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ADVANCED PROGRAM IN ACCOUNTING AND AUDITING REGULATION - MODULE 4

ADVANCED PROGRAM IN ACCOUNTING AND AUDITING REGULATION - MODULE 4. Auditing Regulation in the Acquis Communautaire Andrew J. Popham Chairman FEE Auditing Working Party. Our Programme For Today. Eighth Directive – 1984 version Developments since then Proposed changes to the Eighth Directive.

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ADVANCED PROGRAM IN ACCOUNTING AND AUDITING REGULATION - MODULE 4

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  1. ADVANCED PROGRAMIN ACCOUNTING AND AUDITING REGULATION - MODULE 4 Auditing Regulation in the Acquis Communautaire Andrew J. Popham Chairman FEE Auditing Working Party

  2. Our Programme For Today • Eighth Directive – 1984 version • Developments since then • Proposed changes to the Eighth Directive

  3. 8th Company Law Directive of 10 April 1984 (84/253/EEC) • The 4th and 7th Company Law Directives define the scope of statutory audit but give no indication on who might be authorised to carry out such engagement • The purpose of the 8th Company Law Directive is to organize the approval of statutory auditors and audit firms in the Member States of the European Union

  4. 8th Company Law Directive of 10 April 1984 Main Issues dealt with in the Directive • Approval (registration) of statutory auditors • Qualification requirements of auditors • Principles of independence and integrity and sanctions for violation • Approval of audit firms • Publicity of the register of statutory auditors

  5. 8th Company Law Directive of 10 April 1984 1. Approval (registration) of Statutory Auditors Since 1984 in the EU, statutory audit can only be carried out by an approved statutory auditor or audit firm. 3 conditions are required to be a statutory auditor (natural person): • To meet the qualification requirements as defined by the Directive (art.4) • To be a person of good repute (art.3) • To carry on no activity which is incompatible, under the law of that Member State, with the statutory auditing (art.3)

  6. 8th Company Law Directive of 10 April 1984 1. Approval (registration) of Statutory Auditors Conditions to approve a natural person to carry out statutory audits: • After having attained university entrance level, • To have: • completed a course of theoretical instruction, • undergone practical training and • passed an examination of professional competence of university final examination level organized or recognized by the State.

  7. 8th Company Law Directive of 10 April 1984 2. Qualification Requirements of Auditors Providing details on • the content of theoretical knowledge and • practical training of auditors constitutes the main part of the Directive. The Directive also allows EU Member States to recognize the qualification afforded by another Member State or a foreign country

  8. 8th Company Law Directive of 10 April 19842. Qualification Requirements of Auditors The 8th Directive does not go very far on ethics. Without giving further details, it requires that approved auditors: • carry out audits with professional integrity (art.23) • be independent in accordance with the law of the Member State which requires the audit. (art.24) • be liable to appropriate sanctions when they do not carry out audits in accordance with these principles

  9. 8th Company Law Directive of 10 April 1984 3. Principles of Independence and Integrity and Sanctions for Violation • Ethical requirements apply to natural persons who carry out the statutory audit on behalf of a firm of auditors. (art.25) • Shareholders and members of the management of audit firms who are not approved auditors may not intervene in the execution of audits in any way which jeopardizes the independence of the natural persons acting on behalf of such firms of auditors. (art.27)

  10. 8th Company Law Directive of 10 April 1984 4. Approval of Audit Firms Depending on the legislation of each EU Member State, statutory audit may be carried out by legal persons or othertypes of company, firm or partnership (firms of auditors). (art.2) • Two conditions to be approved as a firm of auditors: • Natural persons acting on behalf of an audit firm must meet the qualification requirements and, if the Member State requires it, be approved. • Conditions on majority in ownership and management

  11. 8th Company Law Directive of 10 April 1984 5. Publicity of the Register of Statutory Auditors • EU Member States shall ensure that the names and addresses of all approved natural persons and firms of auditors are made available to the public. • Following information must be made available to the public in respect of each approved firm of auditors: • the names and addresses of the natural persons allowed to carry out statutory audit on behalf of the audit firm • the names and addresses of the members or shareholders of the firm of auditors; • the names and addresses of the members of the administrative or management body of the firm of auditors.

