Risk & Compliance

Tough New Accounting Rules for Europe

European Commission proposals are expected to follow in the footsteps of rules in the States.
Stephen TaubMarch 15, 2004

The European Commission will announce new rules tomorrow to shore up corporate governance and compliance, according to Reuters.

Mindful of tougher U.S. rules for public companies and auditors, and fresh off a rash of its own accounting scandals, the EC is expected to propose an independent supervisory body to police accountants, similar to the Public Company Accounting Oversight Board.

Other proposals, said the report, are expected to call for improved cooperation among EU supervisors; auditor rotation; and tougher sanctions for accountants who break the rules, said the report.

The rules were being drawn up even as scandals broke at Parmalat and other companies. As a result, the wire service points out, the new rules do not explicitly call for the legal separation of audit and non-audit services, which many critics believe would lessen the chance of collusion and conflicts of interest.

For example, the proposal calls for auditors to reveal potential conflicts of interests but does not bar them from providing tax advice. These issues will be the subject of a new study planned by the commission plans to conduct a study on this issue, according to the wire service.

Currently, Italy and Spain are the only two European Union countries that require rotation of auditing firms. The EU will probably offer companies the choice of rotating audit firms every seven years or audit partners every five years, according to the report. The proposal will also probably require key audit partners to be barred for two years from taking up management positions in companies they audited.

Although the European Commission is expected to call for European Union member states to introduce tough sanctions, the recommendation will be somewhat hollow, noted Reuters, since the commission cannot legislate. Individual member states would have to decide on specific sanctions.

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