Explanatory Memorandum to COM(2011)778 - Amendment of Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts

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dossier COM(2011)778 - Amendment of Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts.
source COM(2011)778 EN
date 30-11-2011
1. CONTEXT OF THE PROPOSAL

The measures adopted both in Europe and elsewhere in the direct aftermath of the financial crisis have mainly focused on the urgent need to stabilise the financial system. While the role played by banks, hedge funds, rating agencies, supervisors or central banks has been questioned and analysed in depth in many instances, little or no attention had been given to the role auditors played in the crisis – or indeed the role they should have played. Given that many banks revealed huge losses from 2007 to 2009 on the positions they had held both on and off balance sheet, it is difficult for many citizens and investors to understand how auditors could give clean audit reports to their clients (in particular banks) for those periods.

It is important to note that in a crisis where €4 588.9 billion of taxpayer money was committed to support banks between October 2008 and October 2009 and where such aid accounted for 39% of EU 27 GDP in 2009[1], all components of the financial system need to be improved.

Robust audit is key to re-establishing trust and market confidence. It contributes to investor protection by providing easily accessible, cost-effective and trustworthy information about the financial statements of companies. It also potentially reduces the cost of capital for audited companies by ensuring more transparency and reliability of financial statements.

It is also important to stress that auditors are entrusted by law to conduct statutory audits. This entrustment responds to the fulfilment of a societal role in offering an opinion on the truth and fairness of the financial statements of the audited entity; the latter in turn are able to enjoy limited liability and/or the possibility of providing services in the financial sector.

Since 1984, EU rules have partially regulated statutory audit when a directive (Directive 1984/253/EEC) harmonized the procedures for the approval of auditors. Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (hereinafter Directive 2006/43/EC) was adopted in 2006 and considerably broadened the scope of the former Directive. The high degree of concentration in audit market and the multitude of approval procedures necessary to provide cross-border statutory audits prevent small and medium-sized audit firms from benefiting from the internal market. In line with Europe 2020 Strategy[2] that calls for an improvement of the business environment, the proposal aims at enhancing the internal market for statutory audits to allow small and medium-sized firms to grow and encourage the entry of new players.

The current Commission proposal on the amendments to the Statutory Audit Directive will coexist with a Proposal of a Regulation on the specific requirements on the statutory audit of public-interest entities.[3] The two proposals are part of the ongoing regulatory reform in various domains of the financial sector. As audit provides comfort on the veracity of financial statements, it remains one of the primary building blocks of financial stability. Other general initiatives that are being worked upon such as corporate governance, accounting and credit ratings are complementary to this proposal. Neither do they duplicate nor overlap with each other.

The proposal contains amendments to the provisions on the approval and registration of auditors and audit firms, on the existing principles in the Statutory Audit Directive regarding professional ethics, professional secrecy, independence and reporting as well as the associated supervision rules that remain applicable for the audit of non-public-interest entities (non-PIEs).

3.

2. CONSULTATION OF THE INTERESTED PARTIES


The Commission conducted a consultation from 13 October to 8 December 2010 i.

In all, almost 700 responses from various stakeholders; these included members of the profession, supervisors, investors, academics, companies, government authorities, professional bodies and individuals were received.

The consultation has shown both an appetite for as well as resistance to change; stakeholders who are currently well established are particularly opposed to changes. On the other hand, especially small and medium sized practitioners as well as investors concluded that the recent financial crisis highlighted serious shortcomings. A summary of public submissions received can be found on:

ec.europa.eu/internal_market/consultations/docs

In addition, a high level conference on audit held by the Commission on 10 February 2011[5] allowed for a further exchange of views.

The European Parliament adopted an own-initiative report on 13 September 2011 on this matter in reaction to the Commission's Green Paper and urges the Commission to ensure more transparency and competition in the audit market[6]. The European Economic and Social Committee (EESC) adopted a similar report on 16 June 2011.[7]

The issues were also brought to the attention of the Member States at the Financial Services Committee meeting of 16 May 2011 and at the Audit Regulatory Committee meeting of 24 June 2011.

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3. IMPACT ASSESSMENT


In line with its 'Better Regulation' policy, the Commission services conducted an impact assessment of the different policy options. Among the different issues that were examined, some concerned only the statutory audit of public-interest entities (PIEs) while others related to statutory audit in general. The conclusion was that there was a need for more detailed rules concerning the audit of PIEs and a separate legal instrument would be required for this. The Statutory Audit Directive would maintain its general scope.

