Friday, December 09, 2011

European Commission Proposes EU Passport for Auditors of Financial Statements

In amendments to the Statutory Audit Directive (2006/43/EC), the European Commission proposes to create a Single Market EU passport for statutory audit services allowing outside auditors of company financial statements to exercise their profession freely and easily across Europe once licensed in one Member State. Statutory audit refers to the mandatory annual audit of companies and is aimed at providing an accurate reflection of the veracity of a company's financial statements to stakeholders.

The Commission would allow audit firms to provide services across the EU and to require all statutory auditors and audit firms to comply with international auditing standards when carrying out financial statement audits. The proposal is part of the ongoing regulatory reform in various domains of the financial sector in light of the financial crisis. Since an independent audit provides comfort on the veracity of financial statements, it remains one of the primary building blocks of financial stability.

The Commission proposes an EU-wide passport for audit firms to provide statutory audits in Member States other than the Member State in which they have been approved, provided that the key audit partner leading the audit is approved as an auditor in the concerned Member State. The burden that a multitude of approval procedures entails would thus be reduced while allowing for the emergence of real pan-European audit firms. In the Commission’s view, this automatic recognition of firms would not result in a reduction of regulatory quality as regulators would continue to be required to oversee audit work carried out in their respective Member State. The changes would also allow statutory auditors to provide cross-border statutory audit services on a temporary or occasional basis.

In order to enhance the quality of financial audits performed in the Union, the proposal requires Member States to ensure that statutory auditors and audit firms carry out audits in accordance with the international auditing standards. The Commission earlier proposed that small companies would no longer be required to have their financial statements audited, although Member States may still require it. However, the requirement will continue to apply to medium-sized companies.

When medium-sized companies are audited pursuant, the amended Directive would require Member States to ensure that application of the auditing standards is adapted to the dimension and scale of the business. Moreover, small companies having their accounts audited either voluntarily or because such is required by national should also benefit from this proportionate application of the standards. This calibration of the audit to the size of the audited entity should result in better audit services to the small and mediums-sized community, said the Commission, and possibly lower costs. The proposed measure does not define in detail how proportionate application of the standards must be done. This is left to the discretion of Member States.