Accounting rules row must not be repeated, warn audit chiefs

By Peter Chapman

Date: 10/06/04

THE political storm on adoption by the EU of complex global accounting standards must not be repeated when the Union turns its attention to vetting international auditing norms, industry bosses have warned.

The warning comes as the European Commission and the International Accounting Standards Board (IASB) expected to end a year-long row with a deal paving the way for all European companies to use international accounting standards next year.

Frits Bolkestein, the internal market commissioner, unveiled a draft law earlier this year to make international audit standards mandatory in the EU too. The proposal came in the wake of a spate of auditing scandals touching European markets.

Bolkestein said common standards for statutory audit reports would boost investor confidence and attract more capital to European markets, by making it easier for international investors to compare companies.

However, under EU rules, a Commission-led panel has the final say over whether or not to endorse standards produced by the IASB.

The Commission gives scant details about how it would double-check the audit standards, set by the New York-based International Auditing and Assurance Standards Board (IAASB).

But auditing chiefs said the EU can - and should - take a less interventionist approach when it comes to vetting the auditing rules.

"Our hope is that the Commission will have enough faith in the processes that we have to put in place a very light endorsement process as far as auditing is concerned," said Graham Ward, president-elect of the International Federation of Accountants (IFAC), the group which controls the IAASB.

Ward, a PricewaterhouseCoopers partner, admitted that there are big differences in the way the EU and US approach company audits - just as in financial accounting.

The US favours a 'cook book' approach whereby auditors must carry out a long series of tick-boxing exercises to ensure that a company's accounts tally with reality.

In the EU, the system is more 'principles based', which leaves auditors scope to develop their "professional scepticism".

But Ward insisted standards meetings are open to the public and the views of all stakeholders, not just the US, are taken into account.

"The process is as open as you can get - more than the IASB and more than any auditor standards setter that I'm aware of."

David Devlin, president of the European Federation of Accountants, added that his group, which represents national accounting bodies across the Union, has "concerns on the uncertainty in the method of endorsement of international standards on auditing (ISA)".

"We suggest endorsement of the whole ISA framework, relying on proper oversight and due process in setting standards, not seeking to endorse individual standards one by one," he said. "And we believe that it is unnecessary for the EU to develop a common audit report within Europe given that this is part of the ISA framework," he added.

The Commission, which chairs an EU group vetting the financial reporting standards, provoked a year-long battle when it refused to endorse two of the norms governing the valuation of complex financial assets.

This followed claims by EU finance houses and French President Jacques Chirac that they were better suited to American firms.

They argued that the norms would wreak havoc in the accounts of many European firms and would make the European economy more volatile.

Frits Bolkestein added fuel to the debate when he voiced concerns that the directors of the London-based IASB were not European enough - and that the views of European industry were not given the weight they deserved. In turn, accounting experts claimed that the EU was trying to politicize standards setting.

Bolkestein's spokesman, Jonathan Todd, said the EU's difficult experience over the accounting norms justifies a cautious approach to auditing.

"Any shenanigans have been due to the IASB and not us," he said, referring to the sparring match between Bolkestein and IASB chairman Sir David Tweedie. "But, clearly, we will not be agreeing to mandate the use of international auditing standards until we are 100% satisfied that the governance takes account of European interests. Let's say it is a case of 'once bitten, twice shy'."

Auditing chiefs say that the European Union should take a less interventionist approach to vetting international auditing rules, set by the US-based International Auditing and Assurance Standards Board (IAASB).