Regarding the issues within the scope of the latter, the following problems were examined:

– High level of administrative burden resulting from fragmented national regulation;

– Provision of cross-border statutory audits allowed only if an auditor passes an aptitude test and gets approved and registered in every Member State;

– Lack of common standards across the EU on audit practice, independence, internal control of audit firms;

– Auditing standards do not take into account the size of the audited companies, in particular of SMEs;

– Associated problems regarding supervision of non-PIEs.

Further to the additional compliance cost, this results in the absence of a level playing field for audit firms and statutory auditors across the Union and low business potential for small and medium-sized practitioners (SMPs).

The impact assessment concluded that the best options to improve the existing situation would be:

– Facilitation of the cross-border recognition of audit providers' competence: principle of mutual recognition of audit firms and statutory auditors across the Union;

– Streamlining of the standards on audit practice, independence and internal control of audit firms across the Union through the introduction of international auditing standards in order to ensure that auditing standards are the same across the Union; national additions would be acceptable, where necessary;

– Adaptation of audit standards to the size of the audited entity by requesting Member States to ensure that a proportionate and simplified audit for SMEs is possible.

These issues concerned all statutory auditors and audit firms which perform statutory audits of entities which are not public-interest entities. In addition to those matters, the impact assessment covered other areas that related to the statutory audit of PIEs only.

The different policy options and their impact on stakeholders are discussed at length in the impact assessment which is available at the following website:

ec.europa.eu/internal_market/auditing/index_en.

Contents

1.

LEGAL ELEMENTS OF THE PROPOSAL



5.

4.1. Legal basis


The amending Directive has the same legal basis as the Statutory Audit Directive. The proposal is based on Article 50 of the Treaty on the functioning of the EU, which requires the adoption of a Directive for establishment-related matters (e.g. those dealing with professional qualifications). The amended Directive is EEA relevant.

The new amended Directive will coexist with a Regulation on specific requirements concerning statutory audit of public-interest entities.

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4.2. Subsidiarity and proportionality principle


In accordance with the principles of subsidiarity and proportionality as set out in Article 5 of the TEU, the objectives of the proposal cannot be sufficiently achieved by Member States and can therefore be better achieved at the Union level. In particular, the facilitation of cross-border mobility of statutory auditors and audit firms across the Union could not be achieved without intervention at the Union level. Thus, the Commission proposal respects the subsidiarity principle, as it aims at overcoming the obstacles to the development of a single market for statutory audit services and those identified during the open stakeholder consultation. In addition, the amended Directive leaves discretion to Member States on how to adapt the audit standards to the size of the audited entity that should result in better audit services to the SMEs concerned. Moreover, the proposal respects the principle of proportionality because all solutions have been drafted keeping cost-efficiency in mind. The proposal does not go beyond what is necessary to achieve the objectives pursued.

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4.3. Detailed explanation of the proposal


The main modifications to the Statutory Audit Directive are:

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1) Articulation between the Statutory Audit Directive and an additional legal instrument on specific requirements for the statutory audit of PIEs (Article 1)


The Commission proposes that the amended Statutory Audit Directive coexists with the Regulation on specific requirements on the statutory audit of annual financial statements and consolidated financial statements of public-interest entities. Thus, a clear articulation between the two legal texts is needed. The current provisions in the Statutory Audit Directive that only relate to the performance of a statutory audit on the annual and consolidated financial statements of the public-interest entities would be integrated and, as appropriate, amended in the Proposal of a Regulation on specific requirements on the statutory audits of annual financial statements and consolidated financial statements of PIEs. As a consequence, Articles 39 to 44 and Article 22(2) in fine should be deleted.

Moreover, Article 1 deals with the applicability of the amended Directive to the statutory audit of PIEs. Articles 3 to 20 (on the access to the market of auditors) apply to statutory auditors and audit firms, irrespective of the type of audited entity. However, for the rest of the Articles of the Directive, the situation is different: Article 22 on independence and objectivity, Article 25 on audit fees, Article 27 and Article 28 on audit reporting, as well as Articles 29 to 31 on quality assurance, investigations and penalties would not apply to the statutory audit of PIEs. On these issues specific more detailed rules would be enacted in the Regulation. Articles 32 to 36 regarding supervision would only apply to the statutory audit of PIEs as regards supervision of compliance with Articles 3 to 20. Finally, other Articles apply to audits of PIEs and are completed by the Regulation on specific requirements (Articles 21, 23, 24, 26, 37 and 38).

