Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC’(COM(2004) 177 final — 2004/0065 (COD))
Date: 2004-12-15
Institutions: European Economic and Social Committee
Subjects: audit, auditing, company law, consolidated account, financial market

28.6.2005

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Official Journal of the European Union

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5.7
The Commission supports the Commission's plan to
adopt research into space and security as new thematic priori-
ties, and it explains why these should be financed and run sepa-
rately from the Framework Programme.

5.8
The Committee supports the Commission's plans for
basic research as such to be covered by the Framework
Programme and to be stimulated through European competi-
tion, and it is in favour of setting up an independent European
Research Council.

5.9
The Committee emphasises that the interplay between
the categories of basic research, applied research and develop-

ment is of vital importance, and that therefore a balance should
be struck in providing support for each one.

The Committee supports the Commission's plans to
5.10
enhance the attractiveness of Europe for top scientists and to
persuade talented young people to take up scientific careers,
while providing support for such careers. This will require
action by all concerned, and by Member States in particular.

For many other key arguments, recommendations and criti-
cisms,
the Committee refers to the detailed comments in
Sections 3 and 4.

Brussels, 15 December 2004.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

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

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

(2005/C 157/21)

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

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

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

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

1. Introduction

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

1.2
Since 1996 the European Commission has been
working towards the objective of improving and harmonising

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

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2. Proposals of the Commission

The proposal for a directive contains provisions on the
international

2.1
approval, continuous education, and mutual
recognition of statutory auditors and audit firms.

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

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

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

All

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

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

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

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

in particular

companies whose

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

securities

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

A committee composed of

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

representatives of

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

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

3. General comments

The

European

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

Economic

and

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

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

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implementation of

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

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

4. Specific comments

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

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

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

(1) OJ C 236/2-8, 2.10.2003, point 3.10.
(2) Cf. opinion of the European Economic and Social Committee of 10
December 2003 on the Communication from the Commission to the
European Parliament and the Council on reinforcing the statutory audit in
the EU (COM(2003) 286 final) (2004/C 80/06); OJ C 80/17-19,
30.3.2004, point 4.7.
(3) OJ L 191, 19.07.2002.

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

4.5
The Committee is generally in favour of the Commis-
sion's proposal for Member States to organise public oversight
of statutory auditors and audit firms based on certain princi-
ples.

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

if statutory auditors or audit

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

in favour of

The Committee is

the Commission's
4.8
proposal to introduce special provisions for the statutory audit
of public interest entities. However, the special requirements
must be proportionate to the accompanying additional costs,
which are ultimately borne by the company's clients and share-
holders.

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

(4) In the opinion of the Committee, a consistent approach in inter-

preting the IAS and IFRS is essential for high-quality audits.

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The Commission proposes that

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

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

5. International aspects

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

lence is to be assessed by the Commission in cooperation with
Member States and decided upon according to the procedure
for adopting implementing measures. The Committee trusts
that approval of statutory auditors from third countries will be
subject to the same conditions as for auditors from EU Member
States.

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

6. Conclusions

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

5.2
The proposal for a directive envisages approving audi-
tors from third countries on the basis of reciprocity, provided
that they furnish certain proofs. A requirement for cooperation
with third countries is equivalence of the system of public over-
sight in the third country with the European system. Equiva-

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

Brussels, 15 December 2004

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

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APPENDIX

to the opinion of the European Economic and Social Committee

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

Point 4.3

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

Result of vote:

Votes in favour: 50

Votes against: 21

Abstentions: 4