CELEX: 52011PC0779
Language: en
Date: 2011-11-30
Title: Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on specific requirements regarding statutory audit of public-interest entities

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		52011PC0779
		
			Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on specific requirements regarding statutory audit of public-interest entities /* COM/2011/0779 final - 2011/0359 (COD) */
			
				
		
		
			
			   	EXPLANATORY MEMORANDUM
1.           CONTEXT OF THE PROPOSAL
The measures adopted both in Europe and
elsewhere in the direct aftermath of the financial crisis have mainly focused
on the urgent need to stabilise the financial system. While the role played by
banks, hedge funds, rating agencies, supervisors or central banks has been
questioned and analysed in depth in many instances, little or no attention had
been given to the role auditors played in the crisis – or indeed the role they
should have played. Given that many banks revealed huge losses from 2007 to
2009 on the positions they had held both on and off balance sheet, it is
difficult for many citizens and investors to understand how auditors could give
clean audit reports to their clients (in particular banks) for those periods. 
It is important to note that in a crisis
where €4 588.9 billion of taxpayer money was committed to support banks
between October 2008 and October 2009 and where such aid accounted for 39% of
EU 27 GDP in 2009[1], all components of the
financial system need to be improved. 
Robust audit is key to re-establishing
trust and market confidence. It contributes to investor protection by providing
easily accessible, cost-effective and trustworthy information about the
financial statements of companies. It also potentially reduces the cost of
capital for audited companies by ensuring more transparency and reliability of
financial statements. 
It is also important to stress that
auditors are entrusted by law to conduct statutory audits of the financial
statements of companies which enjoy limited liability and/or are authorised to
provide services in the financial sector. This entrustment responds to the
fulfilment of a societal role in offering an opinion on the truth and fairness
of the financial statements of those companies.
Since 1984, EU rules have partially
regulated statutory audit when a directive (Directive 1984/253/EEC) harmonized
the procedures for the approval of auditors. Directive 2006/43/EC of the European Parliament and of the
Council of 17 May 2006 on statutory audits of annual accounts and consolidated
accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing
Council Directive 84/253/EEC (hereinafter Directive 2006/43/EC) was adopted in 2006
and considerably broadened the scope of the former Directive. 
The financial crisis has highlighted
weaknesses in the statutory audit especially with regard to Public-Interest
Entities (PIE), entities which are of significant public interest because of
their business, their size, their number of employees or their corporate status
is such that they have a wide range of stakeholders. Therefore, this proposal
lays down conditions for carrying out the statutory audit on the financial
statements of PIEs. 
2.           RESULTS OF CONSULTATIONS WITH THE
INTERESTED PARTIES AND IMPACT ASSESSMENTS
The Commission conducted a consultation
from 13 October to 8 December 2010[2].
In all, almost 700 responses from various
stakeholders; these included members of the profession, supervisors, investors,
academics, companies, government authorities, professional bodies and
individuals were received. 
The consultation has shown both an appetite
for as well as resistance to change; stakeholders who are currently well
established are particularly opposed to changes. On the other hand, especially
small and medium sized practitioners as well as investors concluded that the
recent financial crisis highlighted serious shortcomings. A summary of public
submissions received can be found on:
http://ec.europa.eu/internal_market/consultations/docs/2010/audit/summary_responses_en.pdf
In addition, a high level conference on
audit held by the Commission on 10 February 2011[3] allowed for a
further exchange of views. 
The European Parliament adopted an
own-initiative report on 13 September 2011 on this matter in reaction to the
Commission's Green Paper and urges the Commission to ensure more transparency
and competition in the audit market.[4] The European Economic and
Social Committee (EESC) adopted a similar report on 16 June 2011.[5]

The issues were also brought to the
attention of the Member States at the Financial Services Committee meeting of
16 May 2011 and at the Audit Regulatory Committee meeting of 24 June 2011.
In keeping with the principles of 'Better
Regulation', the Impact Assessment identifies the various problem areas that
may require regulatory action: 
·                        
There is an expectation gap between what
stakeholders expect of an audit and what auditors actually do. 
·                        
Independence is neither assured nor demonstrable
in a paradigm where audit has effectively become one of a plethora of
commercial services. The lack of regular tendering of audit services and
periodic rotation of audit firms has deprived audit of its key ethos:
professional scepticism. 
·                        
Market concentration and lack of choice: The
market is so polarised that rare is the occasion when the auditor of a PIE is
not a 'Big Four' firm. In the majority of Member States, the Big Four audit
more than 85% of large listed companies. 
The impact assessment
resulted in the following preferred policy options:
·                        
The scope of statutory audit should be clarified
and specified and the information that the auditor provides to users, the
audited entities, audit committees and supervisors improved.
·                        
The prohibition of the provision of non-audit
services to the audited entities and even the prohibition of the provision of
non-audit services in general would effectively address the need to reinforce
independence and professional scepticism. Moreover, stricter rules in the
procedure for the appointment of auditors and the introduction of mandatory
audit firm rotation would contribute to higher quality audits. 
·                        
To facilitate an objective choice of an audit
provider, contractual clauses limiting audit firm choice should be prohibited,
the transparency on audit quality and on audit firms should be increased and an
audit quality certification should be established.
·                        
To increase the choice of audit providers ownership
restrictions should be lifted.
·                        
National audit supervisory authorities should be
strengthened and an EU-wide cooperation within the European Securities and
Markets Authority (ESMA) should be set up.
The impact assessment report for this
proposal can be found on:
http://ec.europa.eu/internal_market/auditing/index_en.htm
3.           LEGAL ELEMENTS OF THE PROPOSAL
3.1         Legal basis
The existing Directive 2006/43/EC is based
on Article 50 TFEU. The establishment related requirements (e.g. those
requirements that deal with the approval/registration of auditors) and
amendments thereto remain within the purvey of the Directive[6].
Specific additional requirements that deal
with the conduct of a statutory audit of PIEs are set out in this regulation, based
on Article 114 TFEU.
3.2.        Subsidiarity and
proportionality
So far, EU rules have left a large
discretion to Member States, which in turn have largely relied on
self-regulation by the profession. The crisis has shown that self-regulation is
not adequate when looking towards the future. Moreover, the problems
highlighted in the Impact Assessment cannot be solved at a national level as
important differences would emerge in the regulatory framework and this in turn
would seriously undermine the single market.
Given the interconnected nature of
securities markets and financial actors, audit should be conducted across the
Union within a harmonised framework. It is critical that the role, independence
of auditors and the market structure are dealt with at the level of the Union
as PIEs in Europe often have cross-border activities. It is worth noting that
legislation covering investor protection as well as financial institutions is
already enacted at the level of the Union.
Moreover, a coordinated approach at the
level of the Union, supplemented by international support, would also lower the
risk of regulatory arbitrage.
The proposal respects the principle of
proportionality and it does not go beyond what is necessary to achieve the
objectives pursued.
3.3.        Detailed explanation of
the proposal
Articles 39 to 43 of Directive 2006/43/EC
already deal with certain requirements which apply to the statutory audit of
PIEs. Those requirements will no longer be comprised in the Directive, but
integrated (and further developed) in this Regulation.
A Regulation is a suitable and
proportionate legal instrument to ensure high quality of audits of PIEs. The
direct applicability of a Regulation offers greater legal certainty. Also, the
legislation would become applicable at the same date across the Union, thus avoiding
problems associated with the late transpostion of legislation by Member States[7].
Furthermore, a regulation offers the highest degree of harmonisation: statutory
audits would be carried out under substantially identical rules in all Member
States. 
3.3.1.     Title I (subject matter,
scope and definitions)
The Regulation applies to auditors that
carry out statutory audits of PIEs and to the audited PIEs, e. g. rules on the
audit committee which a PIE is required to have. 
For the purpose of the Regulation the
definitions that apply to the amended Directive 2006/43/EC should also apply
here. As the financial sector evolves, new categories of financial institutions
are created under Union law and it is thus appropriate that the definition of
PIEs also encompasses investment firms, payment institutions, undertakings for
collective investment in transferable securities (UCITS), electronic money
institutions and alternative investment funds.
3.3.2.     Title II (Conditions for
carrying out statutory audit of public-interest entities)
Chapter I (Independence and avoidance of
conflict of interest)
An auditor should establish adequate
policies and procedures to ensure compliance with the obligations under the
Regulation regarding independence, internal quality control systems and the
supervision of employees. 
Former auditors, key audit partners or their
employees are not allowed to take up a key management position in the audited
entity, to become a member of the audit committee of the audited entity, to
become a non-executive member of the administrative body or to join the
supervisory body of the audited entity within two years after the termination
of the audit engagement.
The fees for the provision of related financial audit services to the audited entity should be
limited to 10 % of the audit fees paid by that entity. Additionally, where the
total fees, audit and related financial audit services, received by an auditor
from a PIE reach a significant percentage of his/her/its total annual fees,
appropriate safeguards should be applied.
The statutory auditor, audit firm or member
of the audit firm's network will be prevented from providing certain non-audit
services which are fundamentally incompatible with the
independent public-interest function of audit to their
audited entities in all cases, while for other non-services that are not
fundamentally incompatible with the audit services, the audit committee or the
competent authority will be empowered to assess, depending on the concrete
circumstances, whether or not they may be provided to the audited entity..
However, related financial audit services could be provided. The Commission is
empowered to adapt the lists of authorised services and of prohibited services
in accordance with the conditions set out in Title VI. In addition, audit firms
of significant dimension should focus their professional activity on the
carrying out of statutory audit and should not be allowed to undertake non-audit
services. 
Before accepting or continuing an
engagement, an auditor should assess all potential threats to his/her/its
independence and confirm his/her independence to the audit committee. 
Chapter II (Confidentiality and
professional secrecy)
Auditors should not invoke professional
secrecy rules to prevent the application of the provisions of this proposal. 
Article 13 ensures that necessary
information can be exchanged during the performance of the audit. However, such rules would not allow an auditor to cooperate with
third country authorities outside the cooperation channels foreseen in Chapter
XI of Directive 2006/43/EC. 
Chapter III (Performance of the
statutory audit)
The Regulation lays out that the auditor should
take the necessary steps with a view to forming an opinion as to whether the
financial statements give a true and fair view and have been prepared in
accordance with the relevant financial reporting framework. It does not include
the assurance on the future viability of the audited entity nor the efficiency
or effectiveness with which the management or the administrative body has
conducted or will conduct the affairs of the entity. However, this exclusion
should neither undermine the tasks that an auditor needs to undertake in order
to conduct the audit properly nor any reporting requirements.
Professional scepticism is reinforced. The
auditor should always remain alert to the possibilty of a material misstatement
due to error or fraud, notwithstanding the auditor's past experience with the
entity.
Basic requirements for the performance of
the statutory audit are established. The audit firm should designate at least a
key audit partner, who should be actively involved in the carrying out of the
statutory audit. Sufficient resources should be assigned as well. A client
account record should be maintained and an audit file should be created.
Moreover, the auditor should make sure that all the organisational requirements
are properly applied. 
Where an incident which has or may have
serious consequences for the integrity of the statutory audit activities
happens, the auditor should take appropriate measures with a view to managing
the consequences of the incident and prevent any recurrence. 
In the case of the audit of consolidated financial
statements, where the group auditor is not in the position to document the
audit work performed by third-country auditor(s), he needs to take appropriate
measures including additional audit work and inform the competent authority. 
An auditor/audit firm should carry out its
own internal quality control review before submitting the audit report. The
review should be the responsibility of an auditor who is not involved in the
performance of the statutory audit to which the internal quality review
relates.
Chapter IV (Audit reporting)
The content of the audit report disclosed
to the public is expanded so that it explains the methodology used, especially
how much of the balance sheet has been directly verified and how much has been
based on system and compliance testing, the levels of materiality applied to
perform the audit, the key areas of risk of material misstatements of the
financial statements, whether the statutory audit was designed to detect fraud
and, in the event of a qualified or adverse opinion or a disclaimer of opinion,
the reasons for such a decision. It should also explain the variation in the
weighting of substantive and compliance testing when compared to the previous
year.
Moreover, the auditor should also prepare a
longer and more detailed report for the audit committee. This report would
provide more detailed information on the audit carried out, on the situation of
the undertaking as such (e. g. going concern) and the findings of the audit
combined with the necessary explanations. This additional report would also
present (and justify) the audit work carried out to the audit committee. This
longer report would be submitted to the audit committee and to the management
of the audited entity, but not to the public (given that its content would
include business secrets and potentially price sensitive information). However,
upon request, the auditor should make this report available to the competent
authority.
In most of the financial services
directives, the auditor is already required to the competent authorities
supervising the PIE any fact or decision concerning the PIE. This obligation is
now extended to all PIEs. Moreover, competent authorities supervising credit
institutions and insurance undertakings should establish a regular dialogue
with the auditors.
Chapter V (Transparency reporting by
statutory auditors and audit firms and record keeping)
Auditors will be required to disclose
financial information, showing in particular their total turnover divided into
audit fees paid by PIEs, audit fees paid by other entities and fees for other
services. They should also disclose financial information at the level of the
network to which they belong. 
The transparency reports of auditors of
PIEs should be completed by a statement on the firms' own corporate governance.
Additional supplementary information on audit fees should be provided to
competent authorities with a view to facilitating their supervisory tasks.
The auditor should keep certain documents
and information for a period of five years.
3.3.3.     Title III (The appointment
of statutory auditors or audit firms by public-interest entities)
In order to reinforce the independence and
capacity of the audit committee, it should be composed of non-executive members,
at least one member should have experience and knowledge in auditing and another
one in accounting and/or auditing. 
The proposal for the appointment of the
auditor to the meeting of shareholders should be based on a recommendation of
the audit committee. The recommendation should always contain a justification
of the decision proposed. In addition, unless it concerns the renewal of an
audit engagement, the recommendation should contain at least two choices
(excluding the incumbent auditor) and the audit committee should express a duly
justified preference for one of them. The recommendation of the audit committee
should be made after the completion of a due tendering process. In the case of
credit institutions or insurance undertakings, the audit committee should
submit its recommendation to the prudential supervisory authority, which should
have the right to veto the choice proposed. 
Contractual clauses with third parties
limiting the audited entity's choice of an auditor should be prohibited.
With a view to addressing the threat of
familiarity that results from the audited undertaking often appointing and
re-appointing the same audit firm for decades, the regulation introduces mandatory
rotation of audit firms after a maximum period of 6 years that may be, under
certain exceptional circumstances, extended to 8 years. Where a public-interest
entity has appointed two or more statutory auditors or audit firms, the maximum
duration of the engagements will be 9 years; on an exceptional basis, such
duration may be extended to 12 years. It also provides for a cooling-off period
before the audit firm is able to carry out the statutory audit of the same
entity again. In order to ensure a smooth transition the former auditor is
required to transfer a handover file with relevant information to the incoming
auditor.
The audit committee, one or more shareholders,
the competent authorities and the competent authorities for the supervision of
the PIEs are empowered to bring a claim before a national court for the
dismissal of the auditor where there are proper grounds. 
3.3.4.     Title IV (Surveillance of
the activities of auditors and audit firms carrying out statutory audit of
public-interest entities)
Chapter I (Competent authorities)
Each Member State should designate a
competent authority responsible for the supervision of auditors and audit firms
auditing PIEs. These authorities should be adequately staffed and independent
of auditors. The obligations of professional secrecy apply to the competent
authorities employees.
The competent authorities should have all
supervisory and investigative powers that are necessary to exercise their
function but should not interfere with the content of an audit report..
The competent authorities should cooperate
at the national level with the authority responsible for the approval and
registration of statutory auditors and audit firms (Directive 2006/43/EC) and
with other supervisors of PIEs e. g. the banking or the insurance supervisor.
Chapter II (Quality assurance,
investigation, market monitoring, contingency planning and transparency of
competent authorities)
The tasks of the competent authorities
include:
·                        
undertaking quality assurance reviews on the
statutory audits carried out. These reviews should be proportionate to the
scale and dimension of activity of the reviewed auditor;
·                        
investigating with a view to detecting, correcting
and preventing inadequate statutory audits of PIEs;
·                        
monitoring the developments in the market for
the provision of statutory audit services to PIEs; 
·                        
regularly monitoring the possible threats to the
continuity of the operations of large audit firms, including the risks arising
from high concentration and requiring large audit firms to establish
contingency plans to address such threats;
·                        
being transparent about their activities,
including the publication of individual quality assurance review reports.
Chapter III (Cooperation between competent
authorities and relations with the European supervisory authorities)
The regulation requires that the EU-wide
cooperation between competent authorities takes place within ESMA, thus taking
over the current EU-wide cooperation mechanism under the aegis of the European
Group of Auditors' Oversight Bodies (EGAOB), an expert group chaired by the
European Commission. ESMA is already working in the field
of auditing (and accounting) regarding PIEs and the legal framework foresees
the cooperation of ESMA, the European Banking Authority (EBA) and the European
Insurance and Occupational Pensions Authority (EIOPA) within their joint
committee in the area of auditing. ESMA is required to create a permanent
internal committee which should at least be composed of the national competent
authorities. 
ESMA should issue
guidance on several issues: e.g. on the content and presentation of the audit
report and the additional report to the audit committe, on the oversight
activity of the audit committee or for conducting quality assurance reviews.
A 'voluntary' pan-European audit quality
certification is introduced to increase the visibility, recognition and
reputation of all audit firms having capacities to conduct high quality audits
of PIEs. ESMA should publish the requirements for obtaining the certificate
along with any administrative and fee implications. National competent
authorities should be involved in the examination of the application for the
certificate. Concerning investigation and on-site inspections, competent
authorities should notify the competent authority of the other Member State, if
they conclude that activities contrary to the provisions of the Regulation are
being or have been carried out. Moreover, a competent authority of a Member
State may request that an investigation be carried out by the competent
authority of another Member State in the latter's territory.
Furthermore, colleges of competent
authorities may be established by ESMA upon request of one or more competent
authorities in order to facilitate the exercise of certain tasks. 
Chapter IV (Cooperation with third
country auditors and with international organisations and bodies)
The competent authorities and ESMA may
conclude cooperation agreements on the exchange of information with the competent
authorities of third countries only if the information disclosed is subject to
guarantees of professional secrecy and provided data protection rules are
respected.
3.3.5.     Title V (Supervisory
measures and penalties)
In order to improve compliance with the
requirements of this Regulation and following the Commission Communication of 9
December 2010 entitled 'Reinforcing sanctioning regimes in the financial
sector'[8], the powers to adopt
supervisory measures and the sanctioning powers of competent authorities are
enhanced. Administrative pecuniary sanctions on auditors and PIEs for
identified violations are envisaged. Authorities should be transparent about
the sanctions and measures they apply.
3.3.6.     Title VI (Reporting and
transitional and final provisions)
A transitional regime is introduced regarding
the entry into force of the obligation to rotate audit firms, the obligation to
organise a selection procedure for the choice of audit firm and the
establishment of audit firms that only provide audit services.
3.3.7.     Regulatory technical
standards and compliance with Article 290 TFE
In order to take account of developments in
auditing and the audit market, ESMA is requested to submit regulatory technical
standards to the Commission in order to specify technical requirements on the
content of the handover file that the new auditor should receive and the
establishment of a European quality certificate for auditors carrying out
statutory audits of PIEs. The Commission is empowered to adopt these technical
standards as delegated acts.
On 23 September 2009, the Commission
adopted proposals for Regulations establishing EBA, EIOPA (The European
Insurance and Occupational Pensions Authority (EIOPA), and ESMA (European
Securities and Markets Authority)[9]. In this respect the
Commission wishes to recall the Statements in relation to Articles 290 and 291
TFEU it made at the adoption of the Regulations establishing the European
Supervisory Authorities according to which: "As regards the process for
the adoption of regulatory standards, the Commission emphasises the unique
character of the financial services sector, following from the Lamfalussy
structure and explicitly recognised in Declaration 39 to the TFEU. However, the
Commission has serious doubts whether the restrictions on its role when
adopting delegated acts and implementing measures are in line with Articles 290
and 291 TFEU."
4.           BUDGETARY IMPLICATION
The Commission's proposal has no direct or
indirect impact on the European Union budget. In particular, tasks that would
be entrusted to EU supervisory bodies as mentioned in the proposal would not
entail additional EU funding.
2011/0359 (COD)
Proposal for a
REGULATION OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL
on specific requirements regarding
statutory audit of public-interest entities
(Text with EEA relevance)
THE EUROPEAN PARLIAMENT AND THE
COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 114 thereof,
Having regard to the proposal from the
European Commission,
After transmission of the draft legislative
act to the national Parliaments,
Having regard to the opinion of the
European Economic and Social Committee[10],
After consulting the European Data
Protection Supervisor[11],
Acting in accordance with the ordinary
legislative procedure,
Whereas:
(1)              
Statutory auditors and audit firms are entrusted
by law to conduct statutory audits of public-interest entities with a view to
enhancing the degree of confidence of the public in the annual and consolidated
financial statements of such entities. The public-interest function of
statutory audit means that a broad community of people and institutions rely on
the quality of a statutory auditor's work. Good audit quality contributes to
the orderly functioning of markets by enhancing the integrity and efficiency of
financial statements. Thereby, auditors fulfil a particularly important
societal role.