2) Definition of 'statutory audit' in order to take account of the new accountancy directive (Article 2)

The Commission also proposes a change in the definition of 'statutory audit'. Firstly, the statutory audit will continue to cover the instances where different Union legal texts impose an obligation on some undertakings to have their financial statements audited, depending on their legal form or on their activity. In order to guarantee the unicity of audit, the definition of 'statutory audit' should also cover situations where Member States decide to impose an obligation on small undertakings to have their financial statements audited.[8] Lastly, where a small undertaking decides voluntarily to have its financial statements audited, such audit should also be considered a statutory audit.

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3) Modification of the ownership rules (Article 3 and Article 22 (2))


Another change to the Statutory Audit Directive concerns the liberalization of the ownership rules of audit firms. Currently, the Statutory Audit Directive requires that a majority of the voting rights in an audit firm is held by licensed accountant practitioners. This requirement is no longer stipulated in the proposed amendment and Member States are forbidden to require that a minimum of capital or of voting rights in an audit firm is held by statutory auditors or audit firms. However, the new Article 3 i maintains the existing requirement that a majority of the members of the administrative or management body of the audit firm are audit firms or statutory auditors.

Permitting broader ownership should facilitate audit firms' access to capital which may result in increasing the number of providers of audit and might encourage new entrants into the market, including through expanded capital-raising in public markets.

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4) Passport for audit firms (Articles 3b, Article 15 and 17)


The proposal for an amended Directive would allow audit firms to provide statutory audits in Member States other than the Member State in which they have been approved, provided that the key audit partner leading the audit is approved as an auditor in the concerned Member State. As a consequence, the burden that a multitude of approval procedures entails would be reduced and at the same time this would allow for the emergence of real pan-European audit firms. This automatic recognition of firms would not result in a reduction of supervisory quality as supervisors will continue to be required to oversee audit work carried out in their respective Member State.

However, once approval is obtained in the home Member State, the host Member State may require some form of registration of audit firms from other Member States. This registration should be carried out in accordance with Articles 15 and 17, which also concern the registration of any local audit firm.

5) Passport for statutory auditors (Article 3a) and 'softening' the conditions for a statutory auditor to be approved in a different Member State (Article 14)

The proposed modifications regarding the approval of statutory auditors from other Member States are aligned with the provisions of the Directive 2005/36 on the recognition of professional qualifications (Professional Qualifications Directive)[9].

Article 3a would allow statutory auditors to provide cross-border statutory audit services on a temporary or occasional basis. The conditions of Articles 5 to 9 of the Professional Qualifications Directive would apply, notably the obligation to communicate the intention to provide the services in question to the relevant competent authority.

The amended Article 14 provides a Member State with the possibility to offer the statutory auditor who is approved in another Member State the choice between an adaptation period and an aptitude test, if such auditor wants to set up a permanent establishment in that Member State.

Regarding the requirements of the aptitude test, there are no substantial modifications from the previous drafting of Article 14. The test should be aimed at assessing the statutory auditor's knowledge of the laws and regulations of that Member State that are relevant for the carrying out of the statutory audit.

During the adaptation period, which should be offered to the applicant as an alternative to the aptitude test, the statutory auditor would be allowed to conduct statutory audit in the Member State, other than the one in which he or she is approved, under the supervision of a local auditor. The length of the adaptation period is three years.

Concerning supervision of statutory auditors from other Member States, the public authority that would be responsible for the status of the statutory auditor and for the assessment of the training acquired during the adaptation period is the competent authority of the host Member State, as it is the most suitable one.

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6) Requirements to competent authorities to cooperate regarding educational requirements and aptitude test (Article 6 and Article 14)


In order to ensure more convergence of the educational qualifications of auditors at Union level, the competent national authorities in charge of the public oversight for statutory auditors must cooperate. Cooperation at Union level is also necessary to harmonise the requirements of the aptitude test for statutory auditors to render it more predictable and transparent.

