Bid for auditing single market

Date: 22/02/1996

By Tim Jones

WATCHING a single market being constructed around them has proved frustrating for Europe's statutory auditors.

While a European market in banking and investment services is being assembled, albeit slowly, they have been left on the sidelines.

“We have said for some time that there is no single market in audit services,” says John Hegarty, secretary-general of the Fédération des Experts Comptables Européens (FEE).

Representing around 350,000 accountants from 22 European countries, the FEE has devised a detailed proposal on how to create a true internal market for these company police.

The European Commission has announced that it intends to draw up a Green Paper on audit regulation by June, to be followed by a conference in September and proposals for legislation early next year.

About time too, says the FEE, since there are a series of accounting directives, but no definition in EU legislation of an audit.

The only time their responsibilities have been set out was in the wake of the collapse of the Bank of Credit and Commerce International (BBCI) in July 1991 with losses of 8 billion ecu.

While the losses were originally spotted by the auditor, it was accepted that the maze-like nature of the BCCI group and its presence in a series of jurisdictions made it impenetrable. The case also underlined the need for the auditor to be legally protected when he blew the whistle.

In November 1993, the BCCI directive was adopted, forcing banking groups to become more 'transparent' so that convoluted frauds could not be hidden from auditors or supervisory authorities, and to foster a greater exchange of information between auditors and bank supervisors.

The lessons of the BCCI affair were clear. Fraud knows no boundaries and neither should the audit profession, says the FEE.

In its submission to DGXV, the Directorate-General for the internal market, the federation proposes a number of changes to existing regulations intended to clarify the responsibilities of statutory auditors across the EU.

“Taken up across Europe, these changes will reduce differences and further stimulate the completion and operation of the single market,” says its report.

While pushing for a crack-down on obstacles to freedom of establishment and cross-border service provision, the federation stresses the importance of clarity for statutory auditors.

It says any EU harmonisation should lay out the scope of a statutory audit and specify which laws are covered when the statutory auditor reports - as he must in most member states - that the accounts he is certifying comply with the law. Business law has expanded so much in recent decades that this is now a difficult promise to make.

The FEE also argues that the auditor's responsibility for reporting illegal acts should be made more precise, since the profession needs to know when it can comply with requirements to override a client's right to confidentiality.

Guidance is believed to be needed in this area to specify how certain an auditor has to be that a law has been broken before reporting the offences, and to confirm that only material breaches should be reported.

Auditors should be covered if, in good faith, they report illegal acts, even though they are restricted by their contract from making reports, and the auditor should not be liable in any way.

The differences in member states' practices when a firm under audit is found not to be a going concern also need to be smoothed out, says the FEE.

The statutory auditor needs to be at arm's length from the management and directors of a company, and the latter's influence in the auditor's appointment and fee should be reduced. This way, the federation says, the shareholders would have a freer choice in services.

Similarly, the requirement that the role of the auditor should be rotated periodically ought to be looked at since, in the view of the profession, the risk that a tough auditor might be removed outweighs the chances of the auditor becoming too cosy with the company.

Member states should come to an agreement on a 'common core' of principles to ensure that statutory auditors have no financial interest in their clients, and moves should be made towards a standard form of audit.

As in the case with BCCI, groups should be treated as if they are one entity and not a sum of their parts, ensuring the auditor has access to information throughout the group, regardless of jurisdiction.

In the event of an auditor's failure, the report proposes that liability should be in proportion to his fault, and not punitive. Above all, the audit profession should not be the whipping boy for mistakes or inefficiencies in the entire commercial system.

The FEE says the statutory auditors' responsibilities and reports reflect the special traditions of corporate governance in each member state, and this depends on shareholders, managers and directors as much as auditors. “You can't fix the whole of corporate governance by twiddling with the audit bit,” says Hegarty. “We would like to see a comprehensive, not a piecemeal approach.”