(2)              
Union legislation requires that the financial
stements, comprising annual accounts or consolidated accounts, of credit
institutions, insurance undertakings, issuers of securities admitted to trading
on a regulated market, payment institutions, UCITS, electronic money
institutions and alternative investment funds be audited by one or more persons
entitled to carry out such audits in accordance with Union law, namely: Article
1(1) of Council Directive 86/635/EEC of 8 December 1986 on the annual accounts
and consolidated accounts of banks and other financial institutions[12],
Article 1(1) of Council Directive 91/674/EEC of 19 December 1991 on the annual
accounts and consolidated accounts of insurance undertankings[13],
Article 4(4) of Directive 2004/109/EC of the European Parliament and of the
Council of 15 December 2004 on the harmonisation of transparency requirements
in relation to information about issuers whose securities are admitted to
trading on a regulated market and amending Directive 2001/34/EC[14],
Article 15(2) of Directive 2007/64/EC of the European Parliament and of the
Council of 13 November 2007 on payment services in the internal market amending
Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing
Directive 97/5/EC[15], Article 73 of Directive
2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the
coordination of laws, regulations and administrative provisions relating to
undertakings for collective investment in transferable securities (UCITS)[16],
Article 3(1) of Directive 2009/110/EC of the European Parliament and of the
Council of 16 September 2009 on the taking up, pursuit and prudential
supervision of the business of electronic money institutions amending
Directives 2005/60/EC and 2006/48EC and repealing Directive 2000/46/EC[17],
and Article 22(3) of Directive 2011/61/EC of the European Parliament and of the
Council of 8 June 2011 on Alternative Investment Fund Managers and amending
Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU)
No 1095/2010[18]. Moreover, Article
4(1)(1) of Directive 2004/39/EC of the European Parliament and of the Council
of 21 April 2004 on markets in financial instruments amending Council
Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European
Parliament and of the Council and repealing Council Directive 93/22/EEC[19]
also requires that the annual financial statements of investment firms be
audited when the Fourth Council Directive 78/660/EEC of 25 July 1978 on the
annual accounts of certain types of companies[20] or the
Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts[21]
are not appplicable. 
(3)              
The conditions for the approval of the persons
responsible for carrying out the statutory audit as well as the minimum
requirements for carrying out such statutory audit are laid down in Directive
2006/43/EC of the European Parliament and of the Council of 17 May 2006 on
statutory audits of annual accounts and consolidated accounts, amending Council
Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC[22].

(4)              
During the recent financial crisis, numerous
banks revealed huge losses from 2007 to 2009 on the position they had held both
on and off balance sheet. This raised not only the question of how auditors
could give unqualified audit reports to their clients for those periods but
also about the suitability and adequacy of the current legislative framework.
The Commission published on 13 October 2010 a Green Paper on Audit Policy:
Lessons from the Crisis[23], which launched a wide
public consultation, in the general context of financial market regulatory
reform, on the role and scope of audit and how the audit function could be
enhanced in order to contribute to increased financial stability. It resulted
from the public consultation that the rules of Directive 2006/43/EC regarding
the carrying out of the statutory audit of annual and consolidated accounts of
public-interest entities could be substantially improved. The European
Parliament issued an own initiative report on the Green Paper on 13 September
2011. The European Economic and Social Committee also adopted a report on that Green
Paper on 16 June 2011.
(5)              
It is important to lay down detailed rules with
a view to ensuring that the statutory audits of public-interest entities are of
adequate quality and are carried out by statutory auditors and audit firms
subject to stringent requirements. A common regulatory approach should enhance
the integrity, independence, objectivity, responsibility, transparency and
reliability of statutory auditors and audit firms carrying out statutory audit
of public-interest entities, contributing to the quality of statutory audit in
the Union, thereby contributing to smooth functioning of the internal market,
while achieving a high level of consumer and investor protection. The
development of a separate act for public-interest entities should also ensure
consistent harmonisation and uniform application and thus contribute to a more
effective functioning of the internal market.
(6)              
The financial sector is evolving and new
categories of financial institutions are created by Union law. The importance
of new entities and activities outside the regular banking system is growing
and their impact on financial stability has become greater. Therefore, it is
appropriate that the definition of public-interest entity also encompasses
other financial institutions and entities such as investment firms, payment
institutions, undertakings for collective
investments in transferable securities (UCITS),
electronic money institutions and alternative investment funds. 
(7)              
Audit of annual and consolidated financial
statements is intended as a statutory safeguard for investors, lenders and
business counterparties who have a stake or a business interest in
public-interest entities. Hence, statutory auditors and audit firms should be
completely independent when carrying out statutory audits of such entities and
conflicts of interest should be avoided. In order to determine the independence
of auditors and audit firms, the concept of network in which auditors and firms
operate has to be taken into account.
(8)              
Adequate internal organisation of statutory
auditors and audit firms should contribute to preventing any threats to their
independence. Thus, owners or shareholders of an audit firm, as well as those
managing it, should not intervene in the carrying out of a statutory audit in
any way which jeopardises the independence and objectivity of the statutory
auditor who carries out the statutory audit on behalf of the audit firm.
Additionally, statutory auditors and audit firms should establish appropriate
internal policies and procedures in relation to employees and other persons
involved in the statutory audit activity within their organisations in order to
ensure compliance with their statutory obligations. Those policies and
procedures should in particular seek to prevent and address any threats to
independence and ensure the quality, integrity and thoroughness of the
statutory audit. Those policies and procedures should be proportionate in view
of the scale and complexity of the business of the statutory auditor or audit
firm. 
(9)              
Auditors, audit firms and their employees should
in particular refrain from carrying out the statutory audit of an entity if
they have a business interest or financial interest in it and from engaging on
trading in financial instruments issued, guaranteed or otherwise supported by
an audited entity, other than holdings in diversified collective investment
schemes. The statutory auditor or audit firm should abstain from the internal
decision-making processes of the audited entity. Statutory auditors or their
employees should be prevented from taking up duties in the audited entity at
managerial or board level until an appropriate period has elapsed since the end
of the audit engagement.
(10)          
The level of fees received from one audited
entity and the structure of fees can also threaten the independence of a
statutory auditor or audit firm. Thus, it is important to ensure that audit
fees are not based on any form of contingency and that, when the audit fees
from a single client are significant, a specific procedure is established to
secure the quality of the audit. If the dependence on a single client is
excessive, the statutory auditor or the audit firm should refrain from
undertaking the statutory audit in question.
(11)          
The provision of services other than statutory
audit to audited entities by statutory auditors, audit firms or members of
their networks may compromise their independence. Therefore, it is appropriate
to require the statutory auditor, the audit firm and the members of their
network not to provide non-audit services to their audited entities. The
provision of non-audit services by an audit firm to a company would prevent
that audit firm from carrying out statutory audit of that company, thus
resulting in a reduction of the audit firms available to provide statutory
audit, in particular with regard to the audit of large public-interest entities
where the market is concentrated. As a result, in order to secure that a
minimum number of audit firms is able to provide audit services to large
public-interest entities, it is appropriate to request that audit firms of
significant dimension focus their professional activity on the carrying out of
statutory audit and are not allowed to undertake other services unconnected to
their statutory audit function such as consultancy or advisory services.
(12)          
With a view to avoiding conflicts of interest it
is important that the statutory auditor or the audit firm, before accepting or
continuing an engagement for a statutory audit of a public-interest entity,
assesses whether the independence requirements are met, and in particular
whether any threats to independence arise as a result of the relationship with
that entity. In order to maintain this independence, it is also important that
they keep records of all threats to their independence and that of their
employeess and other persons involved in the statutory audit process, as well
as the safeguards applied to mitigate those threats. Moreover, where the
threats to their indepedence, even after having applied safeguards to mitigate
those threats, are too significant, they should resign or abstain from the
audit engagement. The statutory auditor or the audit firm should confirm
annually to the audit committee of the audited entity their independence and
discuss with such committee any threat to their independence as well as the
safeguards applied to mitigate those threats.
(13)          
Directive 95/46 of the European Parliament and
of the Council of 24 October 1995 on the protection of individuals with regard
to the processing of personal data and on the free movement of such data[24]
govern the processing of personal data carried our in the Member States in the
context of this Regulation and under the supervision of the Member States
competent authorities, in particular the public independent authorities
designated by the Member States. Regulation (EU) No 45/2001 of the European
Parliament and of the Council of 18 December 2000 on the protection of
individuals with regard to the processing of personal data by the EU
institutions and bodies and on the free movement of such data[25],
governs the processing of personal data carried out by ESMA within the
framework of this Regulation and under the supervision of the European Data
Protection Supervisor. Any exchange or transmission of information by competent
authorities should be in accordance with the rules on the transfer of personal
data as laid down in Directive 95/46/EC and any exchange or transmission of
information by ESMA should be in accordance with the rules on the transfer of
personal data as laid down in Regulation (EC) No 45/2001.
(14)          
It is important that statutory auditors and
audit firms respect the rights to private life and data protection of of their
clients. They should therefore be bound by strict rules on confidentiality and
professional secrecy which, however, should not impede the proper enforcement
of this Regulation or the cooperation with the group auditor during the
performance of the audit of consolidated financial statements when the parent
undertaking is in a third country, provided that Directive 95/46/EC is complied
with. However, such rules would not allow a statutory auditor or audit firm to
cooperate with third country authorities outside the cooperation channels
foreseen in Chapter XI of Directive 2006/43/EC. Those confidentiality rules
should also apply to any statutory auditor or audit firm which has ceased to be
involved in a specific audit task.
(15)          
The statutory audit results in an opinion on the
truth and fairness of the financial statements of the audited entities.
Stakeholders, however, might to be unaware of the limitations of an audit
(materiality, sampling techniques, role of the auditor in the detection of
fraud and the responsibility of managers), which can lead to an expectation
gap. In order to reduce such gap, it is important to provide more clarity on
what the scope of the statutory audit is.
(16)          
Whilst the primary responsibility for delivering
financial information should rest with the management of the audited entities,
auditors play a role by actively challenging management from a user's perspective.
In order to improve audit quality, it is therefore important that the
professional scepticism exercised by auditors vis-à-vis the audited entity is
reinforced. Auditors should recognise the possibility that a material
misstatment due to fraud or error could exist, notwithstanding the auditor's
past experience of the honesty and integrity of the audited entity's
management. Securing audit quality should be the main criterion to organise the
audit work and to allocate the necessary resources to the tasks. The integrity
of the statutory auditor, audit firm and their staff is essential to ensure the
public confidence in statutory audits and financial markets. Therefore, any
incident that may have serious consequences for the integrity of the statutory
audit activities should be appropriately managed. The statutory auditor or the
audit firm should appropriately document the audit work.
(17)          
In the case of consolidated financial statements,
it is important that there is a clear definition of responsibilities of the
statutory auditors who audit different entities of the group. For this purpose,
the group auditor should bear full responsibility for the audit report.
(18)          
A sound internal quality control review of the
work carried out in each statutory audit engagement should be conducive to high
audit quality. Therefore, the statutory auditor or the audit firm should not
issue his, her or its audit report until such an internal quality control
review has been completed.
(19)          
The results of the statutory audit should be presented
to the stakeholders in the audit report. In order to increase the confidence of
stakeholders in the financial statements of the audited entity, it is
particularly important that the audit report is well-founded and solidly
substantiated and its content expanded to include additional information
specific to the audit carried out. The audit report should in particular
include sufficient information on the methodology used in the audit, especially
how much of the balance sheet has been directly verified and how much has been
based on system and compliance testing, on the levels of materiality applied to
perform the audit, on the key areas of risk of material misstatements of the
annual and consolidated financial statements, on whether the statutory audit
was designed to detect fraud and, in the event of a qualified or adverse
opinion or a disclaimer of opinion, on the reasons for such decision.
(20)          
The value of statutory audit for the audited
entity would be particularly enhanced if the communication between the
statutory auditor or the audit firm, on the one hand, and the audit committee,
on the other hand, was reinforced. Further to the regular dialogue during the
carrying out of the statutory audit, it is important that the statutory auditor
or the audit firm submits to the audit committee an additional and more
detailed report on the results of the statutory audit. It should be possible to
make such additional detailed reports available to the supervisors of
public-interest entities, but not to the public.
(21)          
Statutory auditors or audit firms already
provide supervisors of public-interest entities with information on facts or
decisions which could constitute a breach of the rules governing the activities
of the audited entity or the impairment of the continuous functioning of the
audited entity. Supervisory tasks would also be facilitated if supervisors of
credit and financial institutions were required to establish a regular dialogue
with their statutory auditors and audit firms.
(22)          
In order to increase the confidence in and the
liability of the statutory auditors and audit firms carrying out the statutory
audit of public-interest entities, it is important that the transparency
reporting by statutory auditors and audit firms is increased. Therefore,
statutory auditors and audit firms should be required to disclose audited
financial information, showing in particular their total turnover divided into
audit fees paid by public-interest entities, audit fees paid by other entities
and fees for other services. They should also disclose financial information at
the level of the network to which they belong. The transparency reports of
audit firms should be completed by a statement on corporate governance with a
view to showing whether the audit firm maintains arrangements for sound
corporate governance. Additional supplementary information on audit fees should
be provided to competent authorities with a view to facilitating their
supervisory tasks.
(23)          
Audit committees, or bodies performing an
equivalent function within the audited entity, have a decisive role in
contributing to high-quality statutory audit. It is particularly important to
reinforce the independence and technical competence of the audit committee by
requiring that a majority of its members is independent and that at least one
member of the committee has competence in auditing and another one in auditing
and/or accounting. The Commission Recommendation of 15 February 2005 on the
role of non-executive or supervisory directors of listed companies and on the
committees of the (supervisory) board[26] sets out how audit
committees should be established and function. Considering, however, the
dimension of boards in companies with reduced market capitalisation and in
small and medium-sized public-interest entities, it would be appropriate that
the functions assigned to the audit committee for those entities, or to a body
performing equivalent functions within the audited entity, may be performed by
the administrative or supervisory body as a whole. Public-interest entities which
are UCITS or alternative investment funds should also be exempted from the
obligation to have an audit committee. This exemption takes into account the
fact that where those funds function merely for the purpose of pooling assets,
the employment of an audit committee is not appropriate. UCITS and alternative
investments funds, as well as their management companies, operate in a strictly
defined regulatory environment and are subject to specific governance
mechanisms such as controls exercised by their depositary.
(24)          
It is also important that the role of the audit
committee in the selection of a new statutory auditor or audit firm be
reinforced, for the benefit of a more informed decision of the general meeting
of shareholders or members of the audited entity. Hence, when making a proposal
to the general meeting, the board should explain whether it follows the
recommendation of the audit committee and, if not, why. The recommendation of
the audit committee should include at least two possible choices for the audit
engagement and a duly justified preference for one of them, so that the general
meeting can make a real choice. In order to provide a fair and proper
justification in its recommendation, the audit committee should use the results
of a mandatory selection procedure organised by the audited entity, under the
responsibility of the audit committee. In such selection procedure, the audited
entity should invite statutory auditors or audit firms, including smaller ones,
to present proposals for the audit engagement. Tender documents should contain
transparent and non-discriminatory selection criteria to be used for the
evaluation of proposals. Considering, however, that this selection procedure
could entail disproportionate costs for companies with reduced market
capitalisation or small and medium-sized public-interest entities having regard
to their dimension, it is appropriate to relieve such entities from this
obligation. 
(25)          
The right of the general meeting of shareholders
or members of the audited entity to choose the statutory auditor or the audit
firm would be of no value if the audited entity were to enter into a contract
with a third party providing for a restriction of such choice. Therefore any
contractual clause entered into by the audited entity with a third party
regarding the appointment or restricting the choice of a particular auditor or
audit firm should be considered null and void.
(26)          
The appointment of more than one statutory
auditor or audit firm by the public-interest entities would reinforce the
professional scepticism and contribute to increasing audit quality. Also, this
measure combined with the presence of smaller audit firms would facilitate the
development of the capacity of such firms, thus contributing to increasing the
choice of statutory auditors and audit firms for public-interest entities.
Therefore, the latter should be encouraged and incentivised to appoint more
than one statutory auditor or audit firm to carry out the statutory audit. 
(27)          
In order to address the familiarity threat and
therefore reinforce the independence of auditors and audit firms, it is
important to establish a maximum duration of the audit engagement of a
statutory auditor or audit firm in a particular audited entity. An appropriate
gradual rotation mechanism should also be established with regard to the most
senior personnel involved in the statutory audit, including the key audit
partners carrying out the statutory audit on behalf of the audit firm. It is
also important to provide for an appropriate period within which such statutory
auditor or audit firm may not carry out the statutory audit of the same entity.
In order to ensure a smooth transition, the former auditor should transfer a
handover file with relevant information to the incoming auditor.
(28)          
In order to protect the independence of the
auditor, it is important that dismissal should be possible only where there are
proper grounds and if those grounds are communicated to the authority or
authorities responsible for supervision. Where there are proper grounds, but
the audited entity does not act, the audit committee, the shareholders, the
competent authorities responsible for the supervision of auditors and audit
firms or the competent authorities responsible for the supervision of the
public-interest entity should be empowered to bring a case before a national
court on the dismissal of the auditor.
(29)          
In order to ensure a high level of investor and
consumer confidence in the internal market by avoiding conflicts of interests,
statutory auditors and audit firms should be subject to appropriate supervision
by competent authorities which are independent from the audit profession and which
have adequate capacity, expertise and resources. The national competent
authorities should have the necessary powers to undertake their supervisory
tasks, including the capacity to access documents, demand information from any
person and carry out inspections. They should specialize in the supervision of
financial markets, of compliance with financial reporting obligations or in
statutory audit oversight. However, it should be possible that the supervision
of the compliance with the obligations set on public-interest entities is
carried out by the competent authorities responsible for the supervision of
those entities. The funding of the competent authorities should be free from
any possible undue influence by statutory auditors or audit firms.
(30)          
The quality of supervision should improve if
there is effective cooperation between authorities charged with different tasks
at national level. Therefore, the authorities competent to supervise compliance
with the obligations on statutory audit of public-interest entities should
cooperate with the authorities responsible for the approval and registration of
statutory auditors and audit firms, with those supervising public-interest
entities and with the Financial Intelligence Units referred to in Directive
2005/60/EC of the European Parliament and of the Council of 26 October 2006 on
the prevention of the use of the financial system for the purpose of money
laundering and terrorist financing[27].
(31)          
External quality assurance for the statutory
audit is fundamental for high quality audit. It adds credibility to published
financial information and provides better protection of shareholders,
investors, creditors and other interested parties. Statutory auditors and audit
firms should therefore be subject to a system of quality assurance under the
responsibility of the competent authorities, thus ensuring objectivity and
independence from the audit profession. Quality assurance reviews should be
organised in such a manner that each statutory auditor or each audit firm
undertaking audits of public-interest entities is subject to a quality
assurance review at least every three years. The Commission Recommendation of 6
May 2008 on external quality assurance for statutory auditors and audit firms
auditing public interest entities[28] provides information on
how inspections should be undertaken. Quality assurance reviews should be
proportionate in view of the scale and complexity of the business of the
reviewed audit firm or statutory auditor.
(32)          
Investigations help to detect, prevent and
correct inadequate carrying out of the statutory audit of public-interest
entities. Therefore, competent authorities should be empowered to undertake
investigations of statutory auditors and audit firms.
(33)          
The market for the provision of statutory audit
services to public-interest entities evolves over time. It is therefore
necessary that competent authorities monitor the developments in the market,
particularly as regards possible limited choice of auditor and the risks that
arise from high market concentration.
(34)          
The demise of important audit firms may disrupt
the provision of audit services in the market and could result in further
structural accumulation of risk in the market. Therefore, competent authorities
should, as a preventive action, request the largest audit firms in each Member
State to establish contingency plans addressing a possible event threatening
the continuity of operations of the concerned firm. Such plans may identify
measures to prepare an orderly failure of the firm concerned.
(35)          
The transparency of the activities of competent
authorities should contribute to increase the confidence of investors and
consumers in the internal market. Therefore, competent authorities should be
required to regularly report on their activities and to publish individual
inspections reports.