12.

7) Auditing standards and audit reporting (Article 26)


In order to enhance the quality of statutory audits performed in the Union, the proposal requires Member States to ensure that statutory auditors and audit firms carry out audits in accordance with the international auditing standards.

As the Proposal for a Regulation on the specific requirements on the statutory audit of public-interest entities comprises detailed provisions on the audit report, Article 28(2) is deleted.

13.

8) New rules regarding competent authorities (Articles 32 and 32a)


Presently, the Statutory Audit Directive requires Member States to organise a system of public oversight for statutory auditors and audit firms. In practice, this allows professional bodies to be responsible, among others, for the approval and registration of statutory auditors and audit firms and their external quality assurance, investigations and disciplinary measures. The new amendment states that the competent authority responsible for public oversight will be a public authority that will be also responsible for approval (Article 3 and Article 32), registration (Article 15) and quality assurance (Article 29).

In order to ensure that the public authorities for auditors' oversight exercise their functions in an independent and effective manner, they must also have appropriate powers and resources for carrying out investigations and access to relevant documents held by statutory auditors or audit firms (Article 32(5)). While it should not be possible any longer that a professional body is responsible for the tasks enumerated in Article 32, the competent authority responsible for the public oversight may delegate some of its tasks to other authorities or bodieswith regard to the approval and registration of the statutory auditors and audit firms (Article 32a). Such delegation must be subject to several conditions and the body which bears the ultimate responsibility is the competent authority as referred to in the first paragraph of Article 32. Member States shall inform each other of the delegations granted.

14.

9) Prohibition of contractual clauses influencing the appointment of statutory auditors or audit firms (Article 37(3))


In the context of the appointment of statutory auditors and audit firms, Article 37 prohibits clauses according to which a third party suggests, recommends or requires the audited entity to appoint a specific statutory auditor or audit firm.

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10) Special rules for the statutory audit of small and medium-sized undertakings (Articles 43a and 43b)


Following the recent Commission proposal, small undertakings would no longer be required by EU law to have their financial statements audited[10], although Member States may still require it. However, the requirement will continue to apply to medium-sized undertakings.

When medium-sized undertakings are audited pursuant to EU law, the amended Directive requires Member States to ensure that the way in which the auditing standards are applied are adapted to the dimension and scale of those undertakings. Moreover, small undertakings having their accounts audited either because required by national law or voluntarily, should also benefit from this proportionate application of the standards. This calibration of the audit to the size of the audited entity should result in better audit services to the small and medium-sized undertakings concerned and possibly lower cost. The proposed measure does not define in detail how proportionate application of the standards must be done; applying the subsidiarity principle, this is left to the discretion of Member States.

It is important to underline, that where a small or medium-sized undertaking is a PIE, it is the provisions contained in the draft Regulation on specific requirements on statutory audit of public-interest entities that would apply.

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11) Special rules regarding delegated and implementing powers, following the entry into force of the Treaty of Lisbon (Article 48a; 48b; 48c)


Articles 8(3), 22 i, 29(2), 36(7), 45(6), 46(2), 47(3) and 47(5) (delegated and implementing acts) align the committee procedures to Articles 290 and 291 TFEU which set out the new framework for the implementing powers of the Commission. In respect of powers of the Commission to adopt implementing acts under Article 291 TFEU, such powers are governed by Regulation (EU) No 182/2011 of the European Parliament and of the Council of 16 February 2011 laying down the rules and general principles concerning mechanisms for control by the Member States of the Commission's exercise of implementing powers.[11].

The alignment is done on a case by case basis in order to allow for a review of the powers conferred by the legislators to the Commission. The implementing powers of the Commission are thus reviewed to allow certain elements of the Directive to be specified, updated and to allow the Commission to take measures to facilitate cooperation, on one hand between the auditor and the competent authorities of Member States, and, on the other hand, between the latter and those of third countries in several areas covered by the Directive.

The new Articles 48a, 48b and 48c specify the way in which the Commission shall exercise the delegated powers, the cases in which the delegation may be revoked by the legislators and the cases in which the European Parliament or the Council may object to a delegated act.

2.

BUDGETARY IMPLICATION



The Commission's proposal has no direct or indirect impact on the European Union budget.