrative  expenditure 
(see points 7.2 and 7.3) 

0.047 

0.047 

0.047  0.047 

0.047 

0.047 

0.280 

Commitments/ 
payments 

TOTAL a+b+c 

Commitments 

0.047 

0.047 

0.047 

0.047 

0.047 

0.047 

0.280 

Payments 

0.047 

0.047 

0.047 

0.047 

0.047 

0.047 

0.280 

2.4. 

Compatibility with financial programming and financial perspective 

[X]  Proposal is compatible with existing financial programming. 

2.5. 

Financial impact on revenue: 

[X]  Proposal  has  no  financial  implications  (involves  technical  aspects  regarding 

implementation of a measure) 

(€ million to one decimal place) 

Budget line 

Revenue 

Prior to
action 
[Year n-
1] 

[Year 
n] 

Situation following action 

[n+1] 

[n+2] 

[n+3] 

[n+4] 

[n+5] 

a) Revenue in absolute terms 

b) Change in revenue 

 ∆ 

3. 

BUDGET CHARACTERISTICS 

Type of expenditure 

New 

EFTA 
contribution 

Contributions 
from applicant 
countries 

Heading in 
financial 
perspective 

Non 
compulsory 

Non-
differentiated 

4. 

LEGAL BASIS  

NO 

NO 

NO 

No 3 

Measures fall under the institutional prerogative of the Commission. 

38 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5. 

DESCRIPTION AND GROUNDS 

5.1. 

Need for Community intervention 1 

Recent  scandals  such  as  Parmalat  confirm  the  urgency  and  the  need  for  the  envisaged  EU 
initiatives  on  statutory  audit  outlined  in  the  May  2003  Commission  Communication 
“Reinforcing  the  statutory  audit  in  the  EU”.  The  proposal  for  a  new  Directive  on  statutory 
audit  is  one  of  the  most  important  initiatives  of  the  Commission  Communication.  The 
proposed  Directive  will  considerably  broaden  the  scope  of  the  former  Eighth  Council 
Directive  by  clarifying  the  duties  of  statutory  auditors,  their  independence  and  ethics,  by 
introducing a requirement for external quality assurance, by ensuring robust public oversight 
over the audit profession and by improving co-operation between oversight bodies in the EU.  

The  new  Directive  is  not  a  knee-jerk  reaction  to  recent  corporate  scandals.  It  is  the  logical 
consequence  of  a  reorientation  of  the  EU  policy  on  statutory  audit  started  back  in  1996. 
However, the initial thinking has been adapted to take account of the most recent scandals. 

5.2. 

Action envisaged and budget intervention arrangements 

5.3.  Methods of implementation 

The  Proposal  reinforces  the  statutory  audit  function  in  the  EU.  The  Directive  provides  a 
comprehensive  legal  underpinning  on  how  statutory  audits  should  be  conducted  and  what 
audit  infrastructure  Member  States  should  have  in  place  to  ensure  audit  quality.  A  new 
decision  making  structure  with  an  audit  regulatory  committee  will  allow  fast  and  more 
detailed implementing measures of certain provisions of the Directive. It is foreseen that the 
Audit regulatory committee, chaired by the Commission will meet three times a year.  

6. 

FINANCIAL IMPACT 

6.1. 

Total financial impact on Part B - (over the entire programming period) 

(The method of calculating the total amounts set out in the table below must be explained by 
the breakdown in Table 6.2. ) 

6.1.1.  Financial intervention 

Commitments (in € million to three decimal places) 

Breakdown 

2004 

2005 

2006 

2007 

2008 

2009 (et 
seq.)] 

Total 

Action 1 

Action 2 

etc. 

TOTAL 

1 

For further information, see separate explanatory note. 

39 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
6.1.2.  Technical  and  administrative  assistance,  support  expenditure  and  IT  expenditure 

(commitment appropriations) 

[Year n] 

[n+1] 

[n+2] 

[n+3] 

[n+4] 

Total 

[n+5 and 
subs. 
years] 

1) 
administrative assistance 

Technical 

and 

Technical 

a) 
offices 

assistance 

b)  Other 
administrative assistance: 

technical 

and 

- intra muros: 

- extra muros: 

of  which  for  construction 
of 
maintenance 
and 
computerised  management 
systems 

Subtotal 1 

2) Support expenditure 

a) Studies 

b) Meetings of experts 

c) Information and 
publications 

Subtotal 2 

TOTAL 

6.2. 

Calculation  of  costs  by  measure  envisaged  in  Part  B  (over  the  entire 
programming period)2 

Commitments (in € million to three decimal places) 

Type  
of outputs 
(projects, files ) 

Number of 
outputs 

Average unit 
cost 

(total for years 
1…n)  

Total cost 

(total for years 
1…n)  

1 

2 

3 

4=(2X3) 

Breakdown  

Action 1 

- Measure 1 

- Measure 2  

Action 2 

- Measure 1 

- Measure 2 

- Measure 3etc. 

TOTAL COST 

2 

For further information, see separate explanatory note. 

40 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
7. 

IMPACT ON STAFF AND ADMINISTRATIVE EXPENDITURE  

7.1. 

Impact on human resources 

Staff to be assigned to management of the 
action using existing and/or additional 
resources 

Number of 
permanent posts 

Number of 
temporary posts 

Total 

Description of tasks deriving from the 
action 

Types of post 

Officials 
temporary staff 

or 

A 

B 

C 

Other human resources 

Total 

The  needs  for  human  and  administrative  resources  shall  be  covered  within  the  allocation 
granted to the managing DG in the framework of the annual allocation procedure. 

7.2. 

Overall financial impact of human resources 

Type of human resources 

Amount (€) 

Method of calculation  

Officials (€108.000) 
Temporary staff 
Other human resources 

(specify budget line) 

Total 

The amounts are total expenditure for twelve months. 

7.3. 

Other administrative expenditure deriving from the action 

Amount € 

Method of calculation 

46.800 (per year) 

3 meetings of 21.000 (3x (24 x 650)) 
per meeting with 25 delegations.  

Budget line 
(number and heading) 

Overall allocation (Title A7) 

A0701 – Missions 

A07030 – Meetings 
A07031 – Compulsory committees 1 
A07032 – Non-compulsory committees 1 

A07040 – Conferences 

A0705 – Studies and consultations 

Other expenditure (specify) 

Information systems (A-5001/A-4300) 

Other expenditure - Part A (specify) 

Total 

46.800 

The amounts are total expenditure for twelve months. 

1 Specify the type of committee and the group to which it belongs. 

41 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
I. 

II. 

Annual total (7.2 + 7.3) 

Duration of action 

III. 

Total cost of action (I x II) 

€ 46.800 

6 years 

€ 280.800 

8. 

FOLLOW-UP AND EVALUATION 

8.1. 

Follow-up arrangements 

Not applicable 

8.2. 

Arrangements and schedule for the planned evaluation 

Not applicable 

9. 

ANTI-FRAUD MEASURES 

Not applicable 

42