(36)          
The cooperation between the competent
authorities of the Member States can make an important contribution to ensuring
consistently high quality in the statutory audit in the Union. Therefore, the competent
authorities of the Member States should cooperate with each other, where
necessary, for the purpose of carrying out their supervisory duties regarding
statutory audits. They should 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. The cooperation
between competent authorities would be particularly enhanced if organised
within the framework of the Joint Committee of European Supervisory Authorities
(ESA), under the leadership of the European Securities and Markets Authority
(ESMA) set up by Regulation (EU) No 1095/2010 of the European Parliament and of
the Council of 24 November 2010 establishing a European Supervisory Authority
(European Securities Market Authority)[29]. ESMA, with
the assistance of the European Banking Authority (EBA) set up by Regulation
(EU) No 1093/2010 of the European Parliament and of the Council of 24 November
2010 establishing a European Supervisory Authority (European Banking Authority)[30]
and the European Insurance and Occupational Pensions Authority (EIOPA) set up
by Regulation (EU) No 1094/2010 of the European Parliament and of the Council
of 24 November 2010 establishing a European Supervisory Authority (European
Insurance and Occupational Pensions Authority)[31], should
contribute to that cooperation by providing advice and guidelines to national
competent authorities.
(37)          
The scope of cooperation between the competent
authorities of Member States should include exchange of information,
cooperation with regard to quality assurance assurance reviews, assistance to
investigations related to the carrying out of statutory audits of
public-interest entities, including in cases where the conduct under
investigation does not constitute an infringment of any legislative or
regulatory provision in force in the Member States concerned and contingency
planning. The modalities of cooperation between the competent authorities of the
Member States may include the creation of colleges of competent authorities and
the delegation of tasks among themselves. The concept of network in which
auditors and firms operate should be taken into account in such cooperation.
Competent authorities and the European Supervisory Authorities should respect
appropriate confidentiality and professional secrecy rules.
(38)          
Recognition of the aptitude of statutory
auditors and audit firms to perform statutory audits of public-interest
entities should faciliate the access of auditors and firms to other clients.
Therefore, it is important to provide for a Quality Certificate of European
dimension which should be developed by ESMA. National competent authorities should
be involved in the examination of the applications for the certificate.
(39)          
The interrelation of capital markets calls for
empowering national competent authorities and the European Supervisory
Authorities to cooperate with supervisory authorities and bodies of third
countries regarding the exchange of information or quality assurance reviews.
However, where the cooperation with third country authorities is related to
audit working papers or other documents held by statutory auditors or audit
firms, the procedures of Directive 2006/43/EC should apply.
(40)          
Sustainable audit capacity and a competitive
market for statutory audit services in which there is a sufficient choice of
audit firms capable of carrying out statutory audits of public-interest
entities are required in order to ensure a smooth functioning of capital
markets. ESMA should report on the changes brought in the audit market
structure by this Regulation. When carrying such analysis, ESMA should take
into account the impact of the national civil liability rules for statutory
auditors on the structure of the audit market. Based on such report and other
appropriate evidence, the Commission should present a
report on the impact of the national liability rules for statutory auditors on
the audit market structure and should take the steps it considers appropriate
as a result of its findings. 
(41)          
In order to improve compliance with the
requirements of this Regulation and following the Commission Communication of 9
December 2010 entitled 'Reinforcing sanctioning regimes in the financial
sector'[32], the power to adopt
supervisory measures and the sanctioning powers of competent authorities should
be enhanced. Administrative pecuniary sanctions on statutory auditors, audit
firms and public-interest entities for identified violations should be
foreseen. The competent authorities should be transparent about the sanctions
and measures they apply. The adoption and publication of sanctions should
respect fundamental rights as laid down in the Charter of Fundamental Rights of
the European Union, in particular the right to respect for private and family
life (Article 7), the right to the protection of personal data (Article 8) and
the right to an effective remedy and to a fair trial (Article 47).
(42)          
Whistleblowers can bring new information to the
attention of competent authorities which assists them in detecting and
sanctioning irregularities, including fraud. However, whistleblowers may be
deterred from doing so for fear of retaliation, or may lack incentives to do
so. Member States should therefore ensure that adequate arrangements are in
place to encourage whistleblowers to alert them to possible breaches of this
Regulation and to protect them from retaliation. Member States may also provide
them with incentives for doing so; however, whistleblowers should only be
eligible for such incentives where they bring to light new information which
they are not already legally obliged to notify and where this information
results in a sanction for a breach of this Regulation. Member States should
also ensure that whistleblowing schemes they implement include mechanisms that
provide appropriate protection of a reported person, particularly with regard
the right to the protection of his personal data and procedures to ensure the
right of the reported person of defence and to be heard before the adoption of
a decision concerning him as well as the right to seek effective remedy before
a tribunal against a decision concerning him.
(43)          
In order to take account of developments in
auditing and the audit market, the Commission should be empowered to specify
technical requirements on the content of the handover file that the new
statutory auditor or audit firm should receive and on the establishment of a
European quality certificate for statutory auditors and audit firms carrying
out statutory audits of public-interest entities.
(44)          
In order to take account of the technical
developments in the financial markets, in auditing and the audit profession and
to specify the requirements laid down in this Regulation, the Commission should
be empowered to adopt delegated acts in accordance with Article 290 of the
Treaty on the Functioning of the European Union. In particular, the use of
delegated acts is necessary to adapt the list of related audit services and of
non-audit services as well as to set out the level of fees that ESMA could
charge for delivering the European Quality Certificate to statutory auditors
and audit firms. It is of particular importance that the Commission carries out
appropriate consultations during its preparatory work, including at expert
level. The Commission, when preparing and drawing up delegated acts, should
ensure a simultaneous, timely and appropriate transmission of relevant
documents to the European Parliament and to the Council.
(45)          
In order to ensure legal certainty and the
smooth transition to the regime introduced by this Regulation, it is important
to introduce a transitional regime regarding the entry into force of the
obligation to rotate audit firms, the obligation to organise a selection
procedure for the choice of audit firm and the conversion of audit firms into
firms that only provide audit services.
(46)          
Since the objectives of this Regulation, namely
clarifying and better defining the role of statutory audit regarding
public-interest entities, improving the information that the statutory auditor
or audit firm provides to the audited entity, investors and other stakeholers,
improving the communication channels between auditors and supervisors of
public-interest entities, preventing any conflict of interest arising from the
provision of non-audit services to public-interest entities, mitigating the
risk of any potential conflict of interest due to existing system of
"auditee selects and pays the auditor" or to familiarity threat,
facilitating the switching of statutory auditor or audit firm and the choice of
an audit provider to public-interest entities, increasing the choice of audit
providers to public-interest entities and improving the effectiveness,
independence and consistency of the regulation and supervison of statutory
auditors and audit firms providing statutory audits to public interest entities
including as regards cooperation at Union level, cannot be sufficiently
achieved by the Member States and can, therefore, by reason of their scale, be
better achieved at Union level, the Union may adopt measures, in accordance
with the principle of subsidiarity as set out in Article 5 of the Treaty on
European Union. In accordance with the principle of proportionality, as set out
in that Article, this Regulatoin does not go beyond what is necessary in order
to achieve those objectives.
(47)          
This Regulation respects the fundamental rights
and observes the principles recognised in particular by the Charter of
Fundamental Rights of the European Union, notably the right to respect for
private and family life (Article 7), the right to the protection of personal
data (Article 8), the freedom to conduct a business (Article 16), the right to
an effective remedy and to a fair trial (Article 47), the presumption of
innocence and right of defence (Article 48), the principles of legality and
proportionality of criminal offences and penalties (Article 49), the right not
to be tried or punished twice for the same offence (Article 50), and has to be
applied in accordance with those rights and principles,
HAVE ADOPTED THIS REGULATION:
Title I
Subject matter, scope and definitions
Article 1
Subject matter
This Regulation lays down requirements for
the carrying out statutory audit of annual and consolidated financial
statements of public-interest entities, rules on the organisation and selection
of statutory auditors and audit firms by public-interest entities to promote
their independence and the avoidance of conflicts of interest and rules on the
supervision of compliance by statutory auditors and audit firms with those
requirements.
Article 2
Scope
1.           This Regulation applies to
the following:
(a)     statutory auditors and audit firms who
carry out statutory audits of public-interest entities; 
(b)     public-interest entities.
2.           This Regulation applies
without prejudice to Directive 2006/43/EC.
Article 3
Definitions
For the purposes of this Regulation, the
definitions laid down in Article 2 of Directive 2006/43/EC shall apply, except for
the definitions of 'audit report' and 'competent authority'.
Article 4
Large public interest entities
For the purposes of this Regulation, 'large
public-interest entities' shall cover the following
(a)          in relation to entities defined
in point 13(a) of Article 2 of Directive 2006/43/EC, the largest 10 issuers of
shares in each Member State measured by the market capitalisation on the basis
of the end-year quotes and in any case all issuers of shares that had an
average market capitalisation of more than EUR 1 000 000 000 on the basis of end-year
quotes for the previous three calendar years; 
(b)          in relation to entities defined
in points 13(b) to (f) of Article 2 of Directive 2006/43/EC, any entity which
on their balance sheet date has a balance sheet total exceeding EUR 1 000 000
000;
(c)          in relation to entities defined
in points 13(g) and (h) of Article 2 of Directive 2006/43/EC, any entity which
on their balance sheet date has total assets under management exceeding EUR 1
000 000 000.
Title
II
Conditions for carrying out statutory audit of
public-interest entities
CHAPTER I
INDEPENDENCE AND AVOIDANCE OF CONFLICTS
OF INTEREST
Article 5
Independence and objectivity
A statutory auditor or audit firm shall
take all necessary steps to ensure that the carrying out of a statutory audit
of a public-interest entity is not affected by any existing or potential
conflict of interest or business or other relationship involving the statutory
auditor or audit firm carrying out the statutory audit and, where appropriate,
its network, managers, auditors, employees, any other natural persons whose
services are placed at the disposal or under the control of the statutory
auditor or audit firm, or any person directly or indirectly linked to the
statutory auditor or audit firm by control. 
Article 6
Internal organisation of auditors and
audit firms
1.                      
A statutory auditor or audit firm shall comply
with the following organisational requirements: 
(a)     an audit firm shall establish adequate
policies and procedures to ensure that its owners or shareholders as well as the
members of the administrative, management and supervisory bodies of the firm,
or of an affiliate firm, do not intervene in the carrying out of a statutory
audit in any way which jeopardises the independence and objectivity of the
statutory auditor who carries out the statutory audit on behalf of the audit
firm;
(b)     a statutory auditor or an audit firm
shall have sound administrative and accounting procedures, internal control
mechanisms, effective procedures for risk assessment, and effective control and
safeguard arrangements for information processing systems.
Those internal control mechanisms shall be
designed to secure compliance with decisions and procedures at all levels of
the audit firm or of the working structure of the statutory auditor.
A statutory auditor or an audit firm shall
implement and maintain decision-making procedures and organisational structures
which clearly and in a documented manner specify reporting lines and allocate
functions and responsibilities;
(c)     a statutory auditor or an audit firm
shall establish adequate policies and procedures to ensure that his, her or its
employees and any other natural persons whose services are placed at its
disposal or under its control and who are directly involved in the statutory
audit activities have appropriate knowledge and experience for the duties
assigned;
(d)     a statutory auditor or an audit firm
shall establish adequate policies and procedures to ensure that outsourcing of
important audit functions is not undertaken in such a way as to impair the
quality of the statutory auditor’s or audit firm’s internal control and the
ability of the competent authorities to supervise the statutory auditor's or
audit firm's compliance with the obligations laid down in this Regulation;
(e)     a statutory auditor or an audit firm
shall establish appropriate and effective organisational and administrative
arrangements to prevent, identify, eliminate or manage and disclose any threats
to independence referred to in Article 11(2);
(f)      a statutory auditor or an audit firm
shall establish appropriate procedures and standards for carrying out statutory
audits of public-interest entities, coaching, supervising and reviewing
employees activities and organising the structure of the audit file referred to
in Article 15(5);
(g)     a statutory auditor or an audit firm
shall establish an internal quality control system to ensure the quality of the
statutory audit of public-interest entities. The quality control system shall
at least cover the procedures and standards described in point (f). In the case
of an audit firm, the responsibility of the internal quality control system
shall be with a person that qualifies as statutory auditor; 
(h)     a statutory auditor or an audit firm
shall use appropriate systems, resources and procedures to ensure continuity
and regularity in the performance of its statutory audit activities;
(i)      a statutory auditor or an audit firm
shall establish a policy to preclude his, her or its involvement and that of
his, her or its employees in any criminal offence or breach of the law in the
conduct of their work. The statutory auditor or the audit firm shall also
establish appropriate and effective organisational and administrative
arrangements for dealing with and recording incidents which have or may have
serious consequences for the integrity of his, her or its statutory audit
activities;
(j)      a statutory auditor or an audit firm
shall have adequate remuneration policies providing sufficient performance
incentives to secure audit quality. In particular, compensation and performance
evaluation of employees shall not be contingent on the amount of revenue that
the statutory auditor or the audit firm derives from the audited entity;
(k)     a statutory auditor or an audit firm
shall monitor and evaluate the adequacy and effectiveness of his, her or its
systems, internal control and internal quality control mechanisms and
arrangements established in accordance with this Regulation and take
appropriate measures to address any deficiencies. A statutory auditor or an
audit firm shall in particular carry out an annual evaluation of the internal
quality control system referred to in point (g). A statutory auditor or an
audit firm shall keep records of the findings of that evaluation and any
proposed measure to modify the internal quality control system.
The policies and procedures referred to in the
first subparagraph shall be documented and communicated to the employees of the
statutory auditor or audit firm.
Any outsourcing of audit functions as referred
to in point (d) shall not affect the liability of the statutory auditor or
audit firm towards the audited entity.
2.                      
The statutory auditor or audit firm shall take
into consideration his, her or its size and complexity of activities when
complying with the requirements of paragraph 1 of this Article.
The statutory auditor or audit firm shall be
able to demonstrate to the competent authority referred to in Article 35(1)
that such compliance is proportionate to the size and complexity of activities
of the statutory auditor or audit firm. 
Article 7
Independence from the audited entity
1.           A statutory auditor or an
audit firm and any holder of voting rights in an audit firm shall be
independent of the audited entity and shall not be involved in the
decision-taking of the audited entity.
2.           A statutory auditor, an
audit firm, their key audit partners, their employees as well as any other
natural person whose services are placed at the disposal or under the control
of such auditor or firm and who is directly involved in statutory audit activities,
and persons closely associated with them within the meaning of Article 1(2) of Commission
Directive 2004/72/EC[33] shall not buy or sell or
engage in any transaction in any financial instrument issued, guaranteed, or
otherwise supported by any audited entity within their area of statutory audit
activities other than holdings in diversified collective investment schemes,
including managed funds such as pension funds or life insurance.
3.           Persons or firms referred
to in paragraph 2 shall not participate in or otherwise influence the
determination of a statutory audit of any particular audited entity if they:
(a)     own financial instruments of the
audited entity, other than holdings in diversified collective investment
schemes;
(b)     own financial instruments of any
entity related to an audited entity, the ownership of which may cause or may be
generally perceived as causing a conflict of interest, other than holdings in
diversified collective investment schemes;
(c)     have had a recent employment, business
or other relationship with the audited entity that may cause or may be
generally perceived as causing a conflict of interest.
4.           Persons or firms referred
to in paragraph 2 shall not solicit or accept money, gifts or favours from
anyone with whom the statutory audit or audit firm has a contractual
relationship.
5.           National measures on
professional ethics enacted pursuant to Article 21(1) of Directive 2006/43/EC
which are not compatible with paragraphs 2, 3 and 4 shall not apply.
Article 8
Employment by public-interest entities
of former statutory auditors or of employees of statutory auditors or audit
firms
1            A statutory auditor or a
key audit partner who carries out a statutory audit of a public-interest entity
on behalf of an audit firm shall not, before a period of at least two years has
elapsed since he or she resigned as a statutory auditor or key audit partner
from the audit engagement, take up any of the following duties:
(a)     take up a key management position in
the audited entity;
(b)     become a member of the audit committee
of the audited entity or, where such committee does not exist, of the body
performing equivalent functions to an audit committee; 
(c)     become a non-executive member of the
administrative body or a member of the supervisory body of the audited entity.
2.           Employees of a statutory
auditor or an audit firm carrying out a statutory audit of a public-interest
entity as well as any other natural person whose services are placed at the
disposal or under the control of such auditor or firm shall not, when such
employees or other natural persons are personally approved as statutory
auditors, before a period of at least one year has elapsed since he or she was
directly involved in the statutory audit activities, take up any of the duties
referred to in points (a), b) and (c) of paragraph 1.
Article 9
Audit fees
1.           Fees for the provision of
statutory audits to public-interest entities shall not be contingent fees. 
For the purposes of the first subparagraph,
contingent fees means fees for audit engagements calculated on a predetermined
basis relating to the outcome or result of a transaction or the result of the
work performed. Fees shall not be regarded as being contingent if a court or a
competent authority has established them.
2.           When the statutory auditor
or audit firm provides to the audited entity related financial audit services,
as referred to in Article 10(2), the fees for such services shall be limited to
no more than 10 % of the fees paid by the audited entity for the statutory
audit. 
3.           When the total fees
received from a public-interest entity subject to the statutory audit represent
either more than 20 % or, for two consecutive years, more than 15 % of the of
the total annual fees received by the statutory auditor or audit firm carrying out
the statutory audit, such auditor or firm shall disclose to the audit committee
the fact that the total of such fees represents more than 20 % or 15 %, as
appropriate, of the total fees received by the firm and the discussions
referred to in Article 11(4)(d) shall be undertaken. The audit committee shall
consider whether the audit engagement shall be subject to a quality control
review by another statutory auditor or audit firm prior to the issuance of the
audit report. 
When the total fees received from a
public-interest entity subject to the statutory audit represent, for two
consecutive years, 15 % or more of the total annual fees received by the
statutory auditor or audit firm carrying out the statutory audit, the auditor
or firm shall inform the competent authority referred to in Article 35(1) of
such situation. The competent authority referred to in Article 35(1) shall
decide on the basis of objective grounds provided by
the statutory auditor or the audit firm whether the statutory auditor or audit firm of such entity may
continue to carry out the statutory for an additional period which in any case
shall not be longer than two years.
Where the audited entity is exempted from the
obligation to have an audit committee, the audited entity shall decide which
body or organ of the entity shall engage with the statutory auditor or audit
firm for the purposes of the obligations set out in this paragraph.
Article 10
Prohibition of the provision of
non-audit services
1.           A statutory auditor or an
audit firm carrying out statutory audit of public-interest entities may provide
to the audited entity, to its parent undertaking and to its controlled
undertakings statutory audit services and related financial audit services.
Where the statutory auditor belongs to a network,
a member of such network may provide to the audited entity, to its parent
undertaking and to its controlled undertakings within the Union statutory audit
services or related financial audit services.
2.           For the purposes of this
Article, related financial audit services shall mean:
(a)     the audit or review of interim
financial statements;
(b)     providing assurance on corporate
governance statements;
(c)     providing assurance on corporate
social responsibility matters;
(d)     providing assurance on or attestation
of regulatory reporting to regulators of financial institutions beyond the
scope of the statutory audit and designed to assist regulators in fulfilling
their role, such as on capital requirements or specific solvency rations
determining how likely an undertaking will be to continue meeting its debt
obligations;
(e)     providing certification on compliance
with tax requirements where such attestation is required by national law; 
(f)      any other statutory duty related to
audit work imposed by Union legislation to the statutory auditor or audit firm.
3.           A statutory auditor or an
audit firm carrying out statutory audit of public-interest entities shall not
directly or indirectly provide to the audited entity, to its parent undertaking
and to its controlled undertakings non-audit services.
Where the statutory auditor belongs to a
network, no member of such network shall provide to the audited entity, to its
parent undertaking and to its controlled undertakings within the Union any non-audit
services.
For the purposes of this Article, non-audit
services shall mean:
(a) services entailing conflict of interest in
all cases:
(i) expert services unrelated to the audit, tax
consultancy, general management and other advisory services;
(ii) bookkeeping and
preparing accounting records and financial statements;
(iii) designing and
implementing internal control or risk management procedure related to the
preparation and/or control of financing information included in the financial
statements and advice on risk;
(iv) valuation services, providing fairness opinions or
contribution-in-kind reports;
(v) actuarial and
legal services, including the resolution of litigation;
(vi) designing and implementing financial
information technology systems for public-interest entities as referred to in
Article 2(13)(b) to (j) of Directive 2006/43/EC;
(vii) participating in the audit client's
internal audit and the provision of services related to the internal audit
function;
(viii) broker or dealer, investment adviser, or
investment banking services.
(b) services which may entail conflict of
interest: 
(i) human resources
services, including recruiting senior management; 
(ii) providing
comfort letters for investors in the context of the issuance of an
undertaking's securities;
(iii) designing
and implementing financial information technology systems for public-interest
entities as referred to in Article 2(13)(a) of Directive 2006/43/EC;
(iv) due diligence
services to the vendor or the buy side on potential mergers and acquisitions
and providing assurance on the audited entity to other parties at a financial
or corporate transaction.
