Letter from Brussels

What amounts to a new directive to harmonise the auditing of EU company accounts is now moving through the Brussels legislative machine. It will complement Europe's (IAS) Regulation, due for 1 January 2005. The move to converge auditing procedures takes the form of a completely revised version of the Eighth Company Law directive of 1984. The update on international standards on auditing (ISA) is likely to come into force in the national legislation of the EU member states by 2007.

While it deals with some aspects covered by the Sarbanes-Oxley Act, the planning of the new directive predates scandals such as Enron, WorldCom and Parmalat. 'We did not wait for some disaster to happen,' is how Frits Bolkestein, Europe's former internal market commissioner, puts it.

ISA was important to Europe's investment, jobs and growth, he added. An official explained that taking care of the the investor by underpinning trust in Europe's capital market would encourage more investment.

Among major features will be a new requirement for external quality assurance, and measures for robust public oversight over the audit profession. Its predecessor dealt only with the approval of statutory auditors. It will provide for improved co-operation between competent authorities within the EU, as well as with regulators in third countries, such as the US' Public Company Accounting Oversight Board.

Other details include an update of the educational standards for auditors, to cover both IAS and ISA. It specifies liberalisation of the ownership and the management of audit firms, opening ownership and management of audit firms across Europe.

It will introduce an electronic registration system for auditors and audit firms, and define the basic principles of professional ethics. It would cover the performing of other work, by auditors, for the companies they audit. The current version will require oversight bodies to assess the adequacy of an audit fee. Overall, there will be some scope for variation at the individual country level (in Brussels parlance, 'convergence', rather than 'bureaucratic straitjacket').

Discussions within the European Parliament started at the beginning of October. The present version of the text will be presented to the European Council in mid-November for an overall, political agreement. Formal 'adoption' is expected under a fast-track system by the summer 2005. The directive would then come into force in the form of legislation by the 25 national governments 18 months later - 2007, or before.

Jeremy Jennings, global director for regulatory & government relations for EU in Ernst & Young Global, says that the directive will not apply to public sector accounting. However, it will apply to non-EU auditors - e.g. to companies outside the EU but affiliated to EU based companies. Thus, it will apply to affiliated firms in the US, which have to register with any one of the EU members states' oversight bodies.

One difference between the Eighth Directive and Sarbanes-Oxley was that the American Act specifies procedures for complaints from whistleblowers. Jennings added that in Europe, the directive would require group auditors to bear full responsibility for the audit of the consolidated accounts, this responsibility extending to the work of other audit firms.

Some corporate sectors are opposing the proposed mandatory creation of an auditing committee. FEE, the European Federation of Accountants, is against the proposed mandatory rotation of accountancy firms every seven years.

FESE, the Brussels based body for EU securities exchanges, has proposed the setting up of an ombudsman service to oversee cross-border disputes between businesses and national regulators. The institution says that the problems arise over unfair enforcement of rules by national regulators motivated to keep their own zones free from pan-EU competition. Gregor Pozniak, of FESE, says that existing barriers, to cross-border securities transactions, lead to European business paying more to fund its development.

Elaboration of plans to tighten legislation on company disclosures were expected last month from the same internal market DG. The proposals could be in the form of amendments of existing company directives. Specifics could concern the independence of directors, the remuneration of directors, and measures against the use of special purpose entities to take cost off the balance sheet.

Jeremy Woolfe is a journalist based in Brussels.