The European Commission paved the way for the PCAOB and other non-EU audit overseers and EU audit oversight bodies to mutually rely on each others’ inspections of audit firms by recognizing the equivalence of audit oversight regimes in the US and nine other countries. However, the grant of equivalence to the US was limited to three years, at which time it will be reviewed. In addition to that of the US, the audit oversight systems of Australia, Canada, China, Croatia, Japan, Singapore, South Africa, South Korea, and Switzerland were deemed equivalent.
As the demand for companies to operate globally increases, noted the Commission, so too does the need for their auditors to do the same. With auditing now moving beyond national borders, there is a need for effective global auditor oversight, which requires extensive international cooperation. It is for this reason that the Commission supports international mutual reliance on the regulation of auditors that is carried out by their home country audit oversight. Mutual reliance means that EU Member States and non-EU states, called third countries by the Commission, can rely on each others' inspections of audit firms allowing for a more effective and efficient oversight of global audit firms.
Europe supports mutual reliance on the oversight of auditors by their home country oversight system. Under the EU doctrine of mutual reliance, Member States and third countries which have been declared equivalent can agree to rely on the regulatory work of the other. In the Commission’s view, the US is still in the process of moving towards this objective. Nonetheless, the Commission recognizes the need to have a temporary solution in place. For this reason, the decision with regard to the US is limited in time enabling the EU to reassess the situation in three years. Specifically, the decision with respect to the US is set to terminate on July 31, 2013.
The equivalence decision comes against the backdrop of the Commission’s consideration of the entire market for the audit of financial statements, noted Commissioner for the Internal Market Michel Barnier, and should be seen within that wider context. Commissioner Barnier said that international cooperation on audit oversight is crucial to avoid overburdening audit firms and duplicating the work of the PCAOB and other oversight bodies, while the same time promoting investor protection and ensuring high quality audits.
With the Commission decision now in place, Member States may choose to rely on the oversight work of one of the 10 third country oversight systems, which have been assessed as equivalent. The Commission noted that equivalence decisions on third country public auditor oversight systems do not provide any automatic or immediate rights to auditors from the concerned third country. After the Commission adopts an equivalence decision, it is up to Member States to decide, based on mutual reliance, to what extent they wish to rely on the public auditor oversight system of the third country concerned. The extent of this reliance and cooperation is set out in cooperative arrangements, which must be signed by both a Member State and a third country to be operational.
A third country may be assessed as equivalent if its system for public auditor oversight is assessed as meeting the requirements set out in the Statutory Audit Directive (Directive 2006/43/EC) which governs public oversight, quality assurance or inspection and investigation and penalty systems of the Member States.