By derogation from the
first and second subparagraphs, the services mentioned in point (b)(iii) and
(iv) may be provided by the statutory auditor or the
audit firm, subject to prior approval by the competent authority
referred to in Article 35(1).
By derogation from the first and second subparagraphs,
the services mentioned in point (b)(i) and (ii) may be provided by the
statutory auditor or the audit firm, subject to prior approval by the
audit committee as referred to in Article 31 of this Regulation.
4.           When a member of the
network to which the statutory auditor or the audit firm carrying out statutory
audit of a public-interest entity belongs provides non-audit services to an
undertaking incorporated in a third country controlled by the audited
public-interest entity, the statutory auditor or the audit firm concerned shall
assess whether his, her or its independence would be compromised by such
provision of services by the member of the network.
If his, her or its independence is affected,
the statutory auditor or the audit firm shall apply safeguards in order to
mitigate the threats caused by such provision of services in a third country.
The statutory auditor or the audit firm may continue to carry out the statutory
audit of the public-interest entity only if he, she or it can justify, in
accordance with Article 11, that such provision of services does not affect
his, her or its professional judgement and the audit report.
Being involved in the decision-taking of the
audited entity and the provision of the services referred to in points (ii) and
(iii) of paragraph 3(a) shall be considered as affecting such independence in
all cases.
The provision of the services referred to in
points (i) and (iv) to (viii) of paragraph 3(a) shall be presumed to affect
such independence.
The statutory auditor or the audit firm may
consult the competent authority for an opinion on this issue.
5.           Where an audit firm
generates more than one third of its annual audit revenues from large
public-interest entities and belongs to a network whose members have combined
annual audit revenues which exceed EUR 1 500 million within the European Union,
it shall comply with the following conditions:
(a)     it shall not directly or indirectly
provide to any public interest entity non-audit services;
(b)     it shall not belong to a network which
provides non-audit services within the Union; 
(c)     any entity which provides the services
listed in paragraph 3 shall not directly or indirectly hold more than 5 % of
the capital or of the voting rights in the audit firm;
(d)     the entities which provide the
services listed in paragraph 3shall not directly or indirectly hold together more
than 10 % of the capital or of the voting rights in the audit firm;
(e)     such audit firm shall not directly or
indirectly hold more than 5 % of the capital or of the voting rights in any
entity which provides the services listed in paragraph 3.
6.           The Commission shall be
empowered to adopt delegated acts in accordance with Article 68 for the purpose
of adapting the list of related financial audit services referred to in
paragraph 2 and the list of non-audit services referred to in paragraph 3 of
this Article. When using such powers, the Commission shall take into account
developments in auditing and the audit profession.
Article 11
Preparation for the statutory audit and
assessment of threats to independence
1.           Before accepting or
continuing an engagement for a statutory audit of a public-interest entity, a
statutory auditor or audit firm shall assess and document the following: 
–              
whether he, she or it complies with the internal
organisation requirements of Article 6;
–              
whether he, she or it complies with the
requirements of Articles 7, 9 and 10;
–              
whether he, she or it has the competent
employees, time and resources to carry out the audit in an appropriate manner;
–              
whether, in the case of an audit firm, the key
audit partner is approved as statutory auditor in the Member State requiring
the statutory audit; 
–              
whether the conditions of Article 33 are complied
with; 
–              
without prejudice to Directive 2005/60//EC, the
integrity of the public-interest entity. 
2.           The statutory auditor or
audit firm shall also assess whether there are threats to his, her or its
independence.
The statutory auditor or audit firm shall not
carry out a statutory audit if there is any direct or indirect financial,
business, employment or other relationship between the statutory auditor, audit
firm, or network and the audited entity from which an objective, reasonable and
informed third party would conclude that the statutory auditor's or audit
firm's independence is compromised.
If the statutory auditor's or audit firm's
independence is affected by threats of self-review or self-interest, the
statutory auditor or audit firm shall not carry out the statutory audit.
If the statutory auditor's or audit firm's
independence is affected by threats of advocacy, familiarity or trust or
intimidation, the statutory auditor or audit firm shall apply safeguards in
order to mitigate those threats. If the significance of the threats compared to
the safeguards applied is such that his, her or its independence is
compromised, the statutory auditor or audit firm shall not carry out the
statutory audit.
3.           A statutory auditor or
audit firm shall keep records of the assessments referred to in paragraphs 1
and 2 and shall document in the audit working papers all significant threats to
his, her or its independence as well as the safeguards applied to mitigate
those threats. 
4            A statutory auditor or
audit firm shall:
(a)     confirm annually in writing to the
audit committee his, her or its independence from the audited entity;
(b)     confirm annually in writing to the
audit comittee the names of the audit partners, senior manager and manager of
the core team conducting the statutory audit, certifying that there are no
conflicts of interest;
(c)     request permission from the audit
committee to provide the non-audit services referred to in Article 10(3)(b)(i)
and (ii) to the audited entity;
(d)     request permission from the competent
authority referred to in Article 35(1) to provide the non-audit services referred
to in Article 10(3)(b)(iii) and (iv) to the audited entity;
(e)     discuss with the audit committee the
threats to their independence and the safeguards applied to mitigate those
threats, as documented by them pursuant to paragraph 3.
Where the audited entity is exempted from the
obligation to have an audit committee, the audited entity shall decide which body
or organ of the entity shall perform the functions assigned to the audit
committee in this paragraph.
CHAPTER II
CONFIDENTIALITY AND PROFESSIONAL SECRECY
Article 12
Confidentiality and professional secrecy
Statutory auditors or audit firms,
including those who have ceased to be engaged in a particular audit assignment
and former statutory auditors or audit firms, shall not invoke the rules on
confidentiality and professional secrecy referred to in Article 23(1) of
Directive 2006/43/EC to prevent the application of the provisions of this
Regulation. 
Article 13
Disclosure to third-country auditors and
to third country authorities
1.           Where a statutory auditor
or an audit firm carries out statutory audit of a public-interest entity which
is part of a group of undertakings whose parent undertaking is situated in a
third country, the confidentiality and professional secrecy rules referred to
in Article 23(1) of Directive 2006/43/EC shall not impede the transfer by the
statutory auditor or audit firm of relevant documentation of the audit work
performed to the group auditor situated in a third country if such
documentation is exclusively necessary for the preparation of the audit of
consolidated financial statements of the parent undertaking. 
The transfer of information to the group
auditor situated in a third country shall comply with Chapter IV of Directive
95/46/EC and the applicable national rules on personal data protection.
2.           A statutory auditor or
audit firm that carries out statutory audit of a public-interest entity which
has issued securities in a third country or which forms part of a group issuing
statutory consolidated financial statements in a third country may only
transfer the audit working papers or other documents related to the audit of
that entity that he, she or it holds to the competent authorities in the
relevant third countries under the conditions set out in Article 47 of
Directive 2006/43/EC.
CHAPTER III
PERFORMANCE OF THE STATUTORY AUDIT 
Article 14
Scope of the statutory audit
1.           When carrying out the
statutory audit of a public-interest entity, the statutory auditor or audit
firm shall take the necessary steps with a view to forming an opinion as to
whether the annual or consolidated financial statements of the public-interest
entity give a true and fair view in accordance with the relevant financial
reporting framework and, where appropriate, whether such annual or consolidated
financial statements comply with statutory requirements as referred to in
Article 22. 
Such steps shall include at least the
requirements set out in Articles 15 to 20.
The opinion of the statutory auditor or audit
firm shall be expressed in accordance with Articles 21 to 25.
2.           Without prejudice to the
reporting requirements as referred to in Articles 22 and 23, the scope of
statutory audit shall not include the assurance on the future viability of the
audited entity nor the efficiency or effectiveness with which the management or
administrative body has conducted or will conduct the affairs of the entity.
Article 15
Professional scepticism
When carrying out the statutory audit of a
public-interest entity, the statutory auditor or audit firm shall maintain
professional scepticism throughout the audit, recognizing the possibility that
a material misstatement due to facts or behaviour indicating irregularities,
including fraud or error could exist, notwithstanding the auditor's or firm's
past experience of the honesty and integrity of the audited entity's management
and of the persons charged with its governance. 
The statutory auditor or the audit firm
shall maintain professional scepticism in particular when reviewing management estimates
relating to fair values and the impairment of goodwill and other intangible and
future cash flow relevant to the consideration of the going concern.
For the purposes of this Article,
'professional scepticism' means an attitude that includes a questioning mind,
being alert to conditions which may indicate possible misstatement due to error
or fraud and a critical assessment of audit evidence.
Article 16
Organisation of the work
1.           When the statutory audit
of a public-interest entity is carried out by an audit firm, that audit firm
shall designate at least one key audit partner. The audit firm shall provide
the designated audit partner(s) with sufficient ressources to carry out his,
her or their duties appropriately. 
Securing audit quality, independence and
competence shall be the main criteria for the audit firm to select the key
audit partner(s) to be designated.
The designated audit partner(s) shall be
actively involved in the carrying out of the statutory audit.
2.           When the statutory audit
of a public-interest entity is carried out by a statutory auditor, he or she
shall devote sufficient time to the engagement and shall assign sufficient ressources
among his or her employees to carry our his or her duties appropriately. 
3.           The statutory auditor or
the audit firm shall keep records of the cases in which their employees do not
respect this Regulation. They shall also keep records of any consequence
thereof, including the measures taken towards those employees and the measures
taken to modify the internal quality control system. The statutory auditor or
the audit firm shall prepare an annual report with an overview of any such
measures taken and communicate it to the employees.
When the statutory auditor or the audit firm
ask external experts for advice, he, she or it shall document the request made
and advice received. 
4.           A statutory auditor or an
audit firm shall maintain a client account record. Such record shall include
the following data for each audit client:
(a)     the name, the address and the place of
business;
(b)     in the case of an audit firm, the key
audit partner(s);
(c)     the fees charged for the statutory
audit and the fees charged for other services in any financial year.
5.           A statutory auditor or an
audit firm shall create an audit file for each statutory audit carried out. The
audit file shall contain at least the following data and documents, either in
paper form or in electronic form:
(a)     the contract between the statutory
auditor or the audit firm and the audited entity, and any amendments thereto;
(b)     the correspondence with the audited
entity related to the statutory audit;
(c)     an audit plan setting out the probable
scope and method of the statutory audit;
(d)     a description of the nature and the
extent of the auditing activities carried out;
(e)     the starting and ending dates of the
phases of audit procedures set out in the audit plan;
(f)      the principal findings of the audit
procedures carried out;
(g)     the conclusions drawn from the
findings referred to under point (f);
(h)     the opinion of the statutory auditor
or the key audit partner as evidenced by the drafts of the reports referred to
in Articles 22 and 23; 
(i)      the data recorded pursuant to Article
11(3), Article 16(3), Articles 17 and 18 and 19(6); 
(j)      other relevant data and documents
that are of importance in support of the reports referred to in Articles 22 and
23 and for monitoring compliance with this Regulation and other applicable
legal requirements. 
The audit file shall be closed no later than
two months after the date of signature of the audit report referred to in
Article 22. 
6.           The statutory auditor or
the audit firm shall keep records of any complaints about the performance of
the statutory audits. 
Article 17
Market integrity
1.           Where an incident which
has or may have serious consequences for the integrity of the statutory audit
activities of a statutory auditor or an audit firm occurs, the statutory
auditor or the audit firm shall: 
(a)     keep record of the incident;
(b)     take appropriate measures with a view
to managing the consequences of the incident and prevent any recurrence;
(c)     inform the competent authority
referred to in Article 35(1) of the incident.
The record referred in point (a) of the first
subparagraph shall include the facts and circumstances of the incident,
information about the person or persons involved and details of the measures
that have been taken pursuant to point (b) of that subparagraph.
2.           Without prejudice to
Directive 2005/60/EC, when a statutory auditor or an audit firm carrying out
the statutory audit of a public-interest entity suspects or has reasonable
grounds to suspect that facts or behaviour indicating irregularities, including
fraud with regard to the financial statements of the audited entity is being or
has been committed or attempted, he, she or it shall inform the audited entity
and invite it to investigate the matter and take appropriate measures to deal
with such irregularities and to prevent any recurrence of such irregularities
in the future.
Where the audited entity does not investigate
the matter or does not take any measures, or where the statutory auditor or
audit firm believes that the measures taken by the audited entity are not
adequate to deal with such irregularities, the statutory auditor or audit firm
shall inform the competent authorities supervising public-interest entities of
such irregularities. 
The disclosure in good faith to the competent
authorities, by the statutory auditor or audit firm, of any fact referred to in
the first subparagraph shall not constitute a breach of any contractual or
legal restriction on disclosure of information and shall not involve such
persons in liability of any kind. 
Article 18
Audit of consolidated financial
statements
1            In the case of a statutory
audit of the consolidated financial statements of a group of undertakings where
the parent undertaking is a public-interest entity, the group auditor shall:
(a)     bear the full responsibility for the
audit report referred to in Article 22 and the additional report to the audit
committee referred to in Article 23 in relation with the consolidated financial
statements; 
(b)     document which audit work is performed by
third-country auditor(s), statutory auditor(s), third-country audit entity(ies)
or audit firm(s) for the purpose of the group audit; 
(c)     carry out a review and maintain
documentation of his, her or its review of the audit work performed by
third-country auditor(s), statutory auditor(s), third-country audit entity(ies)
or audit firm(s) for the purpose of the group audit. The documentation retained
by the group auditor shall enable the relevant competent authority to review
the work of the group auditor properly.
For the purpose of point (c) of the first
subparagraph, the group auditor shall secure the agreement of the third-country
auditor(s), statutory auditor(s), third-country audit entity(ies) or audit
firm(s) to the transfer of relevant documention during the conduct of the audit
of consolidated financial statements, as a condition of the reliance by the
group auditor on the work of that third-country auditor(s), statutory
auditor(s), third-country audit entity(ies) or audit firm(s).
2.           Where the group auditor is not
in a position to comply with point (c) of the first subparagraph of paragraph
1, he, she or it shall take appropriate measures and inform the competent
authority referred to in Article 35(1) accordingly. 
Such measures may include carrying out additional
statutory audit work, either directly or by outsourcing such tasks, in the
relevant subsidiary of the public-interest entity.
3.           Where the group auditor is
subject to a quality assurance review or an investigation concerning the
statutory audit of the consolidated financial statements of a group of
undertakings where the parent undertaking is a public-interest entity, the
group auditor shall, when requested, make available to the competent authority
the relevant documention he, she or it mantains concerning the audit work
performed by third-country auditor(s), statutory auditor(s), third-country
audit entity(ies) or audit firm(s) for the purpose of the group audit,
including the working papers relevant to the group audit. 
The competent authority shall request
additional documentation on the audit work performed by statutory auditor(s) or
audit firm(s) for the purpose of the audit group to the relevant competent
authorities pursuant to Chapter III of Title IV of this Regulation.
When a component of a group of undertakings is
audited by auditor(s) or audit entity(ies) from a third country, the competent
authority shall request additional documentation on the audit work performed by
third-country auditor(s) or third-country audit entity(ies) to the relevant
competent authorities from third countries through the working arrangements
referred to in Article 47 of Directive 2006/43/EC. 
By way of derogation from the third
subparagraph, when a component of a group of undertakings is audited by
auditor(s) or audit entity(ies) from a third country that has no working
arrangement as referred to in Article 47 of Directive 2006/43/EC, the group
auditor shall, when requested, also be responsible for ensuring proper delivery
of the additional documentation of the audit work performed by third-country
auditor(s) or audit entity(ies), including the working papers relevant to the
group audit. To ensure such delivery, the group auditor shall retain a copy of
such documentation, or alternatively agree with the third-country auditor(s) or
audit entity(ies) his, her or its proper and unrestricted access upon request,
or take any other appropriate action. Where audit working papers for legal or
other reasons cannot be passed from a third country to the group auditor, the
documentation retained by the group auditor shall include evidence that he or
she has undertaken the appropiate procedures in order to gain access to the
audit documentation, and in the case of impediments other than legal ones
arising from the legislation of the third country, evidence supporting such an
impediment. 
Article 19
Internal quality control review
1.           Before the reports
referred to in Articles 22 and 23 are issued, an internal quality control
review shall be performed to assess whether the statutory auditor or the key
audit partner could reasonably have come to the opinion and conclusions
expressed in the draft of these reports. 
2.           The internal quality
control review shall be performed by an internal quality control reviewer. Such
reviewer shall be a statutory auditor who is not involved in the performance of
the statutory audit to which the internal quality review relates.
3.           When reviewing the
internal quality control, the reviewer shall record at least the following:
(a)     the oral and written information
provided by the statutory auditor or key audit partner to support the main
findings of the audit procedures carried out and the conclusions drawn
from those findings, whether or not at the request of the internal quality
control reviewer;
(b)     the audited financial statements;
(c)     the main findings of the audit
procedures carried out and the conclusions drawn from those findings;
(d)     the opinions of the statutory auditor
or key audit partner, as expressed in the draft of the reports referred to in
Articles 22 and 23;
4.           The internal quality
control review shall at least assess the following elements:
(a)     the independence of the statutory
auditor or audit firm with from the audited entity;
(b)     the significant risks that the
statutory auditor or key audit partner has identified during the performance of
the statutory audit and the measures that he or she has taken to adequately
manage those risks;
(c)     the reasoning of the statutory auditor
or key audit partner, in particular with regard to the materiality and the
significant risks referred to in point (b);
(d)     any request for advice to external
experts and the implementation of such advice;
(e)     the nature and scope of the corrected
and uncorrected misstatements in the financial statements that were identified
during the performance of the audit;
(f)      the subjects discussed with the audit
committee and the management and/or supervisory bodies of the audited entity; 
(g)     the subjects discussed with competent
authorities and, if applicable, with other third parties; 
(h)     whether the documents and information
selected from the file satisfactorily reflect the positions taken by the
employees involved in the audit, and whether such documents and information
support the opinion of the statutory auditor or key audit partner as expressed
in the draft of the reports referred to in Articles 22 and 23.
5.           The internal quality
control reviewer shall discuss the results of the internal quality control
review with the statutory auditor or the key audit partner. The statutory
auditor or the audit firm shall determine the procedure to be followed when the
reviewer and the statutory auditor or the key audit partner do not agree on the
results of the review.
6.           The statutory auditor or
the audit firm shall keep record of the results of the internal quality control
review, together with the considerations underlying those results. 
Article 20
Use of international standards on
auditing 
The statutory auditor(s) or the audit
firm(s) shall comply with the international auditing standards referred to in Article
26 of Directive 2006/43/EC when carrying out the statutory audit of
public-interest entities as long as those standards are in conformity with the
requirements of this Regulation. 
CHAPTER IV
AUDIT REPORTING
Article 21
Results of the statutory audit
The statutory auditor or the audit firm
shall present the results of the statutory audit in the following reports:
–                        
an audit report in accordance with Article 22;
–                        
an additional report to the audit committee in
accordance with Article 23.
The statutory auditor or the audit firm
shall present the results of the statutory audit to the audit committee of the
audited entity in accordance with Article 24 and to supervisors of
public-interest entities in accordance with Article 25.
Article 22
Audit Report
1.           The statutory auditor or
the audit firm shall present the results of the statutory audit of the
public-interest entity in an audit report. 
