« Eighth » Company Law Directive Statutory Audit

REPARIS Workshop

Vienna, 14 March 2006

Jean-Philippe Rabine 1

Structure of the presentation • Directive on Statutory Audit: status of adoption • Presentation of the main features – Subject Matter and Definitions – Approval, Registration and Mutual Recognition – Auditing Standards and Audit reporting – Quality Assurance – Auditors’ liability – Public Interest Entities – International Aspects 2

Modernisation of the Eighth Directive

• Directive of 1984 will be replaced • A comprehensive, principles based new Directive • Timing: – Commission proposal March 2004 – Council general approach 7 December 2004 – Single reading with the EP: 28 September 2005 – Agreement by ECOFIN Council: 11 October 2005 – Possible formal adoption: Spring 2006 – Transposition by Member States into national law: 24 months spring 2008 3

Subject Matter and Definitions • STATUTORY AUDIT REQUIRED BY COMMUNITY LAW • KEY DEFINITIONS: – Network – Public Interest Entities – Non-practitioner – Key Audit Partner 4

Approval, ownership and registration of statutory auditors and audit firms • Approval • Mutual recognition of statutory auditors between Member States audit firms (aptitude test) • Liberalised ownership and management requirements for audit firms approved in the EU (Majority and Nationality) • Enhanced public registration of statutory auditors and (Electronic, accessible to public, Information about shareholders, management, membership of a network, name and address of competent authorities) 5

Auditing Standards and report • Adoption of International Standards on Auditing • Group auditor bears the full responsibility for the group audit report • Rules on audit of components by other auditors (review and documentation) • Audit report to be signed by an individual, not by the audit firm 6

External Quality Assurance Systems • Principles: – Independent from the reviewed auditors (and avoid conflicts of interest) – Stable, secure, and independent funding – Inspectors: sufficient knowledge and experience in audit – Public oversight system has the ultimate responsibility • Scope and conduct: – At least every 6 years (PIE: 3 years) – Scope review: based on selected audit files – Follow up by auditors: failure -> santions • Report on activities: – Annual report 7

Next steps: Auditors’ liability • Article 30a of 8th Company Law Directive: Auditors’ liability with regard to statutory audits and listed companies • Report from the Commission: end of 2006 • 2007: Possible Commission recommendation to the Member States 8

Auditor’s liability: Preparatory steps • Study on the economic impact of the alternative liability regimes, the competition in the market and the availability of the insurance. • Dialogue between investors and auditors is also essential  forum to obtain the opinion from market experts 9

Public Interest Entities • Transparency report by audit firm ( Information inter alia about the audit firm’s practice, turnover, quality assurance systems and events, etc.) • Audit committee or a body performing equivalent functions – Monitor financial reporting process, provision of onon audit services, independence, effectiveness of internal controls – Composition (one independent member or disclosure of all members) • Rotation of key audit partners, but rotation of audit firms for Member States still allowed 10

International dimension • Registration of individual auditors and audit firms in Member States only if third country’s rules on independence and on auditing standards equivalent • Derogation in the case of equivalence of the third country public oversight systems • Access to audit working papers – Transfer via the national competent authorities only – Adequacy of working arrangements assessed by the Commission 11

Further information

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DG Markt website: http://europa.eu.int/comm/internal_market/e n/company/index.htm

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