Auditing reform in the EU: emulation of the US experience or a genuine approach?

by Eugene Eteris

At the time of American financial scandals with such companies as Enron and WorldCom about three years ago Europeans did not show any signs of worry or incoming trouble. All these atrocities have been regarded as a "purely American" phenomenon. Scandals in Ahold, a Dutch food retailer, and Parmalat, an Italian dairy company, have shown that the problem could be European as well. In fact, the problem of due accountancy and corporate auditing is a universal one.

Photo: europa.eu Juan Manuel Fabra Valles, President of the Court of Auditors.

In the middle of March the European Commission proposed stricter rules for the auditing of companies in the EU. This new proposal has been in the preparation already for a couple of years, and now the Council of Ministers and the European Parliament must approve it; as the latter is slowly but firmly becoming an important co-legislative authority in the Union.

Present EU proposal is not as radical as the corresponding American Sarbanes-Oxley act, working as a push on effort and a motor for the EU legislators, but still is no less important for corporate life in the Union. It's not only that the EU would most probably follow the US example; it's recognition of the fact that corporate fraud has become an international issue. In this regard, some similarities with the US law are quite apparent in the EU proposal. In line with the US creation, i.e. Public Company Accounting Oversight Board (PCAOB), as well as SEC, the EU calls for an end to auditors' self-regulation, requiring the same control body creation. The Commission wants to oblige public companies to establish independent committees to hire and fire auditors, as it is happening in the US. And like in the US law, the EU proposal requires non-EU auditors to be registered with local authorities.

The Commission's proposal also calls for tougher sanctions against "naughty accountants" and increased co-operation among various EU supervisors. It gives the EU member states the option of making compulsory the regular rotation of auditors or the senior partners dealing with a company's account. Two different approaches are still behind such rotation: the first is of a character that permanent auditors' relationships would lead to lax audits; the second is quite negative, meaning that rotation would worsen audit quality as accountants would have to learn about their clients afresh every few years as soon as they change clients.

At the same time the EU proposal differs from the American "original" in several respects, for example, the latter one is more descriptive and numerous. Thus, the US law bans accounting firms from performing non-audit work for clients as well as prohibits certification of company accounts by a firm's CEO, etc. which, in fact is a reflection of the more litigious American society. As the British weekly rightly predicted in March, "… one more big corporate scandal" can easily change the Union's proposal towards more detailed and "American-like" legislation on auditing rules. (The Economist, March 20th, 2004, p.85).