Europe’s Tough New Auditing Standards

The European Commission doesn't take a cookie-cutter to the PCAOB approach.
Stephen TaubMarch 18, 2004

The European Commission has trotted out tough new auditing rules in an attempt to prevent future corporate scandals like the recent ones at Parmalat and Royal Ahold that have rocked Corporate Europe.

A “more robust” oversight board would be established in each European Union member state, following much the same criteria that governs the U.S. Public Company Accounting Oversight Board (PCAOB), reported the Associated Press.

Among the proposals, according to the AP:

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  • Audit firms from outside the European Union would be required to register in each EU state where they do business, just as foreign firms will soon have to register in the United States.
  • The group auditor for an EU company would review the work of other auditors and take full responsibility for the company’s consolidated accounts. In the United States, the CEO and CFO are required to certify their financials.
  • As in the United States, a company would set up an independent audit committee to select its auditor and oversee the process.
  • But unlike the United States, EU audit firms would not be prohibited from offering consulting and other services. Instead, the proposals would prohibit “low-balling” auditing services below cost with the intent of charging more for other services.

In addition, according to Reuters, EU member states would introduce rotation of audit firms every seven years or rotation of audit partners every five years. The goal, of course, would be to avoid cozy relationships that sometimes prevent auditors from asking tough questions of corporate managers.

The commission also called for cooperation with other corporate regulators, especially the PCAOB. The commission added that it hoped the European Parliament and EU member states would adopt the proposals by mid-2005, although many countries have already begun to make changes.