Governments reject key plank of audit plan

Date: 27/07/00

By Peter Chapman

EU MEMBER states have rejected a key element of the European Commission's plan for tough new rules to govern the activities of auditors, on the grounds that it could jeopardise sales of extra non-audit services worth billions of euro a year.

A draft Commission recommendation set to be unveiled later this year calls for EU-wide rules to ensure that auditing firms remain independent and scrupulously neutral, and are not 'corrupted' by supplying a host of other more lucrative consultancy services to their audit clients. The move is designed to create a level playing field by harmonising the current patchwork of national approaches to the issue.

But governments fear that one crucial aspect of the draft proposal could result in a wave of over-regulation and red tape for the industry through the back door. The clause in question calls for the provision of non-audit services to be "prohibited unless adequate safeguards exist".

At a meeting of the Union's audit policy committee, Commission officials insisted this would still allow legitimate firms great latitude to offer services, provided that safeguards were in place to ensure impartiality in audits. However, sources say the Dutch, French, Spanish, Austrian, Irish, Danish, Swedish and UK delegations, together with the EU accountants federation FEE, called for changes to the wording.

They insisted that the Commission's draft text would "give the wrong message" and could lead to blanket bans on non-audit work in some hard-line member states such as Italy. In the worst case scenario, they said, this would drastically cut audit companies' income from fees and deter bright new graduates from joining such firms. "People would have ignored the part about 'adequate safeguards' and just focussed on the 'prohibited' part. It would have been 'thou shalt not offer non-audit services, period," said Jeremy Jennings, EU affairs expert for US firm Arthur Andersen, although he added that the industry would still welcome a better balanced proposal.

Critics claim the Commission's stance stems from a misguided desire to mirror efforts in the US to tackle the issue which have also come under fire. The US' financial watchdog, the Securities and Exchanges Commission (SEC), launched plans for an even tougher approach towards auditor independence in May. But Congress has already lambasted the proposals, claiming that the SEC is using a sledgehammer to crack a nut.

In a letter to SEC chairman Arthur Levitt, leading Democrat congressmen insisted there was no evidence to show that offering non-audit work affected independence. They warned that the demands of the modern financial markets required "skills, methodologies, and technologies beyond those geared to the traditional audit of historical financial statements", adding that restricting the range of audit firms' services would be "at best premature, at worst inimical to investor protection".

EU Member States have rejected a key element of the European Commission's plan for tough new rules to govern the activities of auditors, on the grounds that it could jeopardise sales of extra non-audit services worth billions of euro a year.