Commission Recommendation of 6 May 2008 on external quality assurance for statutory auditors and audit firms auditing public interest entities (notified under document number C(2008) 1721)
Date: 2008-05-06
Institutions: European Commission
Subjects: audit, auditing, consolidated account, qualitative analysis, self-employed person

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Official Journal of the European Union

7.5.2008

RECOMMENDATIONS

COMMISSION

COMMISSION RECOMMENDATION

of 6 May 2008

on external quality assurance for statutory auditors and audit firms auditing public interest entities

(notified under document number C(2008) 1721)

(2008/362/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

Having regard to the Treaty
Community, and in particular Article 211 thereof,

establishing the European

Whereas:

(4)

(5)

(1)

(2)

the statutory audit

External quality assurance for
is
fundamental for high audit quality. It adds credibility to
information and provides better
published financial
protection of
and
other interested parties. Any external quality assurance
system should therefore be objective and independent
from the auditing profession.

shareholders,

investors,

creditors

accounts,

the
Articles 29 and 43 of Directive 2006/43/EC of
European Parliament and of
the Council of 17 May
2006 on statutory audits of annual accounts and con-
solidated
Council Directives
amending
78/660/EEC and 83/349/EEC and repealing Council
Directive 84/253/EEC (1) establishes high-level criteria
for quality assurance systems for all statutory auditors
incorporates
and audit
the ideas
contained
Recommendation
Commission
2001/256/EC of 15 November 2000 on quality
assurance for
in the European
Union: minimum requirements (2).

the statutory audit

firms.
in

some of

It

(1) OJ L 157, 9.6.2006, p. 87. Directive as amended by Directive
the Council

the European Parliament and of

2008/30/EC of
(OJ L 81, 20.3.2008, p. 53).

(2) OJ L 91, 31.3.2001, p. 91.

However, parts of
that Recommendation, which are
related to statutory audit of public interest entities,
have been overtaken by recent
international develop-
for such audits,
ments and tendencies to introduce,
external quality assurance systems, which are managed
independently from the auditing profession and where
quality assurance reviews are performed by persons
other than practising auditors.

The criteria laid down in Directive 2006/43/EC still allow
for considerable differences in the way external quality
assurance systems for statutory auditors and audit firms
are currently organised in Member States. It should be
avoided that the interested parties perceive audit quality
of statutory auditors and audit firms in Member States
in particular with respect to Article 34 of
differently,
Directive
2006/43/EC also
2006/43/EC. Directive
encourages public oversight systems of Member States
to find a co-ordinated approach to the carrying-out of
quality assurance reviews.

Co-operation between Member States is a priority with
regard to audits of public interest entities. Further
guidance should be given to quality assurance systems
for statutory auditors and audit firms performing audit
in such entities. Therefore, it is appropriate to provide for
a new Recommendation which is more in line with the
current
Recommendation
2001/256/EC and which takes into account new inter-
national trends as well as specific needs of the Member
States. However, there is no need to provide detailed
guidance with regard to the quality assurance systems
for statutory auditors and audit firms auditing entities
other than public interest entities.

affairs

state

than

of

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(6)

(7)

(8)

(9)

(10)

Inspections should contribute to enhancing audit quality
in an inspected statutory auditor or an audit firm and
should be of regular and preventive nature. They should
aim at building and maintaining confidence in statutory
audit and thus ultimately in financial markets. Therefore,
this Recommendation should not concern ad-hoc inves-
tigations resulting from the possible violations of laws
and regulations.

used and the efficiency and effectiveness of the quality
assurance system.

(11)

In the light of new international developments,
in
particular the involvement of appropriate bodies and
experts in the execution of inspections, the Commission
intends to evaluate the situation in 2011,

In order to enhance the quality of audits within the
Communities, independent oversight bodies should play
a more active role in the inspections of audit
firms.
Guidance should be provided for the independence of
the inspection system. With regard to execution of
inspections, the possible role of public oversight auth-
orities, professional associations and other appropriate
bodies, as well as
should be
clarified. Clarifications with regard to the funding of
the quality assurance system are also necessary.

the role of experts

Article 43 of Directive 2006/43/EC requires quality
assurance reviews for statutory auditors and audit firms
of public interest entities to be carried out at least every
three years. A public oversight system could face diffi-
culties in recruiting a sufficient number of inspectors to
conduct on-site reviews in each inspection. Therefore, it
should be possible that, under certain conditions, experts
who are not inspectors also participate in on-site reviews.

followed by the statutory auditor or audit

In order to ensure that the final report on an inspection
is
firm
concerned and that
it provides them with sufficient
guidelines to avoid reported problems in the future, an
effective communication should take place between the
inspectors and that statutory auditor or audit firm both
before the final report is adopted and in the follow-up
phase.

