EU Looks to Smooth Global Audit Vetting

New European Union rules let non-European auditors get exemptions from registration.
David KatzJanuary 11, 2007

Spurred by worries about overregulation that echo those of U.S. companies, the European Union is looking for ideas about how to streamline the inspection and registration of non-EU auditors working for companies listed on European exchanges.

On Thursday, the European Commission, the EU’s administrative arm, issued a press release asking for comment from business interests by March 7 “on how third-country audit firms could be supervised and on how the EU could cooperate with third countries.” The EU’s 2006 audit directive requires non-EU audit firms to register in each EU member country where the auditors’ clients’ securities are publicly traded.

The move seemed to be spawned by fears like those expressed by U.S. business interests that Sarbanes-Oxley and other post-Enron strictures have made the country’s stock exchanges less alluring to foreign issuers. “We need to make sure European capital markets remain attractive to investors and issuers from [outside] countries,” Charlie McGreevy, the EC’s internal market and services commissioner, said in the release.

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But the EU may want a quid pro quo from the regulators of non-EU countries. “I also hope that audit regulators in these countries will participate and help us to improve our cooperation on regulation of European audit firms,” McGreevy added.

Currently, about 220 audit firms auditing issuers from about 63 non-EU countries will be affected by the rules contained in last year’s directive, according to the EC. The directive enables non-European auditors to get exemptions from registration and empowers the EC to decide whether the audit systems of the non-EU countries are equivalent to those of the EU.

If the EC finds that an outside country’s audit rules are equivalent, “EU Member States then have a common ground for assessing third-country audit firms for registration purposes,” according to the release. At that point, the rules for auditing the auditors could become reciprocal between the EU and an outside nation.

Under such an agreement, audit firms from countries with equivalent systems won’t have to register with European audit regulators. “Less bureaucracy, same high quality outcome and oversight,” McGreevy said at a conference on audit regulation in Brussels in October.

“Equivalence in this respect does not require systems to be fully identical. What we need to see are similar high-quality structures and procedures,” he said “We want to get to the point where we can have registration and inspection carried out by authorities in those non-EU jurisdictions – and as fast as possible. Sending inspectors abroad is costly and not really a trust building measure.”

In its release, the EC said it’s seeking opinions on what its priorities should be in assessing whether an outside countries’ audit rules are compatible with those of the EU. Further, it’s seeking views on whether to use U.S. Generally Accepted Auditing Standards and International Standards on Auditing as “transitional” standards that audit firms from third countries that can’t yet benefit from equivalence. “Such a measure could be taken to avoid disruptions of European capital markets,” according to the EC release.

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