Auditing reform: More rules

Date: 20/03/04

This time in Europe

WHEN the accounting scams at Enron and WorldCom came to light three years ago, it was common to hear Europeans tut-tutting about America's need to put its house in order. But scandals at Parmalat, an Italian dairy company, and Ahold, a Dutch food retailer, have shown that Europe too could be tidier. On March 16th, the European Commission proposed new, stricter rules for the auditing of European companies.

The proposals, which must still be approved by European Union ministers and the European Parliament, have long been in the works. “We've been looking at auditing for years,” says Jonathan Todd, a commission spokesman. “The proposal was not a knee-jerk response, like Sarbanes-Oxley was.”

Even so, the passage of America's Sarbanes-Oxley act, which was rushed through Congress in 2002 to fix the corporate-governance and auditing holes exposed by Enron and the rest, seems to have kicked Europe's protracted process into gear. “Parmalat was an extra boost, but the real motor was Sarbanes-Oxley,” says Neil Lerner, head of regulatory issues at KPMG, an auditing firm. “Europe had to stand up and be counted.”

In fact, the commission's proposals bear a lot of similarity to America's new rules. This is probably necessary, given the need to co-ordinate the regulation of multinational companies. The European version calls for an end to auditors' self-regulation, requiring individual countries to set up regulators similar to America's newish Public Company Accounting Oversight Board. The commission also wants to oblige public companies to establish independent committees to hire and fire auditors, as in America. And it would require non-EU auditors to register with local authorities - mirroring a provision in the Sarbanes-Oxley act that provoked rage among European auditors.

The commission also calls for tougher sanctions for wayward accountants and increased co-operation among various EU supervisors. It gives individual countries the option of making compulsory the regular rotation of auditors or the senior partner dealing with an account. The idea is that long relationships can lead to over-cosy ties and lax audits. Auditors think that rotation would worsen audit quality, because accountants would have to learn about their clients afresh every few years.

Yet there are differences between what the United States has and what Europe might get. America's rules are much more prescriptive and numerous. For example, the American ban on accounting firms providing some (but not all) non-audit work to audit clients, the certification of company accounts by company bosses and the requirement that a “financial expert” (painstakingly defined by the SEC) be on each audit committee do not feature in the commission's proposals.

America's more detailed rules may reflect its more litigious society. The question is whether Europe's principles-based approach can endure. As the participation by Italian shareholders in American class-action suits against Parmalat show, litigiousness is not a trait confined to America. And, given that the commission's proposals are still open to change, some auditors are worried that one more big corporate scandal could yet push Europe towards more detailed, far-reaching legislation similar to Sarbanes-Oxley.

• Primary Source

http://ec.europa.eu/comm/internal_market/auditing/index_en.htm http://ec.europa.eu/comm/internal_market/auditing/index_en.htm

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