Non-EU Auditors to be Regulated through Equivalence and Reciprocity

There is growing support in the European Union for an equivalence regime for the regulation of non-EU audit firms based on reciprocity and equivalent oversight systems. Responses to a European Commission consultation on the issue also said that non-EU audit firms should be allowed to use international audit standards or PCAOB standards for registration purposes during a transitional period. Commissioner for the Internal Market Charlie McCreevy emphasized that the Commission wants to find the most efficient way to regulate non-EU audit firms and invited the PCAOB and other audit regulators to participate in a cooperative process.

In addition to using the sophistication of the oversight board as an equivalence standard, the commenters suggested using the size of the companies being audited and the volume of the company’s trading on EU-regulated markets. Naturally, the majority also emphasized the importance of close co-operation between the oversight bodies of EU member states and the PCAOB and other audit overseers. There is also widespread support for the Commission to make the equivalence determination on non-EU audit oversight boards rather than consigning such decisions to each member state.

The new Directive on Statutory Audit empowers the Commission to regulate non-EU auditors. The Directive requires non-EU auditors conducting audits on companies incorporated outside the EU whose securities are admitted to trading on an EU-regulated market to register with the relevant authority in each EU state in which their clients' securities are admitted to trading and to be subject to that state's oversight.

However, an audit firm can be exempted from registration based on reciprocity and provided that the firm is subject to an oversight system that the European Commission has recognized as equivalent. An exemption is thus conditioned on both reciprocity and equivalence.