  12. Developments since 1984 • 28 October 1996 Green Paper on the Role, Position or Responsibilitites of Statutory Auditors in the EU • 8 May 1998 EU communication « Statutory Audit in the European Union - the way forward » Establishment of the Committee on Auditing • 15 November 2000 EU Recommendation « Quality Assurance for statutory audit » • 16 May 2002 EU recommendation « Statutory Auditors’ Independence in the EU »

  13. Modernisation of the 8th Directive Why Changing Now? • The Eighth Directive does not cover auditing standards, quality assurance or public oversight • Ethical requirements in the Eighth Directive are seen as too high level • US pressure after Sarbanes Oxley • EU Parliament’s pressure after Parmalat

  14. Modernisation of the 8th Directive • Presentation of a proposed Directive by the European Commission in March 2004 • The EU Council of Member States approved an amended version in December 2004 • The EU Parliament is expected to vote in September 2005 • If the three bodies agree on the same text, which is probable, the Directive will be finalised and published early in 2006 • Member States are granted 24 months to implement the new provisions

  15. Our Programme For Today…… • To avoid duplication with other modules of the World Bank’s programme we will discuss : • Audit standards • Quality assurance • Investigations and sanctions • Audit of public interest entities • International aspects • Other Modules Will Cover • Registration and mutual recognition 20 September • Oversight 29 November • Education 31 January • Ethics 14 February

  16. 1. Auditing Standards • EU Members States shall require statutory auditors and audit firms to carry out statutory audits in accordance with international auditing standards adopted by the Commission • Adopted international auditing standards shall be published in full in each of the official languages of the Community, in the Official Journal of the European Union

  17. 1. Auditing Standards The EU Commission shall only adopt international auditing standards for application in the Community if they: • Are generally accepted internationally and are developed with proper due process, public oversight and transparency; and • Contribute to a high-level of credibility and quality to the annual or consolidated accounts; and • Are conducive to the European public good

  18. 1. Auditing Standards Behind the formal wording, objectives are: • To endorse a coherent set of standards which can only be International Standards on Auditing (ISA) issued by IAASB • To decide on the report of a technical committee which will have the responsibility to assess the technical soundness of the standards • Year after year, new standards will be regularly endorsed by the EU Commission in order to make them part of the EU system of law.

  19. 1. Auditing Standards Main Issues under discussion on standard setting • EU commitment to continue working with IAASB in future • Convergence between ISAs and US standards • Clarity and enforceability of Isas • Who will be present in the technical committee? Oversight bodies? the profession?

  20. 1. Auditing Standards Implementation at National Level: • EU Member States may apply a national auditing standard as long as the Commission has not adopted an ISA covering the same subject matter. • EU Member states must implement the Directive within a period of two year but an additional transitional period of two years is introduced to eliminate unnecessary additional requirements.

  21. 1. Auditing Standards Implementation at National Level: • Member States may impose audit procedures or requirements in addition to ISAs but only if these follow from specific national legal requirements relating to the scope of the statutory audit. • In exceptional cases where there is a serious legal problem, a carve out of ISA requirements could also be possible. • Arrangements must be developed to “police” these rules

  22. 1. Auditing StandardsAudit Report Audit Report • A recent update of ISA 700 facilitates the application of ISA reporting in Europe, especially because it clearly separates the opinion on financial statements and other declarations on (national) legal and regulatory requirements • Where an audit firm carries out the statutory audit, the audit report shall be signed at least by the statutory auditor(s) carrying out the statutory audit on behalf of the audit firm.

  23. 1. Auditing StandardsGroup Accounts • IAASB started working on audit of group accounts recently – approval of the standard is expected shortly. • Parmalat raised questions on responsibilities. • Audit documentation in group audits was an issue in the US.

  24. 1. Auditing Standards Group Accounts • The group auditor bears the full responsibility for the audit report on consolidated accounts. • The group auditor carries out a review and maintains documentation of the review of the audit work performed by other auditors for the purpose of the group audit. • The documentation shall be adequate for the relevant competent authority to properly review the work of the group auditor.