2.           The audit report shall be
in writing. It shall at least:
(a)     identify the entity whose annual or
consolidated financial statements have been audited; 
(b)     specify the annual or consolidated financial
statements and the date and period they cover; 
(c)     explain, where additional reports have
been reviewed, the scope of such review; 
(d)     identify which body within the audited
entity appointed the statutory auditor(s) or the audit firm(s); 
(e)     indicate the date of the appointment
and the period of total uninterrupted engagement including previous renewals
and reappointments;
(f)      indicate that the statutory audit was
conducted in accordance with the international standards on auditing as
referred to in Article 20; 
(g)     identify the financial reporting
framework that has been applied in the preparation of the financial statements;

(h)     describe the used methodology,
including how much of the balance sheet has been directly verified and how much
has been based on system and compliance testing; 
(i)      explain any variation in the
weighting of substantive and compliance testing when compared to the previous
year, even if the previous year's statutory audit had been conducted by another
statutory auditor(s) or audit firm(s);
(j)      lay out the details of the level of
materiality applied to perform the statutory audit;
(k)     identify key areas of risk of material
misstatement of the annual or consolidated financial statements, including
critical accounting estimates or areas of measurement uncertainty;
(l)      provide a statement on the the
situation of the audited entity or, in case of the statutory audit of consolidated
financial statements, of the parent undertaking and the group, especially an
assessment of the entity's or the parent undertaking's and group's ability to
meet its/their obligation in the forseeable future and therefore continue as a
going concern; 
(m)    assess the entity's or, in case of
consolidated financial statements, the parent undertaking's internal control
system, including significant internal control deficiencies identified during
the statutory audit, as well as the bookkeeping and accounting system;
(n)     explain to what extent the statutory
audit was designed to detect irregularities, including fraud;
(o)     indicate and explain any violation of
accounting rules or violation of laws or the articles of incorporations,
accounting policy decisions and other matters that are significant for the
governance of the entity; 
(p)     confirm that the audit opinion is
consistent with the additional report to the audit committee referred to in
Article 23;
(q)     declare that the non-audit services
referred to in Article 10(3) were not provided and that the statutory
auditor(s) or the audit firm(s) remained completely independent in conducting
the audit. Where the statutory audit was carried out by an audit firm, the
report shall identify each member of the audit engagement team and shall state
that all members remained completely independent and had no direct or indirect
interest in the audited entity;
(r)      indicate the non-audit services
referred to in Article 10(3)(b)(i) and (ii) that the audit committee allowed
the statutory auditor or the audit firm to provide to the audited entity;
(s)     indicate the non-audit services
referred to in Article 10(3)(b)(iii)
and (iv) that the competent authority referred to in
Article 35(1) allowed the statutory auditor or the audit firm to provide to the
audited entity;
(t)      give an opinion which shall state
clearly the opinion of the statutory auditor(s) or the audit firm(s) as to
whether the annual or consolidated financial statements give a true and fair
view and have been prepared in accordance with the relevant financial reporting
framework and, where appropriate, whether the annual or consolidated financial
statements comply with statutory requirements; the audit opinion shall be
either unqualified, qualified, an adverse opinion or, if the statutory
auditor(s) or audit firm(s) are unable to express an audit opinion, a
disclaimer of opinion. In case of a qualified or an adverse opinion or a
disclaimer of opinion, the report shall explain the reasons of such decision;
(u)     refer to any matters to which the
statutory auditor(s) or the audit firm(s) draw attention by way of emphasis
without qualifying the audit opinion;
(v)     give an opinion concerning the
consistency or otherwise of the annual report with the annual financial
statements for the same fiscal year; 
(w)    identify where the statutory auditor(s)
or audit firm(s) is established.
3.           When more than one
statutory auditor or audit firm have been appointed to carry out the statutory
audit of the public-interest entity, they shall agree on the results of the
statutory audit and submit a joint report and opinion. In case of disagreement,
each statutory auditor or audit firm shall submit his, her or its opinion
separately. If one statutory auditor or audit firm qualifies his, her or its
opinion, submits an adverse opinion or a disclaimer of opinion, the overall
opinion shall be considered as qualified, adverse opinion or a disclaimer of
opinion. In a separate paragraph each statutory auditor or audit firm shall
state the reasons of disagreement.
4.           The audit report shall not
be longer than four pages or 10000 characters (without spaces). It shall not
contain any cross-references to the additional report to the audit committee referred
to in Article 23.
5.           The audit report shall be
signed and dated by the statutory auditor(s) or the audit firm(s). Where an
audit firm carries out the statutory audit, the audit report shall be signed by
at least the statutory auditor(s) carrying out the statutory audit on behalf of
the audit firm. 
6.           Article 35 of Directive [XXX]
on the annual financial statements, consolidated financial statements and
related reports of certain types of undertakings shall not apply to audit
reports of public-interest entities. 
7.           The statutory auditor or
audit firm shall not use the name of any competent authority in such a way that
would indicate or suggest endorsement or approval by that authority of the
audit report. 
Article 23
Additional report to the audit committee
1.           The statutory auditor(s)
or the audit firm(s) carrying out statutory audit of public-interest entities
shall submit an additional report to the audit committee of the audited entity.
If the audited entity does not have an audit
committee, the additional report shall be submitted to the body performing
equivalent functions within the audited entity.
The audit committee or the body performing
equivalent functions shall be allowed to transmit the additional report to the
management, administrative or supervisory body of the audited entity. 
The additional report shall be disclosed to the
general meeting of the audited entity if the management or administrative body
of the audited entity so decides.
2.           The additional report to
the audit committee shall be in writing. It shall explain in detail and
explicitly the results of the statutory audit carried out and shall at least: 
(a)     include a declaration of independence
as provided for in point (q) of Article 22(2);
(b)     identify the dates of the meetings
with the audit committee or the body performing equivalent functions within the
audited entity;
(c)     identify the dates of the meetings, if
any, with the management, administrative or supervisory body of the audited
entity; 
(d)     describe the appointment procedure;
(e)     describe the distribution of tasks
among the statutory auditor(s)s and/or the audit firm(s); 
(f)      indicate and explain judgments about
material uncertainty that may cast doubt about the entity's ability to continue
as a going concern;
(g)     determine in detail whether the
bookkeeping, the accounting, all audited documents, the annual or consolidated
financial statements and possible additional reports show appropriateness;
(h)     indicate and explain in detail all
instances of non-compliance, including non-material instances as far as it is
considered to be important to the audit committee in order to fulfil its tasks;
(i)      assess the valuation methods applied
to the various items in the annual or consolidated financial statements including
any impact of changes of such;
(j)      provide full details of all
guarantees, comfort letters, undertakings of public intervention and other
support measures that have been relied upon when making a going concern
assessment;
(k)     confirm the attendance at stock takes
as well as other instances of physical verification, in case such stock takes
or verifications took place; 
(l)      indicate and explain the principles
of consolidation in the case of a statutory audit of consolidated financial
statements; 
(m)    indicate which audit work is performed
by third-country auditor(s), statutory auditor(s), third-country audit
entity(ies) or audit firm(s) in case of a statutory audit of consolidated financial
statements;
(n)     indicate whether all requested
explanations and documents were provided by the audited entity.
3.           In case of disagreement
between the appointed statutory auditors or audit firms on auditing procedures,
accounting rules or any other issue regarding the conduct of the statutory
audit, the reasons for such disagreement shall be explained in the additional
report to the audit committee.
4.           The additional report to
the audit committee shall be signed and dated by the statutory auditor(s) or
the audit firm(s). Where an audit firm carries out the statutory audit, the
additional report to the audit committee shall be signed by at least the
statutory auditor(s) carrying out the statutory audit on behalf of the audit
firm.
5.           Upon request, the
statutory auditor(s) or the audit firm(s) shall make available without delay
the additional report to the competent authorities.
Article 24
Oversight of the statutory audit by the
audit committee
The audit committee of the public-interest
entity shall monitor the work of the statutory auditor(s) or audit firm(s)
carrying out the statutory audit.
The statutory auditor(s) or audit firm(s)
shall report to the audit committee on key matters arising from the statutory
audit, and in particular on material weaknesses in internal control in relation
to the financial reporting process. Upon request of any of the parties, the
statutory auditor(s) or audit firm(s) shall discuss these matters with the audit
committee. 
The audit committee shall inform the
administrative or supervisory body of the audited entity of the outcome of the
statutory audit. The audit committee shall explain how the statutory audit
contributed to the integrity of financial reporting and which was its role in
this process. 
In is the instance of the audited entity
being exempted from the obligation to have an audit committee, the audited
entity shall decide which body or organ of the entity shall engage with the
statutory auditor or audit firm for the purposes of the obligations set out in
this Article.
Article 25
Report to supervisors of public-interest
entities
1.           Without prejudice to Article
55 of Directive 2004/39/EC, Article 53 of Directive 2006/48/EC of the European
Parliament and of the Council[34], Article 15(4) of
Directive 2007/64/EC, Article 106 of Directive 2009/65/EC, the first paragraph
of Article 3 of Directive 2009/110/EC and Article 72 of Directive 2009/138/EC of
the European Parliament and of the Council[35], the
statutory auditor or audit firm carrying out the statutory audit of a
public-interest entity shall have a duty to report promptly to the competent
authorities supervising public-interest entities any fact or decision
concerning that public-interest entity of which he, she or it has become aware
while carrying out that statutory audit and which is liable to bring about any
of the following:
(a)     a material breach of the laws,
regulations or administrative provisions which lay down, where appropriate, the
conditions governing authorisation or which specifically govern pursuit of the
activities of such public-interest entity;
(b)     the impairment of the continuous
functioning of the public-interest entity; 
(c)     a refusal to certify the financial
statements or the expression of reservations.
The statutory auditor or the audit firm shall
also have a duty to report any facts and decisions of which he, she or it
becomes aware in the course of carrying out the statutory audit of an
undertaking having close links with the public-interest entity for which he,
she or it is also carrying out the statutory audit.
2.           Competent authorities
supervising credit institutions and insurance undertakings shall establish
regular a dialogue with the statutory auditors and audit firms carrying out the
statutory audit of those institutions and undertakings. 
In order to facilitate the exercise of the
tasks referred to in the first subparagraph, EBA and EIOPA shall issue
guidelines addressed to the competent authorities supervising credit institutions
and insurance undertakings, in accordance with Article 16 of Regulation (EU) No
1093/2010 and of Regulation (EU) No 1094/2010, respectively. 
3.           The disclosure in good
faith to the competent authorities, by the statutory auditor or audit firm, of
any fact or decision referred to in paragraph 1 or of any fact during the
dialogue foreseen in paragraph 2 shall not constitute a breach of any
contractual or legal restriction on disclosure of information and shall not
involve such persons in liability of any kind.
CHAPTER V
TRANSPARENCY REPORTING BY STATUTORY
AUDITORS AND AUDIT FIRMS AND RECORD KEEPING
Article 26
Disclosure of financial information
1.           An audit firm that carries
out statutory audits of public-interest entities shall make public its annual
financial report within the meaning of Article 4(2) of Directive 2004/109/EC at
the latest four months after the end of each financial year. 
Statutory auditors who carry out statutory
audits of public-interest entities shall publish their annual income statement.

2.           The annual financial
report and the annual income statement shall show the total turnover divided
into fees from the statutory audit of annual and consolidated financial statements
of public-interest entities and entities belonging to a group of undertakings
whose parent undertaking is a public-interest entity, fees from the statutory
audit of annual and consolidated financial statements of other entities and
fees charged for related financial audit services as defined in Article 10(2). 
The annual financial report or the annual
income statement shall be audited in accordance with the provisions of this
Regulation.
3.           Where the statutory
auditor or the audit firm belongs to a network, the statutory auditor or the
audit firm shall provide the following additional information in the annual
financial report or as an annex to the annual income statement:
(a)     the name of each statutory auditor or
audit firm belonging to the network;
(b)     the country(ies) in which each
statutory auditor or audit firm belonging to the network is qualified as
statutory auditor or has his, her or its registered office, central
administration or principal place of business;
(c)     the total turnover generated by the
statutory auditors and audit firms belonging to the network, resulting from the
statutory audit of annual and consolidated financial statements; 
(d)     the audited consolidated financial
statements for the network and, where there is a legal entity governing the
network, the audited financial statements of such legal entity prepared in
accordance with Article 4(3) of Directive 2004/109/EC. 
By derogation from the first subparagraph, the
statutory auditor or the audit firm may not provide the additional information
where it is disclosed by the legal entity governing the network or another
representative of the network. In this case, the statutory auditor or the audit
firm shall indicate in the annex to the annual income statement or to the
annual financial report where that information is accessible.
4.           The annual financial report
or annual income statement shall be published on the website of the statutory
auditor or the audit firm and shall remain available on that website for at
least five years. 
              Statutory auditors and
audit firms shall communicate to the competent authorities that the annual
income statement or to the annual financial report have been published on the
websites of the statutory auditor or the audit firm. 
Article 27
Transparency Report
1.           A statutory auditor or an
audit firm that carries out statutory audit(s) of public-interest entities
shall make public an annual transparency report at the latest three months
after the end of each financial year. The annual transparency report shall be
published on the website of the statutory auditor or audit firm and shall
remain available on that website for at least five years.
A statutory auditor or audit firm shall be
allowed to update its published annual transparency report. In such a case, the
auditor or firm indicate that it is an updated version of the report and the
original version of the report shall continue to remain available on the
website.
Statutory auditors and audit firms shall
communicate to ESMA and to the competent authorities that the transparency
report has been published on the website of the statutory auditor or audit firm
or, as appropriate, that it has been updated.
2.           The annual transparency
report shall include at least the following:
(a)     a description of the legal structure
and ownership of the audit firm; 
(b)     where the statutory auditor or audit
firm belongs to a network, a description of the network and the legal and
structural arrangements in the network; 
(c)     a description of 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 referred to in Article 40 was carried out; 
(f)      a list of public-interest entities
for which the statutory auditor or audit firm has carried out statutory audits
during the preceding financial year and a
list of the entities from which the statutory auditor or audit firm receives
more than 5% of its annual revenue;
(g)     a statement concerning the statutory
auditor's or audit firm's independence practices which also confirms that an
internal review of independence compliance has been conducted; 
(h)     a statement on the policy followed by
the statutory auditor or audit firm concerning the continuing education of
statutory auditors referred to in Article 13 of Directive 2006/43/EC; 
(i)      information concerning the basis for
the partners' remuneration in audit firms; 
(j)      a description of its policy
concerning the rotation of key audit partners and staff in accordance with
Article 33(5); 
(k)     where appropriate, a corporate
governance statement.
The statutory auditor or audit firm may, in
exceptional circumstances, decide not to disclose the information required in
point (f) of the first subparagraph to the extent necessary to mitigate an
imminent and significant threat to the personal security of any person. The
statutory auditor or audit firm shall be able to demonstrate to the competent
authority the existence of such threat. 
3.           The transparency report shall
be signed by the statutory auditor or audit firm.
Article 28
Corporate governance statement
1.           Where an audit firm
generates more than one third of its annual audit revenues from large
public-interest entities, it shall make public a corporate governance
statement. That statement shall be included as a specific section of the
Transparency Report.
2.           The corporate governance
statement shall at least include the following information:
(a)     a reference to at least one of the
following:
(i)      the corporate governance code to
which the audit firm is subject,
(ii)      the corporate governance code which
the audit firm may have voluntarily decided to apply;
(iii)     all relevant information about the
corporate governance practices applied beyond the requirements under national
law.
Where the information referred to in points (i)
and (ii) is included, the audit firm shall also indicate where the relevant
texts are publicly available. Where the information referred to in point (iii)
is included, the audit firm shall make its corporate governance practices
publicly available;
If the audit firm is not subject to any
corporate governance code and does not voluntarily apply one, it shall state
so. 
(b)     the extent to which an audit firm, in
accordance with national law, departs from a corporate governance code referred
to in points (a)(i) or (ii), an explanation by the audit firm as to which parts
of the corporate governance code it departs from and the reasons for doing so.
Where the audit firm has decided not to apply any provisions of a corporate
governance code referred to in points (a)(i) or (ii), it shall explain its
reasons for doing so; 
(c)     a description of the main features of
the undertaking's internal control and risk management systems in relation to
the financial reporting process; 
(d)     the following information:
(i)      significant direct and indirect
holdings of voting rights equal to or exceeding 5 % of the total voting rights
in the audit firm, including indirect holdings of voting rights through pyramid
structures and cross holdings of voting rights;
(ii)      the identity of the holders
of any special control rights and a description of those rights, whether such
rights results from the holding of any securities, by contract or otherwise; 
(iii)     any restrictions on voting rights,
including limitations of the voting rights of holders of a given percentage or
number of votes, deadlines for exercising voting rights, 
(iv)     the rules governing the appointment
and replacement of board members and the amendment of the articles of association;
(v)     the powers of board members;
(e)     unless the information is already
fully provided for in national laws or regulations, the operation of the
meeting of shareholders or holders of voting rights and its key powers, and a
description of shareholders’ or voting rights holders' rights and how they can
be exercised; 
(f)      the composition and operation of the
administrative, management and supervisory bodies and their committees.
Article 29
Information to competent authorities
A statutory auditor or audit firm shall
provide annually to his, her or its competent authority a list of the audited
public-interest entities by revenue generated from them.
Article 30
Record keeping
Statutory auditors and audit firms shall
keep the documents and information referred to in Article 6(1), Article 9(3),
Article 11(3) and (4), Article 16(2) to (6), Article 17(1) and (2), Article 18(1)
and (3), Article 19(3) to (6), Articles 22, 23 and 24, Article 25(1) and (2),
Article 29, Article 32(2), (3), (5) and (6), Article 33(6) and Article 43(4)
for a period of five years following the production of such documents or
information.
Member States may require statutory
auditors and audit firms to keep the documents and information referred to in
the first subparagraph for a longer period in accordance with their rules on
personal data protection and administrative and judicial proceedings. 
Title III
The appointment of statutory auditors or audit firms
by public-interest entities
Article 31
Audit Committee
1.           Each public-interest
entity shall have an audit committee. The audit committee shall be composed of
non-executive members of the administrative body and/or members of the
supervisory body of the audited entity and/or members appointed by the general
meeting of shareholders of the audited entity or, for entities without
shareholders, by an equivalent body. 
At least one member of the audit committee
shall have competence in auditing and another member in accounting and/or
auditing. The committee members as a whole shall have competence relevant to
the sector in which the audited entity is operating. 
A majority of the members of the audit
committee shall be independent. The chairman of the audit committee shall be
appointed by its members and shall be independent. 
2.           By derogation from
paragraph 1 of this Article, in public-interest entities which meet the
criteria set out in points (f) and (t) of Article 2(1) of Directive 2003/71/EC
of the European Parliament and of the Council[36], the
functions assigned to the audit committee may be performed by the
administrative or supervisory body as a whole, provided at least that where the
chairman of such a body is an executive member, he or she is not the chairman
of the audit committee.
3.           By derogation from
paragraph 1, the following public-interest entities may decide not to have an
audit committee:
(a)     any public-interest entity which is a
subsidiary undertaking within the meaning of Article 1 of Directive 83/349/EEC
if the entity complies with the requirements in paragraphs 1 to 4 of that
Article at group level; 
(b)     any public-interest entity which is an
undertaking for collective investment in transferable securities (UCITS) as
defined in Article 1(2) of Directive 2009/65/EC or an alternative investment
fund (AIF) as defined in Article 4(1)(a) of Directive 2011/61/EU;
(c)     any public-interest entity the sole
business of which is to act as issuer of asset backed securities as defined in
Article 2(5) of Commission Regulation (EC) No 809/2004[37];
(d)     any credit institution within the
meaning of Article 1(1) of Directive 2006/48/EC whose shares are not admitted
to trading on a regulated market of any Member State within the meaning of
point 14 of Article 4(1) of Directive 2004/39/EC and which has, in a continuous
or repeated manner, issued only debt securities admitted to trading in a
regulated market, provided that the total nominal amount of all such debt
securities remains below EUR 100 000 000 and that it has not published a
prospectus under Directive 2003/71/EC. 
The public-interest entities referred to in
points (b) and (c) shall explain to the public the reasons for which it
considers it not appropriate to have either an audit committee or an
administrative or supervisory body entrusted to carry out the functions of an
audit committee.
4.           By derogation from
paragraph 1, a public-interest entity that has a body performing equivalent
functions to an audit committee, established and functioning according to
provisions in place in the Member State in which the entity to be audited is
registered, may decide not to have an audit committee. In such a case the
entity shall disclose which body carries out those functions and how that body
is composed.
5.           Without prejudice to the
responsibility of the members of the administrative, management or supervisory
bodies, or of other members who are appointed by the general meeting of
shareholders of the audited entity, the audit committee shall, inter alia:
(a)     monitor financial reporting process
and submit recommendations or proposals to ensure its integrity;
(b)     monitor the effectiveness of the undertaking's
internal control, internal audit where applicable, and risk management systems;
(c)     monitor the statutory audit of the
annual and consolidated financial statements and supervise the completeness and
integrity of the draft audit reports in accordance with Articles 22 to 23;
(d)     review and monitor the independence of
the statutory auditors or audit firms in accordance with Articles 5 to 11, and
in particular the provision of additional services to the audited entity in
accordance with Article 10;
(e)     be responsible for the procedure on
the selection of statutory auditor(s) or audit firm(s) and recommend the
statutory auditor(s) or audit firm(s) to be appointed in accordance with
Articles 32;
(f)      authorise, on a case by case basis,
the provision by the statutory auditor or audit firm of the services referred
to in Article 10(3)(b)(i) and (ii) of this Regulation to the audited entity. 
Article 32
Appointment of the statutory auditors or
audit firms
1.           For the purposes of the
application of Article 37 of Directive 2006/43/EC, for the appointment of
statutory auditors or audit firms by public-interest entities, the conditions
set out in paragraphs 2 to 5 of this Article shall apply. 
Where Article 37(2) of Directive 2006/43/EC
applies, the public-interest entity shall inform the competent authority of the
use of the alternative systems or modalities referred to in that Article.
2.           The audit committee shall
submit a recommendation to the administrative or supervisory board of the
audited entity for the appointment of statutory auditors or audit firms. The
audit committee shall justify the recommendation made. 
Unless it concerns the renewal of an audit
engagement in accordance with the second subparagraph of Article 33(1), the
recommendation shall contain at least two choices for the audit engagement and
the audit committee shall express a duly justified preference for one of them. 