To improve accountability of
the quality assurance
system and comparability within the Community, the
annual
inspections
should include key performance information that would
enable an evaluation to be made of both the resources

report on the overall

results of

HEREBY RECOMMENDS:

Subject matter

This Recommendation provides guidance for implemen-
1.
statutory
systems
ting independent quality assurance
auditors and audit
firms conducting an audit of public
interest entities in accordance with Articles 29 and 43 of
Directive 2006/43/EC.

for

2. Where a Member State decided to exempt certain public
interest entities in accordance with Article 39 of the Directive
2006/43/EC, the Member State should also exempt such public
interest entities from the scope of measures adopted in the light
of this Recommendation.

Definitions

The definitions

3.
in Article 2 of Directive
2006/43/EC apply to this Recommendation. For the purposes
of this Recommendation, also the following definitions apply:

set out

(a)

‘public oversight authority’ means a competent authority
within the meaning of Article 2(10) of Directive
2006/43/EC, which represents a public oversight system
that is based on the principles set out in Article 32 of
that Directive;

(b) ‘inspector’ means a reviewer, who meets the requirements
set out in point (d) of the first subparagraph of Article 29(1)
of Directive 2006/43/EC, is employed by a public oversight
authority or another appropriate body to which execution
of inspections has been delegated;

(c)

‘inspections’ means quality assurance reviews of statutory
auditors and audit firms, which are led by an inspector
and which do not represent an investigation within the
meaning of Article 32(5) of Directive 2006/43/EC;

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(d) ‘expert’ means a natural person, who has specific expertise
in financial markets, financial reporting, auditing or other
fields relevant for inspections, including practising statutory
auditors.

The public oversight authority should have the right to
7.
participate in inspections and to get access to inspection files,
audit working papers and other documents of relevance.

Independence of the quality assurance system

A public oversight authority should assume ultimate
4.
the external quality assurance system for
responsibility for
firms auditing public interest
statutory auditors and audit
should not designate as a public
entities. Member States
oversight authority any association or body affiliated with the
accounting or audit profession.

8.
All funding arrangements for the quality assurance system,
including those concerning the level of funding and financial
control, should not be subject to approval or veto by persons or
organisations that are representatives of or otherwise affiliated
with the accounting profession, the audit profession or an audit
firm. The level of funding should enable the public oversight
authority to be sufficiently equipped with staff supporting it in
implementing points 6 and 7.

5.
Statutory auditors and audit firms auditing public interest
entities should be subject to inspections that are executed by a
public oversight authority, either exclusively, or together with
another appropriate body in accordance with point 6.

9.
If funds for the quality assurance system are provided by
statutory auditors or audit firms subject to inspections, any fee
or other contribution payable by them should be mandatory
and required to be paid in full on a timely basis.

6.
It should be possible for tasks related to the execution of
the inspections to be delegated to another appropriate body
provided that the accountability of such body to the public
the latter retains at
oversight authority is ensured and that
least the following responsibilities:

Independence of inspections

A public oversight authority should ensure that appro-
10.
priate policies and procedures related to the independence and
objectivity
the
management of the inspection system, are put in place.

inspectors,

including

staff,

and

the

of

(a) approval and,

if considered appropriate by the public
the inspection meth-
including inspection and follow-up manuals,
inspection

oversight authority, amendment of
odologies,
reporting methodologies
programmes;

periodic

and

A person, who is a practising statutory auditor or is
11.
employed or otherwise associated with a statutory auditor or
an audit firm, should not be allowed to act as an inspector.

(b) approval and,

if considered appropriate by the public
oversight authority, amendment of inspection reports and
follow up reports;

12.
A person should not be allowed to act as an inspector in
an inspection of the statutory auditor or audit firm until at least
two years have elapsed since that person ceased to be a partner
or employee of that auditor or in that audit firm or to be
otherwise associated therewith.

(c) approval

and,

if
oversight authority, assignment of
inspection;

considered necessary by the public
for each

inspectors

(d) issuance of recommendations and instructions of any form

to the body to which the tasks have been delegated.

