Auditors face tough new EU controls

Date: 22/06/2000

By Peter Chapman

THE European Commission is preparing new rules designed to ensure that the auditors who pore over EU companies' books are not too close to their clients.

The move follows concerns in the US that some auditors - mainly the 'big five' accountancy firms - are earning so much from offering additional, and more lucrative, consultancy and legal services to their clients that they can no longer give an impartial view on their accounts. The world's biggest firm Price Waterhouse Coopers was rapped over the knuckles earlier this year, by the US Securities and Exchange Commission, for hundreds of instances of partners breaching tough American rules on auditor independence.

"The subject is difficult and controversial. We want to produce a core set of principles on auditor independence which would ensure that all member states basically follow the same approach," said a Commission official. "It should not come as a secret that the discussions are also influenced by developments in the US."

Auditors play a crucial role in ensuring that companies' financial accounts are a true and fair record of their activities. Ignoring potential cracks in those accounts - deliberately or not - could paint firms in a more favourable light than is justified, misleading investors and crucially, inflating stock prices.

Under the Commission's plan, auditors would generally be prohibited from offering consultancy and legal services to companies for which they prepare 'statutory audits', except in special cases. Auditors would also be banned from owning shares in clients' firms.

Although the new rules would be in the form of a recommendation, which would not be legally binding, the profession would face the threat of formal legislation if it did not comply with the requirements.

The plan will be discussed next month at a meeting of the Union's committee on auditing, which includes Commission officials, member state regulators and the profession. A final version is due to be adopted before Christmas.

Professional trade associations have welcomed the Commission's promise to offer guiding 'principles' rather than a US-style 'cook book' approach, which they claim has overburdened the American auditing industry. "In the US you have very detailed rules - so many, that many of them are conflicting while others are quite ridiculous," said Saskia Slomp, technical director of the European Federation of Accountants (FEE).

But Peter Poulson , secretary-general of small and medium-sized accountants lobby group EFAA, expressed concern the Commission could still overburden small firms with red tape designed to police their much larger rivals' activities.

The Commission insists the EU cannot veer too far away from the US system. Officials say lax controls would unnerve investors and could encourage firms to 'forum shop' - moving auditing activities to countries with less stringent regulations.

The European Commission is preparing new rules designed to ensure that the auditors who pore over EU companies' books are not too close to their clients.