Deadline set for auditors to agree common EU-wide rules

Date: 07/01/1999

By Chris Johnstone

Auditors will be given an end-of-year deadline by the European Commission to prove that they can shake up their rules and provide guarantees to business and investors that an examination of the company's books in one member state is as trustworthy as that in another.

Officials say failure by the auditing profession to demonstrate that self-regulation is a viable option would force the Commission to draw up its own proposals for rules to tackle an increasingly visible brake on the creation of a genuine single market.

Audit regimes currently differ significantly between EU countries, making it difficult for investors and others needing an instant picture of a company's health to know what to look for and how much weight to give to auditors' reports.

The problem, as the Commission pointed out in a policy paper last May, will become even more apparent following the introduction of the euro, which removes exchange-rate barriers to investment and should, in theory, spark more cross-border take-over and merger activity.

Responses to the Commission's Green Paper have generally endorsed its low-key approach, with most warning the institution against proposing new legislation to solve problems.

Instead, they argue that the emphasis should be on national governments and the auditing profession itself taking action where necessary, with the threat of EU rules held in reserve and only carried out if harmonisation does not take place rapidly enough.

Europe's auditing lobby, the Fédération Des Experts Comptables Européens (FEE), says the Commission is prepared for the moment to let the industry identify where problems exist and put forward its own answers.

"The Commission and member states are prepared to support this," said FEE secretary-general John Hegarty.

On the key issue of whether there should be a European definition of what comprises a statutory audit, the Commission has been advised by governments and auditors to steer clear of EU directives which would be too clumsy and too time-consuming to deal with a situation which is still changing.

Instead, the Commission and auditors are looking to agree a set of minimum quality criteria, with EU countries where there is currently no quality control on auditing forced to introduce minimum standards as quickly as possible.

The overall framework for European accounting procedures will, the Commission and the auditing community have agreed, be defined according to internationally agreed auditing standards.

EU governments have until the end of next month to reply to a Commission questionnaire on how far their current rules diverge from these standards. The Commission and FEE are also identifying which international rules are inappropriate for the EU context.

The delicate question of how European rules could guarantee auditors' independence is likely to be discussed when Commission officials meet representatives of the auditing profession and national experts in April.

Existing rules differ widely across the EU, with some appearing to be aimed more at reinforcing professional barriers against encroachment than offering any real assurance that the relationship between the auditor and employer will not be corrupted.

The auditing industry and the Commission have still to address the question of whether, and how, new rules should be framed to force auditors to sound the alarm if they discover fraud - an area which is hardly covered by existing national measures.