When it concerns the renewal of an audit
engagement in accordance with the second subparagraph of Article 33(1), the
audit committee shall, for the preparation of its recommendation, take into
consideration any findings and conclusions on the recommended statutory auditor
or audit firm referred to in Article 40(6) and published by the competent
authority pursuant to Article 44(d).
In its recommendation, the audit committee
shall state that its recommendation is free from influence by a third party and
that no contractual clause as referred to in paragraph 7 has been imposed upon
it. 
3.           Unless it concerns the
renewal of an audit engagement in accordance with the second subparagraph of
Article 33(1), the recommendation of the audit committee referred to in
paragraph 2 of this Article, shall be prepared following a selection procedure organized
by the audited entity respecting the following criteria:
(a)     the audited entity shall be free to
invite any statutory auditors or audit firms to submit proposals for the
provision of the statutory audit service on the condition that Article 33(2) is
respected and that at least one of the invited auditors or firms is not one who
received more than 15% of the total audit fees from large public-interest
entities in the Member State concerned in the previous calendar year; 
(b)     the audited entity shall be free to
choose the method to contact the invited statutory auditor(s) or audit firm(s)
and shall not be required to publish a call for tenders in the Official
Journal of the European Union and/or in national gazettes or newspapers; 
(c)     the audited entity shall prepare
tender documents to the intention of the invited statutory auditor(s) or audit
firm(s). Those tender documents shall allow them to understand the business of
the audited entity and the type of statutory audit that is to be carried out.
The tender documents shall contain transparent and non-discriminatory selection
criteria that shall be used by the audited entity to evaluate the proposals
made by statutory auditors or audit firms; 
(d)     the audited entity shall be free to
define the selection procedure and may conduct direct negotiations with
interested tenderers in the course of the procedure; 
(e)     where, in accordance with national law or Union law, the competent
authorities referred to in Article 35, require statutory auditors and audit
firms to comply with certain quality standards, those standards shall be
included in the tender documents;
(f)      the audited entity shall evaluate the
proposals made by the statutory auditors or audit firms in accordance with the
selection criteria predefined in the tender documents. The audited entity shall
prepare a report on the conclusions of the selection procedure, which shall be
validated by the audit committee. The audited entity and the audit committee
shall take into consideration any inspection report on the applicant statutory
auditor or audit firm referred to in Article 40(6) and published by the
competent authority pursuant to Article 44(d);
(g)     the audited entity shall be able to
demonstrate to the competent authority referred to in Article 35 that the
selection procedure was conducted in a fair manner.
The audit committee shall be responsible for
the selection procedure referred to in the first subparagraph. 
For the purposes of point (a) of the first
subparagraph, the competent authority referred to in Article 35(1) shall make
public a list of the auditors and audit firms concerned which shall be updated
on an annual basis. The competent authority shall use the information provided
by statutory auditors and audit firms pursuant to Article 28 to make the
relevant calculations.
4.           Public-interest entities
which meet the criteria set out in points (f) and (t) of Article 2(1) of
Directive 2003/71/EC shall not be required to apply the selection procedure
referred to in paragraph 4.
5.           The proposal of the administrative
or supervisory board to the general meeting of shareholders or members of the
audited entity for the appointment of statutory auditors or audit firms shall
include the recommendation made by the audit committee.
If the proposal of the administrative or
supervisory board departs from the recommendation of the audit committee, the
proposal shall justify the reasons for not following the recommendation of the
audit committee.
6.           In the case of a credit
institution or insurance undertaking, the administrative or supervisory board
shall submit its draft proposal to the competent authority referred to in
Article 35(2). The competent authority referred to in Article 35(2) shall have
the right to veto the choice proposed in the recommendation. Any such opposition
shall be duly justified. 
The absence of a reply by the competent
authority within the prescribed time-limit following submission of the audit
committee's recommendation shall be considered as constituting an implied
consent to the recommendation.
7.           Any contractual clause
entered into between a public-interest entity and a third party restricting the
choice by the general meeting of shareholders or members of that entity
pursuant to Article 37 of Directive 2006/43/EC to certain categories or lists
of statutory auditors or audit firms to carry out the statutory audit of that
entity shall be null and void. 
The public-interest entity shall inform the
competent authorities referred to in Article 35 of any attempt by a third party
to impose such a contractual clause or to otherwise influence the decision of
the general meeting of shareholders on the selection of a statutory auditor or
audit firm.
8.           Where the audited entity
is exempted from the obligation to have an audit committee, the audited entity shall
decide which body or organ of the entity shall perform its functions for the
purposes of the obligations set out in this Article.
9.           Member States may decide
that a minimum number of statutory auditors or audit firms shall be appointed
by public-interest entities in certain circumstances and establish the
conditions governing the relations between the auditors or firms appointed.
If a Member State establishes such requirement,
it shall inform the Commission and ESMA thereof.
10.         In order to facilitate the
exercise of the task of the audited entity to organize a selection procedure
for the appointment of a statutory auditor or audit firm, EBA, EIOPA and ESMA
shall issue guidelines addressed to the public-interest entities on the
criteria governing the selection procedure referred to in paragraph 3, in
accordance with Article 16 of Regulation (EU) No 1093/2010, of Regulation (EU)
No 1094/2010 and of Regulation (EU) No 1095/2010, respectively.
Article 33
Duration of the audit engagement
1.           The public-interest entity
shall appoint a statutory auditor or audit firm for an initial engagement that
shall not be shorter than two years.
The public-interest entity may renew this engagement
only once. 
The maximum duration of the combined two
engagements shall not exceed 6 years.
Where throughout a continuous engagement of 6
years two statutory auditors or audit firms have been appointed, the maximum
duration of the engagement of each statutory auditor or audit firm shall not
exceed 9 years.
2.           After the expiry of the maximum duration of the engagement referred to in paragraph 1, the statutory auditor or audit firm or any members of its network
within the Union, where applicable, shall not undertake the statutory audit of
the public-interest entity concerned until a period of at least four years has
elapsed.
3.           By way of derogation from paragraphs
1 and 2, on an exceptional basis the public-interest entity may request the competent authority referred to in Article 35(1) to grant an
extension to re-appoint the statutory auditor or audit
firm for an additional engagement. In case of appointment of two statutory
auditors or audit firms, this third engagement shall not exceed three years. In
case of appointment of one statutory auditor or audit firm, this third
engagement shall not exceed two years. 
4.           The key audit partner(s)
responsible for carrying out a statutory audit shall cease his, her or their participation
in the statutory audit of the audited entity after a period of seven years from
the date of appointment has elapsed. He, she or they may participate in the
statutory audit of the audited entity again after a period of at least three
years.
The statutory auditor or audit firm shall
establish an appropriate gradual rotation mechanism with regard to the most
senior personnel involved in the statutory audit, including at least the
persons who are registered as statutory auditors. The gradual rotation
mechanism shall be undertaken in phases on the basis of individuals rather than
of a complete team. It shall be proportionate in view of the scale and the
dimension of the activity of the statutory auditor or audit firm. 
The statutory auditor or audit firm shall be
able to demonstrate to the competent authority that such mechanism is
effectively applied and adapted to the scale and the dimension of the activity
of the statutory auditor or audit firm.
5.           Where a statutory auditor
or audit firm is replaced by another statutory auditor or audit firm, the
former statutory auditor or audit firm shall provide the incoming statutory
auditor or audit firm with a handover file. Such file shall include relevant
information concerning the audited entity as may reasonably be necessary to
understand the nature of the business and the internal organisation of the
audited entity and to ensure the continuity of the statutory audit and the
comparability with the audits carried out in previous years. 
The former statutory auditor or audit firm
shall also grant access to the incoming statutory auditor or audit firm to the
additional reports to the audit committee referred to in Article 23 of previous
years and to any information transmitted to competent authorities pursuant to
Articles 25 and 27.
The former statutory auditor or audit firm
shall be able to demonstrate to the competent authority that such information
has been provided to the incoming statutory auditor or audit firm. 
6.           ESMA shall develop draft
regulatory technical standards to specify technical requirements on the content
of the handover file referred to in paragraph 6.
Power is delegated to the Commission to adopt
the regulatory technical standards referred to in paragraph 6 in accordance
with Article 10 of Regulation (EU) No 1095/2010.
Article 34
Dismissal and resignation of the
statutory auditors or audit firms
1.           Without prejudice to
Article 38(1) of Directive 2006/43/EC, the audited entity and the statutory
auditor or audit firm shall inform the competent authority concerning the
dismissal or resignation of the statutory auditor or audit firm during the term
of appointment and give an adequate explanation of the reasons thereof. 
Where a Member State has appointed other
competent authorities for the purpose of Title III of this Regulation in
accordance with Article 35(2), such competent authority shall forward this
information to the competent authority referred to in Article 35(1).
2.           The audit committee, one
or more shareholders, the competent authorities referred to in Article 35(1) or
35(2) shall be able to bring a claim before a national court for the dismissal
of the statutory auditor(s) or audit firm(s) where there are proper grounds.
Where the condition laid down in Article 6(2)
of Directive 2007/36/EC applies, it shall also apply to shareholders exercising
the power described in the first subparagraph. 
In case that the audited entity is exempted
from the obligation to have an audit committee, the audited entity shall decide
which body or organ of the entity shall perform its functions for the purposes
of this paragraph.
Title IV
Surveillance of the activities of auditors and audit
firms carrying out statutory audit of public-interest entities
CHAPTER I
COMPETENT AUTHORITIES
Article 35
Designation of competent authorities
1.           Each Member State shall
designate a competent authority responsible for carrying out the tasks provided
for in this Regulation and for ensuring that the provisions of this Regulation
are applied. 
The competent authority shall be one of the
following:
(a)     the competent authority referred to in
Article 24(1) of Directive 2004/109/EC;
(b)     the competent authority referred to in
Article 24(4)(h) of Directive 2004/109/EC;
(c)     the competent authority referred to in
Article 32 of Directive 2006/43/EC.
2.           By derogation from
paragraph 1, Member States may decide that the responsibility for ensuring that
all or part of the provisions of Title III of this Regulation are applied shall
be entrusted to, as appropriate, the competent authorities referred to in:
(a)     Article 24(1) of Directive 2004/109/EC;
(b)     Article 24(4)(h) of Directive
2004/109/EC;
(c)     Article 40 of Directive 2006/48/EC;
(d)     Article 30 of Directive 2009/138/EC;
(e)     Article 20 of Directive 2007/64/EC;
(f)      Article 3(1) of Directive
2009/110/EC;
(g)     Article 48 of Directive 2004/39/EC;
(h)     Article 97 of Directive 2009/110/EC;
(h)     Article 44 of Directive 2011/61/EU.
3.           Where more than one
competent authority has been designated pursuant to paragraphs 1 and 2, those
authorities shall be organised in such a manner that their tasks are clearly
allocated.
4.           Paragraphs 1, 2 and 3
shall be without prejudice to the possibility for a Member State to make
separate legal and administrative arrangements for overseas European
territories for whose external relations that Member State is responsible.
5.           The competent authorities
shall be adequately staffed, with regard to capacity and expertise, and shall
have the adequate resources in order to be able to fulfill their tasks provided
for in this Regulation.
6.           The Member States shall
inform each other, EBA, EIPA and ESMA in accordance with the relevant
provisions of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No
1095/2010, and shall inform the Commission of the appointment of competent
authorities for the purposes of this Regulation. 
ESMA shall consolidate this information and
make it public.
Article 36
Conditions of independence
The competent authorities and any authority
to which the competent authority referred to in Article 35(1) has delegated
tasks shall be independent of statutory auditors and audit firms. 
A person shall not be involved in the
governance of those authorities if in the course of the three previous years he
or she:
(a)          has carried out statutory audits
of public-interest entities;
(b)          held voting rights in an audit
firm;
(c)          was member of the administrative,
management or supervisory body of an audit firm;
(d)          was an employee or otherwise
associated with an audit firm.
The funding of those authorities shall be
secure and free from any possible undue influence by statutory auditors and
audit firms.
Article 37
Professional secrecy
The obligation of professional secrecy
shall apply to all persons who are or have been employed by competent
authorities or by any authority to whom the competent authority referred to in
Article 35(1) has delegated tasks, including experts contracted by such authorities.
Information covered by professional secrecy may not be disclosed to any other
person or authority except by virtue of the obligations of this Regulation or
of the laws, regulations or administrative procedures of a Member State.
Article 38
Powers of competent authorities
1.           Without prejudice to
Articles 40 and 41, in carrying out their tasks under this Regulation, the
competent authorities or any other public authorities of a Member State may not
interfere with the content of audit reports.
2.           In order to carry out
their tasks under this Regulation, the competent authorities shall, in
conformity with national law, have all the supervisory and investigatory powers
that are necessary for the exercise of their functions. They shall exercise
their powers in any of the following ways:
(a)     directly;
(b)     in collaboration with other
authorities; 
(c)     under their responsibility by
delegation to entities to which tasks have been delegated according to Article
35(1); 
(d)     by application to the competent
judicial authorities.
3.           In order to carry out
their tasks under this Regulation, the competent authorities shall, in
conformity with national law, have the power in their supervisory capacity to: 
(a)     access any document in any form
relevant to the carrying out of their tasks and to receive or take a copy
thereof;
(b)     demand information from any person and
if necessary to summon and question a person with a view to obtaining
information;
(c)     carry out on-site inspections with or
without announcement; 
(d)     require records of telephone and data
traffic processed by statutory auditors and audit firms;
(e)     refer matters for criminal
prosecution;
(f)      request experts to carry out verifications
or investigations;
(g)     take the administrative measures and
sanctions referred to in Article 61.
The competent authorities may use the powers
referred to in the first subparagraph only in relation to statutory auditors
and audit firms carrying out statutory audit of public-interest entities,
persons involved in the activities of statutory auditors and audit firms
carrying out statutory audit of public-interest entities, audited entities,
their affiliates and related third parties, third parties to whom the statutory
auditors and audit firms carrying out statutory audit of public-interest
entities have outsourced certain functions or activities, and persons otherwise
related or connected to statutory auditors and audit firms carrying out
statutory audit of public-interest entities.
4.                      
A request for records of telephone or data
traffic referred to in point (d) of paragraph 3 shall require authorisation
from a judicial authority.
5.           Where a cooperative within
the meaning of Article 2(14) of Directive 2006/43/EC or a similar entity as
referred to in Article 45 of Directive 86/635/EEC is required or permitted
under national law to be a member of a non-profit-making auditing entity, the
competent authority referred to in Article 35(1) may decide that certain
provisions set out under this Regulation shall not apply to the statutory audit
of such entity provided that the principles of independence laid down in
Chapter I of this Regulation are complied with by the statutory auditor
carrying out the statutory audit and by persons who
may be in a position to influence the statutory audit. For
the purpose of deciding upon such exceptional situations of non-application of
certain provisions of this Regulation, the competent
authority referred to in Article 35(1) shall consult the supervisory authority
of the cooperative or the similar entity where appropriate.
              The competent authority
referred to in Article 35(1) shall inform ESMA of such exceptional situations
of non-application of certain provisions of this Regulation. It shall
communicate ESMA the list of provisions of this Regulation that have not been applied
to the statutory audit of the entities referred to in paragraph 5 and the
reasons that justified the exemption granted for such non-application.
6.           The processing of personal
data processed in the exercise of the supervisory and investigative powers
pursuant to this Article shall be carried out in accordance with Directive
95/46/EC.
Article 39
Cooperation with other competent
authorities at national level
The competent authority designated pursuant
to Article 35(1) and, where appropriate, any authority to whom that competent
authority has delegated tasks shall cooperate at national level with:
(a)          the competent authorities
responsible for the approval and registration of statutory auditors and audit
firms pursuant to Directive 2006/43/EC;
(b)          the authorities referred to in
Article 35(2), whether they have been designated competent authorities for the
purposes of this Regulation or not;
(c)          the financial intelligence units
and the competent authorities referred to in Articles 21 and 37 of Directive
2005/60/EC.
CHAPTER II
QUALITY ASSURANCE, INVESTIGATION, MARKET
MONITORING, CONTINGENCY PLANNING AND TRANSPARENCY OF COMPETENT AUTHORITIES
TASKS 
Article 40
Quality assurance 
1.           For the purposes of this
Article:
(a)     "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 41; 
(b)     "inspector" means a reviewer
who meets the requirements set out in point (a) of the second subparagraph of
paragraph 3 of this Article and is employed by a competent authority; 
(c)     "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.
2.           The competent authorities referred
to in Article 35(1) shall establish an effective system of audit quality
assurance.
The competent authority shall carry out quality
assurance reviews of statutory auditors and audit firms that carry out
statutory audits of public-interest entities at least every three years. 
3.           The competent authority
shall be responsible for the quality assurance system and shall organise it in
a manner that is independent of the reviewed statutory auditors and audit
firms.
The competent authority shall have the
following responsibilities which may not be delegated to any association or
body affiliated with the accounting or audit profession:
(a)     approval and amendment of the
inspection methodologies, including inspection and follow-up manuals, reporting
methodologies and periodic inspection programmes;
(b)     approval and amendment of inspection
reports and follow up reports;
(c)     approval and assignment of inspectors
for each inspection.
The competent authority shall allocate adequate
resources to the quality assurance system.
4.           The competent authority
shall ensure that appropriate policies and procedures related to the
independence and objectivity of the staff, including inspectors, and the
management of the inspection system are put in place. 
The competent authority shall comply with the
following criteria when appointing inspectors:
(a)     inspectors shall have appropriate
professional education and relevant experience in statutory audit and financial
reporting combined with specific training on quality assurance reviews;
(b)     a person who is a practicing statutory
auditor or is employed or otherwise associated with a statutory auditor or an
audit firm shall not be allowed to act as an inspector;
(c)     a person shall 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;
(d)     inspectors shall declare that there
are no conflicts of interest between them and the statutory auditor and audit
firm to be inspected.
The competent authority may contract experts
for carrying out specific inspections when the number of inspectors within the
authority is insufficient. The competent authority may also be assisted by
experts when this is essential for the proper conduct of an inspection. In such
instances, the competent authorities and the experts shall comply with the
requirements of this paragraph. Experts shall be independent from professional
associations and bodies.
5.           The scope of inspections
shall cover:
(a)     an assessment of the design of the
internal quality control system of the audit firm or of the statutory auditor; 
(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;
(c)     in the light of the inspection
findings under points (a) and (b) of this paragraph, 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 27.
At least the following internal control
policies and procedures of the statutory auditor or the audit firm shall be
reviewed:
(a)     compliance by the statutory auditor or
the audit firm with applicable auditing and quality control standards, and
ethical and independence requirements, including those related to Chapter IV of
Directive 2006/43/EC and Articles 5 to 10 of this Regulation, as well as
relevant laws, regulations and administrative provisions of the Member State
concerned;
(b)     the quantity and quality of resources
used, including compliance with continuing education requirements as set out in
Article 13 of Directive 2006/43/EC;
(c)     compliance with the requirements set
out in Article 9 on the audit fees charged.
For the purposes of testing compliance, at
least a significant part of audit files shall be selected on the basis of an
analysis of the risk of an inadequate carrying out of the statutory audit.
The competent authorities shall also
periodically review the methodologies used by statutory auditors and audit
firms to carry out statutory audit.
Inspections shall be appropriate and proportionate
in view of the scale and complexity of the activities of the reviewed audit
firm or statutory auditor.
6.           Inspections findings and
conclusions on which recommendations are based, including the findings and
conclusions related to a transparency report, shall be communicated to and
discussed with the inspected statutory auditor or audit firm before an
inspection report is finalised. 
Recommendations of inspections shall be
followed up by the inspected statutory auditor or audit firm within a
reasonable period set by the competent authority. Such period shall not exceed
12 months in the case of recommendations on the internal quality control system
of the audit firm. 
7.           The inspection shall be
the subject of a report which shall contain the main conclusions of the quality
assurance review.
Article 41
Investigation
The competent authorities referred to in
Article 35(1) shall establish effective systems of investigation with a view to
detecting, correcting and preventing inadequate carrying out of the statutory
audit of public-interest entities.
Where a competent authority contracts
experts for carrying out specific assignments, the authority shall ensure that
there are no conflicts of interest between these experts and the statutory
auditor or audit firm under investigation. 
Article 42
Market monitoring
1.           The competent authorities referred
to in Article 35(1) shall regularly monitor the developments in the market for
providing statutory audit services to public-interest entities.
The competent authorities shall in particular
assess the following:
(a)     the risks arising from high
concentration, including the demise of audit firms with significant market
share, the disruption in the provision of statutory audit services whether in a
specific sector or across sectors, the further accumulation of risk in the
market and the impact on the overall stability of the financial sector;
(b)     the need to adopt measures to mitigate
those risks. 
2.           By X X 20XX [2 years
after the entry into force of the Regulation], and at least on a two-year basis
thereafter, each competent authority shall draw up a report on this issue and
submit it to ESMA, EBA and EIOPA.