  25. 1. Auditing Standards Group Accounts • Cooperation between regulators of different countries will provide a framework for transfer of audit working papers related to components of a group • In the absence of a cooperation agreement, the group auditor is responsible for ensuring proper delivery, when requested, to the public oversight authorities of the documentation relevant for the group audit • Therefore, he shall • retain a copy of such documentation, • agree with the third country auditor his proper and unrestricted access upon request, or • take any other appropriate action.

  26. 2. Quality Assurance • EU Recommendation published in November 2000 • Principles of the Recommendation are inserted in the proposed Directive to make them mandatory • Applicable to all kinds of audits, not just listed companies • Organisation of quality assurance is different in the Member States • Good balance must be found between independence, competence and resources

  27. 2. Quality Assurance • Quality assurance systems must be independent from the reviewed statutory auditors and audit firms and subject to public oversight • The funding for the quality assurance system must be secure and free from any undue influence by statutory auditors or audit firms • The quality assurance system must have adequate resources

  28. 2. Quality Assurance • Persons who carry out the quality assurance reviews must have: • Appropriate professional education and relevant experience in statutory audit and financial reporting • Specific training on quality assurance reviews

  29. 2. Quality Assurance • The selection of reviewers for specific quality assurance review assignments must: • Be made under an objective procedure • Ensure that there are no conflicts of interest between the reviewers and the statutory auditor or audit firm under review

  30. 2. Quality Assurance • Quality assurance review must: • Assess the internal quality control of the firm • Include adequate testing of selected audit files • Have as objectives to assess: • compliance with auditing standards • compliance with independence requirements • the quantity and quality of resources spent • the audit fees

  31. 2. Quality Assurance • Quality assurance reviews must take place at least every six years • Report on quality assurance review must contain the main conclusions of the external quality assurance review • Findings on individual firms are not disclosed but the overall results of the quality assurance system must be published annually by the body responsible for quality assurance

  32. 2. Quality Assurance • Recommendations of quality reviews shall be followed up by the statutory auditor or audit firm within a reasonable period • If recommendations are not followed up, the auditors will be subject to disciplinary action

  33. 3. Investigations (in case of malpractice) and Sanctions • Systems of investigations must be in place to detect, correct and prevent inadequate execution of the statutory audit • Investigation are conducted in case of : • Complaints from a third party • Lack of reaction of the auditor on recommendations after a quality review • Specific initiative of the oversight body

  34. 3. Investigations and Sanctions • Disciplinary sanctions are already mentioned in the current 8th Directive but the system is reinforced. • Member States must provide effective, proportionate and dissuasive sanctions in respect of statutory auditors and audit firms, where statutory audits are not carried out in conformity with the provisions adopted in the implementation of the Directive.

  35. 3. Investigations and Sanctions • Sanctions for malpractice can be: • Criminal sanctions; • Civil responsibility (damages); • Disciplinary sanctions. • Measures taken or sanctions imposed on statutory auditors and audit firms must be appropriately disclosed to the public. Sanctions may include the possibility of the withdrawal of approval.

  36. 4. Audit of Public Interest Entities • Definition of PIE : listed companies, large banks and insurance companies • Mandatory audit committees to support the statutory auditor • More frequent quality review of the work of audit firms • Firms to public «public interest » reports summarising their quality control arrangements and those of their network

  37. 5. International Aspects Major issues in the transatlantic regulatory dialogue. • Possibility to approve third country auditors when providing an audit report on a EU company • Registration of third country auditors when providing an audit report on companies listed in the EU; derogation possible in case of equivalence • Organisation of cooperation between regulators (competent authorities of EU and third Countries) on access to audit working papers in other countries.

  38. Conclusions • The objective of audit regulation is to enhance audit quality in the public interest. • The EU regulatory system has been gradually developed since 1984. • When implemented by the Member States the new Directive will provide an important improvement of the framework. • Additional efforts will be conducted at the level of regulators and at the level of the profession, including the European profession of accountants, to ensure appropriate development and enforcement of the principles.

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