Inspectors should declare that there are no conflicts of
13.
interests between them and the statutory auditor and audit firm
to be inspected. Inspectors who make an incomplete or false
declaration should be excluded from carrying out inspections
and should be subject to effective, proportionate and dissuasive
penalties.

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Inspectors should be remunerated in connection with
14.
inspections only by the public oversight authority or by the
body to which execution of inspections has been delegated.
Inspectors
receive any remuneration from the
reviewed statutory auditor, audit firm or their networks.

should not

and independence requirements, including those related to
Chapter IV and Article 42 of Directive 2006/43/EC, as well
as relevant laws, regulations and administrative provisions
of the Member State concerned;

15.
If a public oversight authority considers that specific
expertise is essential for the proper conduct of an inspection,
inspectors should be assisted by experts. Such experts should act
under the direct control of an inspector and should be subject
to the requirements referred to in points 10, 12 to 14.

(b) the quantity and quality of

including
compliance with continuing education requirements as set
out in Article 13 of Directive 2006/43/EC;

resources used,

Methodological guidance for conducting inspections

(c) compliance with the requirements set out in Article 25 of

Directive 2006/43/EC on the audit fees charged.

16. When there is temporarily an insufficient number of
inspectors available in a Member State to carry out on-site
inspections, a public oversight authority should have the right
to decide that experts perform on-site reviews, provided that
those experts meet the requirements set out in point (d) of
the
of Directive
they are fully accountable to the public
2006/43/EC,
that
oversight authority and that
inspectors carry out on-site
reviews in the same statutory auditor or audit firm at least
every six years.

subparagraph

of Article

29(1)

first

17.

The scope of inspections should cover:

(a) an assessment of the design of the internal quality control

system of the audit firm;

(b) adequate compliance testing of procedures and a review of
audit files of public interest entities in order to verify the
effectiveness of the internal quality control system;

For

the purposes of

least a
19.
significant part of audit files should be selected on the basis
of an analysis of the risk of an inadequate execution of the
statutory audit.

testing compliance, at

Outcome of inspections

Inspection findings and conclusions on which recom-
20.
mendations are based,
including the findings and conclusions
related to a transparency report, should be properly commu-
nicated to and discussed with the inspected statutory auditor or
audit firm before an inspection report is finalised. The inspected
statutory auditor or audit firm should be granted a period not
exceeding 12 months from the issuance of the inspection report
to take action in respect of recommendations on the internal
quality control system of
the inspected
statutory auditor or audit firm did not give the appropriate
the public oversight
follow up to the recommendations,
authority should disclose major deficiencies
found in the
internal quality control system.

the audit

firm.

If

(c)

in the light of the inspection findings under points (a) and
(b), an assessment of the contents of the most recent annual
transparency report published by a statutory auditor or an
audit
firm in accordance with Article 40 of Directive
2006/43/EC.

A public oversight system should have the right,

in
21.
accordance with the due process of law as provided for in
the Member State concerned, to take disciplinary actions or
impose penalties in respect of statutory auditors and audit firms.

At

least

18.
the following internal control policies and
procedures of the statutory auditor or the audit firm should
be reviewed:

(a) compliance by the statutory auditor or the audit firm with
applicable auditing and quality control standards, and ethical

22.
The public oversight authority should at least inform the
public in a timely and appropriate manner about any final
disciplinary actions taken or penalties imposed in respect of
statutory auditors and audit firms in relation to the execution
of the statutory audit. It should identify the statutory auditor or
audit firm concerned and describe the major deficiencies which
have given rise to such actions or penalties.

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In the cases where it has been established during an
23.
inspection that a transparency report published by a statutory
auditor or an audit
firm in accordance with Article 40 of
Directive 2006/43/EC contains information, including that on
the effectiveness of the internal quality control system of the
audit firm, that a public oversight authority considers signifi-
cantly misleading, it should ensure that the transparency report
is amended accordingly without delay.

resources and staffing, and the efficiency and effectiveness of the
quality assurance system.

Follow-up

25. Member States are invited to inform the Commission of
actions taken in light of this Recommendation by 6 May 2009.

Transparency on the overall

results of

the quality

assurance system

24.
Public oversight authorities should report annually on
the overall results of the quality assurance system. The report
should include information on recommendations issued, follow-
up on the recommendations, disciplinary actions taken and
penalties imposed.
It should also include quantitative infor-
mation and other key performance information on financial

Addressees

This Recommendation is addressed to the Member

26.
States.

Done at Brussels, 6 May 2008.

For the Commission

Charlie McCREEVY
Member of the Commission