ESMA, EBA and EIOPA shall use those reports to
draw up a joint report on the situation at Union level. The report shall be
submitted to the Commission, the European Central Bank and the European
Systemic Risk Board.
Article 43
Contingency planning
1.           Without prejudice to
Article 52, competent authorities designated pursuant to Article 35(1) shall
require at least the six largest audit firms in terms of statutory audits of
large public-interest entities in each Member State to establish a
contingency plan addressing a possible event threatening the continuity of
operations of the concerned firm.
The competent authority shall make public a
list of the firms concerned by the first subparagraph and update it annually.
The competent authority shall use the information provided by statutory
auditors and audit firms pursuant to Article 28 to calculate which the largest
six audit firms are.
2.           The contingency plans
shall identify measures to avoid disruption in the provision of statutory audit
services to public-interest entities, prevent the contagion effect to other
audit firms, belonging to the same network or not, as a result of either
liability or reputation risks and prevent further structural accumulation of
risk in the market.
The contingency plans shall indicate:
(a)     the level of liability that each
partner is subjected to within the audit firm;
(b)     the extent to which legal liability
can spread to other audit firms belonging to the same network, both at
national, Union and international level.
3.           Without prejudice to the
applicable national insolvency laws, competent authorities may specifically
require that the contingency plans identify measures to prepare an orderly
failure of the firm concerned. 
4.           The audit firms concerned
shall submit their respective contingency plans to the competent authorities
within a timeframe set by the competent authorities. The contingency plans shall
be updated as appropriate. 
The competent authorities shall not formally
approve or endorse the contingency plans. They may however provide an opinion
on the contingency plans or on draft contingency plans, should the audit firms
consult them in advance.
Article 44
Transparency of Competent Authorities
Competent authorities shall be transparent
and shall at least publish:
(a)          annual activity reports regarding
the tasks provided in this Regulation;
(b)          annual work programmes regarding
the tasks provided in this Regulation;
(c)          a report on the overall results
of the quality assurance system on an annual basis. This report shall include
information on recommendations issued, follow-up on the recommendations,
supervisory measures taken and penalties imposed. It shall also include
quantitative information and other key performance information on financial
resources and staffing, and the efficiency and effectiveness of the quality
assurance system;
(d)          the inspections findings and
conclusions referred to in Article 40(6).
CHAPTER III
COOPERATION BETWEEN COMPETENT
AUTHORITIES AND RELATIONS WITH THE EUROPEAN SUPERVISORY AUTHORITIES
Article 45
Obligation to cooperate 
The competent authorities of the Member
States shall cooperate with each other where it is necessary for the purposes
of this Regulation, including in cases where the conduct under investigation
does not constitute an infringement of any legislative or regulatory provision
in force in the Member State concerned.
Article 46
ESMA
1.           The cooperation between
competent authorities shall be organised within the framework of ESMA. 
ESMA shall create a permanent internal
committee pursuant to Article 41 of Regulation (EU) No 1095/2010 for this
purpose. Such internal committee shall be at least composed of the competent
authorities referred to in Article 35(1) of this Regulation. The competent
authorities referred to in Article 32 of Directive 2006/43/EC shall be invited
to attend the meetings of such internal committee concerning matters related to
approval and registration of statutory auditors and audit firms and relations
with third countries in so far as relevant to the statutory audit of
public-interest entities.
ESMA shall cooperate with EBA and EIOPA within
the framework of the Joint Committee of the European Supervisory Authorities
established in Article 54 of Regulation (EU) No 1095/2010. 
ESMA shall take over, as appropriate, all
existing and ongoing tasks from the European Group of Audit Oversight Bodies
(EGAOB) created by Decision 2005/909/EC.
2.           ESMA shall provide advice
to the competent authorities in the cases provided for in this Regulation. The
Competent authorities shall consider that advice before taking any final
decision under this Regulation. 
3.           In order to facilitate the
exercise of the tasks provided for in this Regulation, ESMA shall issue
guidelines, in accordance with Article 16 of Regulation (EU) No 1095/2010, as
appropriate, on:
(a)     common standards on the content and
presentation of the report referred to in Article 22;
(b)     common standards on the content and
presentation of the report referred to in Article 23;
(c)     common standards on the oversight
activity of the audit committee referred to in Article 24;
(d)     common standards and best practices on
the content and presentation of the report referred to in Article 27, including
the statement referred to in Article 28;
(e)     common standards and best practices on
the gradual rotation mechanism referred to in Article 33;
(f)      common standards and best practices
regarding the dismissal of auditors, in particular on the existence of proper
grounds for it, as referred to in Article 34;
(g)     enforcement practices and activities
to be conducted by competent authorities under this Regulation;
(h)     common standards and best practices
for conducting quality assurance reviews provided for in Article 40, taking
into consideration, in particular: 
(i)      the different scale and dimension of
activity of statutory auditors and audit firms and policies; 
(ii)      the commonality of quality
standards, policies and procedures to which members of networks of statutory
auditors and audit firms adhere;
(i)      common standards and best practices
for conducting investigations provided for in Article 41;
(j)      procedures for the exchange of
information provided for in Article 48;
(k)     procedures and modalities for
cooperation with regard to quality assurance reviews provided for in Article 49;
(l)      procedures and modalities for joint
investigations and inspections provided for in Article 51;
(m)    the operational functioning of the colleges
provided for in Article 53, including on the modalities for determining the
membership to the colleges, the selection of facilitators, the written
arrangements for the operation of the colleges and the coordination
arrangements between colleges.
ESMA shall consult EBA and EIOPA before issuing
the guidelines referred to in the first subparagraph.
4.           By X X 20XX [four years
after the entry into force of the Regulation], and at least at on a two-year
basis thereafter, ESMA shall prepare a report on the application of this
Regulation.
ESMA shall consult EBA and EIOPA before making
public its report.
In a report to be prepared by X X 20XX [two years
after the entry into force of the Regulation], ESMA shall undertake an
evaluation of the structure of the audit market .
For the purpose of this report, ESMA shall examine the influence of
Member States’ 
civil liability systems for statutory auditors on the audit market
structure.
In a report to be prepared by ESMA by X X 20XX
[four years after the entry into force of the Regulation], shall examine
whether the competent authorities referred to in Article 35(1) are sufficiently
empowered and have adequate resources to carry out their tasks.
In a report to be prepared by ESMA by X X 20XX
[six years after the end of the transitional period], shall examine the
following issues:
(a)     the changes in the audit market
structure; 
(b)     the changes in the patterns of cross-border
activity, including as a result of the changes introduced to Chapter II of
Directive 2006/43/EC by Directive xxxx/xx/EU;
(c)     an
interim assessment on the improvement of audit quality and the impact of this
Regulation on small and medium-sized enterprises which are public-interest
entities.
In a report, to be prepared by X X 20XX [twelve
years after the entry into force of the Regulation], ESMA shall undertake
an evaluation of the impact of this Regulation. 
5.           Before X X 20XX [three years
after the entry into force of the Regulation] the Commission shall present
a report, on the basis of the ESMA reports and other appropriate evidence, on
the impact of the national liability rules for statutory auditors on the audit
market structure. In the light of that report, the Commission shall take the
steps it considers appropriate as a result of its findings.
Article 47
Home Member State principle
1.           Member States shall
respect the principle of Home Member State 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. 
2.           In the case of a statutory
audit of consolidated financial statements, the Member State requiring the
statutory audit of the consolidated financial statements may not impose
additional requirements in relation to the statutory audit concerning registration,
quality assurance review, auditing standards, professional ethics and
independence on a statutory auditor or audit firm carrying out a statutory
audit of a subsidiary established in another Member State.
3.           In the case of a undertaking
whose securities are traded on a regulated market in a Member State other than
that in which that undertaking has its registered office, the Member State in
which the securities are traded may not impose any additional requirements in
relation to the statutory audit concerning registration, quality assurance
review, auditing standards, professional ethics and independence on a statutory
auditor or audit firm carrying out the statutory audit of the annual or
consolidated financial statements of that undertaking.
Article 48
Exchange of information
1.           The competent authorities
referred to in Article 35 shall, without undue delay, supply each other and the
relevant European Supervisory Authorities with the information required for the
purposes of carrying out their tasks under this Regulation. 
2.           When receiving a request
for information from another competent authority or a European Supervisory
Authority, the competent authority receiving such request shall, without undue
delay, take the necessary measures to gather the required information. If the requested
competent authority is not able to supply the required information without
undue delay, it shall notify the requesting competent authority of the reasons
thereof.
3.           The competent authorities
may refuse to act on a request for information under any of the following
circumstances:
(a)     supplying information might adversely
affect the sovereignty, security or public order of the requested Member States
or breach national securities rules;
(b)     judicial proceedings have already been
initiated in respect of the same actions and against the same statutory
auditors or audit firms before the authorities of the requested Member State;
(c)     a final judgment has already been
passed in respect of the same actions and on the same statutory auditors or
audit firms by the competent authorities of the requested Member State.
Without prejudice to the obligations to which
they are subject in judicial proceedings, competent authorities or the European
Supervisory Authorities which receive information pursuant to paragraph 1 may
use that information only for the exercise of their tasks within the scope of
this Regulation and in the context of administrative or judicial proceedings
specifically related to the exercise of those tasks. 
4.           The competent authorities
may transmit to the competent authorities responsible for supervising
public-interest entities, central banks, the European System of Central Banks
and the European Central Bank, in their capacity as monetary authorities, and
the European Systemic Risk Board confidential information intended for the
performance of their tasks. Such authorities or bodies shall not be prevented
from communicating to the competent authorities information that the competent
authorities may need in order to carry out their duties under this Regulation.
Article 49
Cooperation with regard to quality
assurance reviews
1.           Competent authorities
shall take measures to ensure effective cooperation at Union level in respect
of quality assurance reviews.
2.           The competent authority of
one Member State may request the assistance of the competent authority of
another Member State with regard to the quality assurance reviews of statutory
auditors or audit firms belonging to a network exercicing significant
activities in that Member State.
The competent authority making any such request
shall inform ESMA thereof. In the event of an investigation or inspection with
cross-border effect, the competent authorities may request ESMA to coordinate
the investigation or inspection.
3.           Where a competent
authority receives a request from a competent authority of another Member State
to participate in the quality assurance review of a statutory auditors or audit
firm belonging to a network exercicing significant activities in that Member
State, it shall allow the requesting competent authority to participate in such
quality assurance review.
The requesting competent authority shall not
have the right to access information which might adversely affect the
sovereignty, security or public order of the requested Member State or breach
national securities rules.
Article 50
European Quality Certificate
1.           ESMA shall establish a European
quality certificate for statutory auditors and audit firms carrying out
statutory audits of public-interest entities. 
The European quality certificate shall meet the
following conditions:
(a)     the European quality certificate shall
be delivered by ESMA and shall be valid across the Union;
(b)     Union auditors and audit firms meeting
the relevant requirements shall be entitled to apply for the European quality
certificate;
(c)     ESMA shall publish the requirements
for obtaining the European quality certificate. Such requirements shall be
based on audit quality and the experience of the quality assurance systems
referred to in Article 30 of Directive 2006/43/EC and Article 40 of this
Regulation;
(d)     ESMA shall charge fees to the
applicant statutory auditors and audit firms for delivering the European
quality certificate in accordance with the delegated act referred to in paragraph
4 of this Article. Those fees shall fully cover ESMA's necessary expenditure
relating to the delivering of the certificate and the reimboursement of any
costs that the competent authorities may incur carrying out work pursuant to
this Article;
(e)     ESMA shall state the reasons for
delivering the certificate or for rejecting the application; 
(f)      a statutory auditor or audit firm
shall comply at all times with the conditions for the initial granting of the
certificate;
(g)     ESMA shall be entitled to re-examine
any certificate granted to any statutory auditor or audit firm, either at the
request of a competent authority or on its own initiative. The results of the
quality assurance reviews shall be taken into account;
(h)     ESMA shall be entitled to withdraw the
European quality certificate where the statutory auditor or audit firm does not
longer meet the conditions for obtaining it; 
(i)      ESMA shall keep a registry of
statutory auditors and firms which obtained the certificate;
(j)      the European quality certificate
shall have a voluntary character and shall not be a condition for statutory
auditors or audit firms to be able to carry out statutory audits of
public-interest entities, to be approved in another Member in accordance with
Article 14 of Directive 2006/43/EC or to be recognised in another Member in
accordance with Article 3a of that Directive. 
2.           ESMA shall develop draft
regulatory technical standards to specify the procedure for obtaining a
European quality certificate for statutory auditors and audit firms carrying
out statutory audits of public-interest entities. Those technical standards
shall comply with the following principles:
(a)     applications shall be submitted to
ESMA in either a language accepted in the Member State where the statutory
auditor or audit firm is approved or in a language customary in the sphere of
international finance.
Where a group of audit firms applies for the
European quality certificate, the members of the group may mandate one of their
members to submit all the applications on behalf of the group;
(b)     ESMA shall transmit a copy of the
application to the competent authorities of the Member States concerned by the
application; 
(c)     the competent authorities of the
Member States concerned by the application shall jointly examine the
application for the certificate within a college of competent authorities
referred to in Article 53. Such examination shall cover whether the application
is complete and whether it meets the conditions for delivering the certificate.
Information obtained in quality assurance reviews on a particular applicant
shall be used in this examination;
(d)     the competent authorities of the
Member States concerned by the application shall provide an advice to ESMA as
to whether the applicant shall be entitled to obtain the certificate;
(e)     ESMA shall take a decision on the
application;
(f)      ESMA shall establish the detailed
procedural steps and time limits; 
For the purposes of point (ii), those Member
States shall be at least: 
–              
if the applicant is a statutory auditor, the
Member State(s) where the statutory auditor is approved in accordance with
Article 3 of Directive 2006/43/EC and, if applicable, the Member State(s) where
the statutory auditor is approved in accordance with Article 14 of that
Directive and/or the Member State(s) where statutory auditor is undertaking an
adaptation period pursuant to Article 14 of Directive 2006/43/EC; 
–              
if the applicant is an audit firm, the Member
State(s) where the audit firm is approved in accordance with Article 3 of
Directive 2006/43/EC and, if applicable, the Member State(s) where the audit
firm is recognised in accordance with Article 3a of that Directive and/or the
Member State(s) where the audit firm has controlled firms, affiliate firms or a
parent firm.
3.           ESMA shall submit the
draft regulatory technical standards referred to in paragraph 2 to the
Commission by [ 3 years after the entry into force of this Regulation].
Powers are delegated to the Commission to adopt
the regulatory technical standards referred to in paragraph 2 in accordance
with Article 10 of Regulation (EU) No 1095/2010.
4.           The Commission shall be
empowered to adopt delegated acts in accordance with Article 68 for the purpose
of determining the fees referred to in point (d) of paragraph 1. 
The delegated acts shall determine in
particular the types of fees and the matters for which fees are due, the amount
of the fees, they way in which they are to be paid and the way in which ESMA is
to reimburse competent authorities in respect of any costs that they may incur
carrying out work pursuant to this Article. 
The amount of a fee charged to a statutory
auditor or an audit firm shall cover all administrative costs. 
Article 51
Cooperation with regard to
investigations or on-site inspections
1.           Where a competent authority
concludes that activities contrary to the provisions of this Regulation are
being carried out or have been carried out on the territory of another Member
State, it shall notify the competent authority of the other Member State of
that conclusion in as specific a manner as possible. 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. 
2.           A competent authority of
one Member State may request that an investigation is carried out by the
competent of another Member State on the latter's territory.
It may also request that some of its own
personnel be allowed to accompany the personnel of the competent authority of
that Member State in the course of the investigation, including with regard to
on-site inspections.
The competent authority making any such request
shall inform ESMA of any request referred to in the first and second
subparagraphs.
The investigation or inspection shall be
subject throughout to the overall control of the Member State on whose
territory it is conducted. However, in the event of an investigation or
inspection with cross-border effect, the competent authorities may request ESMA
to coordinate the investigation or inspection.
3.           The requested competent
authority may refuse to act on a request for an investigation to be carried out
as provided for in the first subparagraph of paragraph 2, or on a request for
its personnel to be accompanied by personnel of a competent authority of
another Member State as provided for in the second subparagraph of paragraph 2,
in the following cases:
(a)     such an investigation or on-site
inspection might adversely affect the sovereignty, security or public order of
the requested Member State; 
(b)     judicial proceedings have already been
initiated in respect of the same actions and against the same persons before
the authorities of the requested Member State; 
(c)     a final judgment has already been
passed in respect of the same actions on such persons by the competent
authorities of the requested Member State.
Article 52
Cooperation with regard to contingency
planning
Where the audit firms concerned by the
requirement in Article 43 belong to networks of at least Union dimension,
competent authorities shall cooperate within ESMA with a view to ensuring that
the different national requirements take account of the network dimension.
The competent authorities shall make
available to ESMA and the other competent authorities the contingency plans
received pursuant to Article 43(4). 
ESMA shall not formally approve or endorse
the contingency plans, but may provide an opinion on them. 
Article 53
Colleges of competent authorities
1.           Colleges of competent
authorities may be established in order to facilitate the exercise of the tasks
referred to in Articles 40, 41, 50, 51, 52 and 61 with regard to specific statutory
auditors, audit firms or their networks. 
2.           With regard to specific statutory
auditors or audit firms, colleges of competent authorities shall be established
by the competent authority of the home Member State. 
The college shall comprise the competent
authority of the home Member State and any other competent authority of other
Member States provided that:
(a)     the statutory auditor or audit firm is
providing statutory audit services to public-interest entities within its
jurisdiction; or
(b)     a branch which is a part of the audit
firm is established within its jurisdiction. 
The competent authority of the home Member
State shall act as facilitator.
3.           With regard to specific
networks, colleges of competent authorities shall be established by ESMA upon
request of one or more competent authorities.
The college shall comprise the competent
authorities of the Member States where the network exercises significant
activities. 
4.           Within 15 working days of
the establishment of the college of competent authorities with regard to a
specific network, its members shall select a facilitator. In the absence of
agreement, ESMA shall appoint a facilitator.
Members of the college shall review the
selection of the facilitator at least every five years to ensure the selected
facilitator remains the most appropriate.
5.           The facilitator shall
chair the meetings of the college, coordinate the actions of the college and
ensure efficient exchange of information among members of the college.
6.           The facilitator shall,
within 10 working days of his or her selection, establish written coordination
arrangements within the framework of the college regarding the following
matters:
(a)     information to be exchanged between
competent authorities;
(b)     cases in which the competent
authorities must consult each other; 
(c)     cases in which the competent
authorities may delegate supervisory tasks in accordance with Article 54.
7.           In the absence of
agreement concerning the written coordination arrangements under paragraph 6,
any member of the college may refer the matter to ESMA. The facilitator shall
give due consideration to any advice provided by ESMA concerning the written
coordination arrangements before agreeing their final text. The written
coordination arrangements shall be set out in a single document containing full
reasons for any significant deviation from the advice of ESMA. The facilitator
shall transmit the written coordination arrangements to the members of the
college and to ESMA.
Article 54
Delegation of tasks
The competent authority of the home Member
State may delegate any of its tasks to the competent authority of another
Member State subject to the agreement of that authority. Delegation of tasks
shall not affect the responsibility of the delegating competent authority.
Article 55
Confidentiality and professional secrecy
in relation to ESMA
1.           The obligation of
professional secrecy shall apply to all persons who work or who have worked for
ESMA, or for any other person to whom ESMA has delegated tasks, including
experts contracted by ESMA. Information covered by professional secrecy shall
not be disclosed to another person or authority except where such disclosure is
necessary for legal proceedings.
2.           Paragraph 1 of this
Article and Article 37 shall not prevent ESMA and the competent authorities
from exchanging confidential information. Information thus exchanged shall be
covered by the obligation of professional secrecy, to which persons employed or
formerly employed by competent authorities are subject. 
3.           All the information
exchanged under this Regulation between ESMA, the competent authorities and
other authorities and bodies shall be considered confidential, except where
ESMA or the competent authority or other authority or body concerned states at
the time of communication that such information may be disclosed or where such
disclosure is necessary for legal proceedings.
Article 56
Protection of personal data
1.           Member
States shall apply Directive 95/46/EC to the processing
of personal data carried out in the Member States pursuant to this Regulation.
2.           Regulation
(EC) No 45/2001 shall apply to the processing of personal data carried out by
ESMA, EBA and EIOPA in the context of this Regulation.
CHAPTER IV
COOPERATION WITH THIRD COUNTRY
AUTHORITIES AND WITH INTERNATIONAL ORGANISATION AND BODIES
Article 57
Agreement on exhange of information
1.           The competent authorities
and ESMA may conclude cooperation agreements on exchange of information with
the competent authorities of third countries only if the information disclosed
is subject, in the third countries concerned, to guarantees of professional
secrecy which are at least equivalent to those set out in Articles 37 and 55.
Such exchange of information shall be intended
for the performance of the tasks of those competent authorities.
Where such exchange of information involves the
transfer of personal data to a third country, Member States shall comply with Directive
95/46/EC and ESMA shall comply with Regulation (EC) No 45/2001.
2.           The competent authorities
shall cooperate with the competent authorities or other relevant bodies of
third countries regarding the quality assurance reviews and investigations of
auditors and audit firms. ESMA shall contribute to this cooperation. 
ESMA shall contribute to the establishment of
supervisory convergence with third countries.
3.           Where the cooperation or
exchange of information is related to audit working papers or other documents
held by statutory auditors or audit firms, Article 47 of Directive 2006/43/EC
shall apply.
Article 58
Disclosure of information received from
third countries
The competent authority of a Member State
or ESMA may disclose the information received from competent authorities of
third countries only if it has obtained the express agreement of the competent
authority that has transmitted the information and, where applicable, the
information is disclosed only for the purposes for which that competent
authority gave its agreement, or where such disclosure is necessary for legal
proceedings. 
Article 59
Disclosure of information transferred to
third countries
The competent authority of a Member State
or ESMA shall require that information communicated by them to a competent
authority of a third country may be disclosed by that competent authority to
third parties or authorities only with the prior express agreement of the
competent authority which has transmitted the information, in accordance with
its national law and provided that the information is disclosed only for the
purposes for which that competent authority of the Member State or ESMA has
given its agreement, or where such disclosure is necessary for legal
proceedings. 
Article 60
Cooperation with international
organisation and bodies
ESMA shall cooperate with the international
organisations and bodies elaborating international auditing standards. 
Title V
Administrative sanctions and measures 
Article 61
Administrative sanctions and measures
1.           Member States shall lay
down the rules on administrative sanctions and measures applicable in cases of breaches of the provisions of this Regulation identified
in the Annex to the persons responsible for those breaches
and shall take all measures necessary to ensure that they are implemented. The
sanctions and measures provided for shall be effective, proportionate and dissuassive.
2.           By [24 months after the
entry into force of this Regulation] the Member States shall notify the rules
referred to in paragraph 1 to the Commission and ESMA. They shall notify the
Commsison and ESMA without delay of any subsequent amendment thereto.
3.           This Article and Articles 62
to 66 are without prejudice to provisions of national criminal law. 
Article 62
Sanctioning powers
1.           This Article shall apply
to breaches of the provisions of this Regulation identified in the Annex.
2.           Without prejudice to the
supervisory powers of competent authorities in accordance with Article 38, in
case of a breach referred to in paragraph 1, competent authorities shall, in
conformity with national law, have the power to impose at least the following administrative
measures and sanctions:
(a)     an order requiring the person
responsible for the breach to cease the conduct and to desist from a repetition
of that conduct;
(b)     a public statement which indicates the person responsible and
the nature of the breach, published on the website of competent authorities;
(c)     a temporary prohibition for the
statutory auditor, the audit firm or the key audit partner to carry out
statutory audits of public-interest entities and/or signing audit reports
within the meaning of Article 22 with effect throughout the Union, until the breach
has been brought to an end;
(d)     declaring that the audit report does
not meet the requirements of Article 22, until the breach has been brought to
an end; 
(e)     a temporary ban against a member of an
audit firm or a public-interest entity administrative or management body to
exercise functions in audit firms or public-interest entities; 
(f)      administrative pecuniary sanctions of
up to twice the amount of the profits gained or losses avoided because of the
breach where those can be determined;
(g)     in respect of a natural person,
administrative pecuniary sanctions of up to EUR 5 000 000 or, in the Member
States where the Euro is not the official currency, the corresponding value in
the national currency on the date of entry into force of this Regulation;
(h)     in respect of a legal person,
administrative pecuniary sanctions of up to 10% of its total annual turnover in
the preceding business year; where the legal person is a subsidiary of a parent
undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC, the
relevant total annual turnover shall be the total annual turnover resulting
from the consolidated account of the ultimate parent undertaking in the
preceding business year.
3.           Member States may give to
competent authorities other sanctioning powers in addition to those referred to
in paragraph 2 and may provide for higher levels of administrative pecuniary
sanctions that those established in that paragraph.
Article 63
Effective application of sanctions
1.           When determining the type
of administrative sanctions and measures, competent authorities shall take into
account all relevant circumstances, including:
(a)     the gravity and the duration of the
violation;
(b)     the degree of responsibility of the
responsible person;
(c)     the financial strength of the
responsible person, as indicated by the total turnover of the responsible
undertaking or the annual income of the responsible natural person;
(d)     the importance of the profits gained
or losses avoided by the responsible person, insofar as they can be determined;
(e)     the level of cooperation of the
responsible person with the competent authortiy, without prejudice to the need
to ensure disgorgements of profits gained or losses avoided by that person;
(f)      previous violations by the
responsible person.
Additional factors may be taken into account by
competent authorities, if such factors are specified in national law.
2.           EBA, EIOPA and ESMA shall
jointly issue guidelines addressed to competent authorities in accordance with
Article 16 of Regulation No (EU) 1093/2010, Regulation No (EU) 1094/2010 and
Regulation No (EU) 1095/2010 on types of administrative measures and sanctions
and level of administrative pecuniary sanctions to be applied in individual
cases within the national legal framework.
Article 64
Publication of sanctions and measures
Every administrative measure or sanction imposed
for breach of this Regulation shall be published without undue delay, including
at least information on the type and nature of the breach and the identity of
the persons responsible for it, unless such publication would seriously
jeopardise the stability of financial markets. Where publication would cause
disproportionate damage to the parties involved, competent authorities shall
publish the measures and sanctions on an anonymous basis.
Competent authorities shall inform ESMA,
without undue delay, of any sanction or measure adopted for breach of this
Regulation.
The publication of sanctions shall respect
fundamental rights as laid down in the EU Charter of Fundamental Rights, in
particular the right to respect for private and family life and the right to
the protection of personal data.
Article 65
Appeal
Member States shall ensure that decisions taken by the competent authority in
accordance with this Regulation are subject to the right of appeal.
Article 66
Reporting of breaches 
1.           Member States shall
establish effective mechanisms to encourage reporting of breaches of this
Regulation to the competent authorities.
2.           The mechanisms referred to
in paragraph 1 shall include at least:
(a)     specific procedures for the receipt of
reports of breaches and their follow-up;
(b)     appropriate protection for persons who
report potential or actual breaches;
(c)     protection of personal data concerning
both the person who reports the potential or actual breaches and the accused
person in compliance with the principles laid down in Directive 95/46/EC;
(d)     appropriate procedures to ensure the
right of the accused person of defence and to be heard before the adoption of a
decision concerning him and the right to seek effective remedy before a
tribunal against any decision or measure concerning him.
3.           Audit firms and
public-interest entities shall establish appropriate procedures for their
employees to report potential or actual breaches of this Regulation internally
trough a specific channel.
Article 67
Exchange of information with ESMA
1.           Competent and judicial
authorities shall provide ESMA annually with aggregated information regarding
all administrative measures, sanctions and fines imposed in accordance with
Articles 61, 62, 63, 64, 65 and 66. ESMA shall publish this information in an
annual report.
2.           Where the competent
authority has disclosed administrative measures, sanctions and fines to the
public, it shall simultaneously report that fact to ESMA. 
Title VI
Delegated acts, reporting and transitional and final
provisions
Article 68
Exercise of the delegation
1.           The power to adopt
delegated acts is conferred on the Commission subject to the conditions laid
down in this Article.
2.           The power to adopt
delegated acts referred to in Articles 10(6) and 50(4) shall be conferred on
the Commission for an indeterminate period of time from [date of entry into
force of this Regulation].
3.           The delegation of power
referred to in Articles 10(6) and 50(4) may be revoked at any time by the
European Parliament or by the Council. A decision to revoke shall put an end to
the delegation of the power specified in that decision. It shall take effect
the day following the publication of the decision in the Official Journal of
the European Union or at a later date specified therein. It shall not affect
the validity of any delegated acts already in force.
4.           As soon as it adopts a
delegated act, the Commission shall notify it simultaneously to the European
Parliament and to the Council.
5.           A delegated act adopted
pursuant to Articles 10(6) and 50(4) shall enter into force only if no
objection has been expressed either by the European Parliament or the Council
within a period of [two months] of notification of that act to the
European Parliament and the Council or if, before the expiry of that period,
the European Parliament and the Council have both informed the Commission that
they will not object. That period shall be extended by [two months] at
the initiative of the European Parliament or of the Council.
Article 69
Report
By X X 20XX [five years after the end of
the transitional period] the Commission shall prepare a report on the
application of this Regulation. The report shall take due account of the report
prepared by ESMA referred to in the fourth subparagraph of Article 46(4).
Article 70
Transitional provision
1.           By derogation from
Articles 32and 33, the following requirements shall apply to contracts for the
provision of statutory audit to public-interest entities which are in force at
[date of entry into force of this Regulation]:
(a)     any audit contract entered into before
XX/XX/XXXX [the date of adoption of the Commission proposal] which is
still in force on [the date of entry into force of this Regulation]
shall remain applicable for a maximum period of four accounting years after [the
date of entry into force of this Regulation]; 
(b)     any audit contract entered into after
XX/XX/XXX [the adoption of the Commission proposal] but before XX/XX/XXXX
[the date of entry into force of this Regulation] and which is still in
force shall remain applicable for a maximum period of five accounting years
after XX/XX/XXXX [the date of entry into force of this Regulation]; 
(c)     when an audit contract referred to in
points (a) or (b) of this paragraph expires or is terminated, the
public-interest entity may renew such contract once with the same audit
statutory auditor or audit firm, without the provisions Article 31(3) being
applicable. Such renewed contract shall be subject to the following maximum
duration:
(i)      1 year: if the auditor has been providing
services to the audited entity for a consecutive period exceeding 100 years; 
(ii)      2 years: if the auditor has been
providing services to the audited entity for a consecutive period between 51
and 100 years;
(iv)     3 years: if the auditor has been providing
services to the audited entity for a consecutive period between 21 and 50
years;
(v)     4 years: if the auditor has been
providing services to the audited entity for a consecutive period between 11
and 20 years;
(vi)     5 years: if the auditor has been
providing services to the audited entity for a consecutive period not exceeding
10 years.
By derogation from the criteria set out in
point (c), the audit contract may remain applicable until the end of the first
accounting year ending after [2 years after the entry into force of this
Regulation].
By derogation from points (a) to (c), when
national rules establish a maximum duration of the contractual relationship
between the statutory auditor or the audit firm and the audited entity which
does not exceed 9 years and require the audited entity to select a different
statutory auditor or audit firm when such maximum duration is reached, the
audit contract may remain applicable until the end of that maximum duration
period.
2.           Article 33 shall apply to
any audit contract entered into after […] [the date of the entry into force
of this Regulation] but before […] [[2 years after the entry into force
of this Regulation]. 
Article 32(3) shall only apply to such contract
after the expiration or termination of the first renewal of such contract.
Article 71
National provisions
The Member States shall make such provision
as is appropriate to ensure the effective application of this Regulation.
Article 72
Entry into force
This Regulation shall enter into force on
the twentieth day following that of its publication in the Official Journal
of the European Union.
It shall apply from [2 years after the
entry into force]. 
However, Article 32(7) shall apply from […]
[the date of the entry into force of the Regulation] and Article 10(5)
shall apply from […] [3 years after the entry into force of the Regulation].
This
Regulation shall be binding in its entirety and directly applicable in all
Member States.
Done at Brussels,
For the European Parliament                       For
the Council
The President                                                 The
President
ANNEX 
I.          Breaches by statutory
auditors, audit firms or key audit partners
A. Breaches related to conflicts of
interest, organisational or operational requirements
1.           The statutory auditor or
audit firm infringes Article 6(1) by not establishing adequate policies and
procedures to ensure compliance with the minimum organisational requirements,
as set out in paragraph 1(a) to (k).
2.           The statutory auditor or
the key audit partner who carries out a statutory audit on behalf of an audit
firm infringes Article 8(1)(a) by taking up a key management position in the
audited entity before a period of at least two years has elapsed since he or
she resigned as a statutory auditor or key audit partner from the audit
engagement.
3.           The statutory auditor or
the key audit partner who carries out a statutory audit on behalf of an audit
firm infringes Article 8(1)(b) by becoming a member of the audit committee of
the audited entity or of an equivalent body, before a period of at least two
years has elapsed since he or she resigned as a statutory auditor or key audit
partner from the audit engagement. 
4.           The statutory auditor or
the key audit partner who carries out a statutory audit on behalf of an audit
firm infringes Article 8(1)(c) by becoming a non-executive member of the
administrative body or a member of the supervisory body of the audited entity,
before a period of at least two years has elapsed since he or she resigned as a
statutory auditor or key audit partner from the audit engagement. 
5.           The statutory auditor or
audit firm infringes Article 9(2) by not ensuring that related financial audit
services provided to the audited entity do not exceed 10% of the fees paid by
the audited entity for the statutory audit.
6.           The statutory auditor or
audit firm infringes Article 10 by providing services other than statutory
audit services or related financial audit services to the audited entity.
B. Breaches related to the performance
of the statutory audit
7.           The statutory auditor or
the audit firm infringes Article 16(3) by not keeping records of the cases when
his, her or its employees do not respect the provisions contained in this
Regulation or by not preparing an annual report of the measures taken in order
to ensure compliance with those provisions.
8.           The statutory auditor or
the audit firm infringes Article 16(4) by not maintaining a client account
record that includes the data referred to in point (a), (b) and (c) of the same
paragraph.
9.           The statutory auditor or
the audit firm infringes Article 16(5) by not creating an audit file for each
statutory audit carried out which contains the information referred to in
points (a) to (j) of the same paragraph.
10.         The statutory auditor or
the audit firm infringes Article 17(1)(c) by not informing the competent authority
referred to in Article 36 of an incident which has or may have serious
consequences for the integrity of his, her or its statutory activity.
11.         The statutory auditor or
the audit firm infringes Article 17(2) by not informing the competent authority
supervising public-interest entities of any fraud committed or attempted with
regard to the financial statements of the audited entity.
12.         The statutory auditor or
the audit firm infringes Article 19 by not ensuring that an internal quality
control review is done according to the requirements set out in paragraphs 2 to
6 of that Article. 
C. Breaches related to audit reporting 
13.         The statutory auditor or
the audit firm infringes Article 22 by not providing an audit opinion prepared
in accordance with the requirements set out in paragraphs 2, 3, 4, 5 and 7 of
that Article.
14.         The statutory auditor or
the audit firm infringes Article 23 by not submitting an additional report to
the audit committee of the audited entity that is prepared in accordance with
the requirements set out in paragraphs 2 to 5 of that Article.
15.         The statutory auditor or
the audit firm infringes Article 25 by not reporting promptly to the competent
authorities supervising public-interest entities any fact or decision
concerning that public-interest entity of which he, she or it has become aware
while carrying out that statutory audit and which might be linked to any of the
breaches mentioned in points (a) to (c) of the first paragraph of Article 25. 
D. Breaches related to disclosure
provisions 
16.         The audit firm infringes
the first subparagraph of Article 26(1) in connection with Article 26(4) by not
making public on its website its annual financial report within the meaning of
paragraph 2 of Article 4 of Directive 2004/109/EC at the latest four months
after the end of each financial year and making it available for at least five
years.
17.         The statutory auditor
infringes the second subparagraph of Article 28(2) in connection with Article 27(1)
by not making public on his or her website his or her annual income statement
and making it available for at least five years.
18.         The statutory auditor or
the audit firm infringes Article 26(2) by not showing in his or her annual
income statement or in its annual financial report the fees received from the
statutory audit of annual and consolidated financial statements of
public-interest entities and entities belonging to a group of companies whose
parent undertaking is a public-interest entities separated from the fees
received from the statutory audit of annual and consolidated financial
statements of other entities and fees charged for related financial audit
services as defined in Article 10.
19.         The statutory auditor or
audit firm that belong to a network infringes Article 26(3) by not providing as
annex to the income statement or to the annual financial report the information
referred to in point (a) to (d) of Article 26(3), unless the derogation of the
second subparagraph of that paragraph applies. 
20.         The statutory auditor or
audit firm infringes Article 27 by not or not timely publishing a transparency
report including information set out in paragraph 2 of that Article and, where
applicable, the information set out in Article 28.
21.         The statutory auditor or
audit firm infringes Article 29 by not providing annually to his, her or its
competent authority referred to in Article 35(1) a list of the audited
public-interest entities by revenue generated from them.
22.         The statutory auditor or
audit firm infringes Article 30(1) by not keeping the documents and information
referred to in Article 30(1).
E. Breaches related to the appointment
of statutory auditors or audit firms by public-interest entities
23.         The statutory auditor or
audit firm infringes Article 33(2) by undertaking the statutory audit of the
public–interest entity after the expiry of the two consecutive engagements
referred to in Article 33(1) before the period of four years has elapsed.
24.         The statutory auditor or
audit firm infringes Article 33(6) by not presenting a complete handover file
at the end of the audit engagement to the incoming statutory auditor or audit
firm. 
F. Breaches related to quality assurance

25.         The statutory auditor or
audit firm infringes Article 40(6) by not following up the recommendations of
inspections within the period set out by the competent authority.
II.        Breaches by public-interest
entities
A.        Breaches related to the
appointment of statutory auditors or audit firms 
1.           Without prejudice to
Article 31(2), (3) and (4), a public-interest entity infringes Article 31(1) by
not establishing an audit committee and/or by not appointing the required
number of independent members and/or by not appointing the required number of
members having specific competence in accounting and/or auditing.
2.           A public-interest entity
infringes Article 32(1) by not appointing the statutory auditor(s) or audit
firm(s) in accordance with the conditions set out in Article 32(2) to (6).
3.           A public-interest entity
infringes Article 33 by employing the same statutory auditor or audit firm for
a period longer than the one referred to in Article 33.
4.           A public-interest entity
infringes Article 34 by dismissing a statutory auditor or audit firm in the
absence of proper grounds. 
[1]               The large amounts of support approved under schemes
can be explained by the fact that some Member States adopted blanket guarantee
schemes which covered all their banks' debt. Member States relied mainly on
guarantee measures. €546.08 billion (4.5% of GDP) was approved as
recapitalisation measures, of which Member States actually used about €141.5
billion in 2009. In the period between October 2008 and October 2010 the
Commission authorized financial crisis measures in the field of State aid in 22
Member States: i.e. all Member States except Bulgaria, the Czech Republic,
Estonia, Malta and Romania.
[2]               European Commission, Green Paper on Audit Policy:
Lessons from the Crisis, COM (2010)561, 13.10.2010. 
[3]               http://ec.europa.eu/internal_market/accounting/conferenc_20110209_en.htm
[4]               http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=en&procnum=INI/2011/2037
[5]               COM(2010)561 final, OJ C 248, 25.8.2011, p. 92.
[6]               See section 4.3 of the Explanatory Memorandum of the
proposal for an amendment of Directive 2006/43/EC for more detailed information
on the scope of each proposal.
[7]               Subject, where appropriate, to adequate transitional
arrangements. 
[8]               COM(2010) 716 final.
[9]               COM(2009) 501 final, COM(2009) 502 final, COM (2009)
503 final.
[10]             OJ C , , p. .
[11]             Date of the opinion of the EDPS
[12]             OJ L 372, 31.12.1986, p. 1.
[13]             OJ L 374, 31.12.1991, p. 7.
[14]             OJ L 390, 31.12.2004, p. 38.
[15]             OJ L 319, 5.12.2007, p. 1.
[16]             OJ L 302, 17.11.2009, p. 32.
[17]             OJ L 267, 10.10.2009, p. 7.
[18]             OJ L 174, 1.7.2011, p.1.
[19]             OJ L 145, 30.4.2004, p. 1.
[20]             OJ L 222, 14.8.1978, p.11.
[21]             OJ L 193, 18.7.1983, p. 1.
[22]             OJ L 157, 9.6.2006, p.87.
[23]             COM(2010)561 final.
[24]             OJ L 281, 23.11.1995, p. 31.
[25]             OJ L 8, 12.1.2001, p. 1.
[26]             OJ L 52, 25.2.2005, p. 51.
[27]             OJ L 309, 25.11.2005, p. 15.
[28]             OJ L 120, 7.5.2008, p.20.
[29]             OJ L 331, 15.12.2010, p.84.
[30]             OJ L 331, 15.12.2010, p.12.
[31]             OJ L 331, 15.12.2010, p.48.
[32]             COM(2010)716 final.
[33]             OJ L 162, 30.4.2004, p.70.
[34]             OJ L 177, 30.6.2006, p.1.
[35]             OJ L 335, 17.12.2009, p.1.
[36]             OJ L 345, 31.12.2003 p.64.
[37]             OJ L 149, 30.04.2004, p. 1.