Commission proposes new audit directive to combat corporate fraud 

With its proposal for a revised EU Audit Directive, the Commission hopes to restore confidence in the financial reporting of companies. The draft directive was presented on 16 March 2004. It identifies, among others, the following key measures:

• the introduction in each Member State of an independent body to oversee the audit profession - this body should be governed mainly by non-practicioners;
• the establishment in each Member State of an effective system of investigations and sanctions;
• ' home country control': audit firms to be regulated by authorities in the Member State where they are established;
• procedures for the exchange of information between oversight bodies of Member States;
• auditors to be banned from being involved in management decisions of client companies;
• establishment of audit committees to monitor financial reports;
• Member States to introduce rotation of audit firms every seven years or alternatively audit partners every five years.

 

In a first reaction to the Commission's proposal, the European Federation of Accountants (FEE) welcomed the draft audit directive but expressed concerns over several elements. The FEE calls for the creation of a European-level body to co-ordinate oversight arrangements. It opposes the Commission's recommendation to exclude the audit profession from national oversight systems and rejects the proposal on rotation of audit firms, expressing its preference for a more robust system of quality assurance and inspection. Last, but not least, the FEE calls for an EU study on liability.

The

UK Association of Chartered Accountants warned that overreaction to recent corporate scandals could lead to an increase in red tape and higher costs for companies.

The Confederation of British Industry (CBI) also criticized the Commission's draft directive, saying that "corporate governance should be driven by business, not regulators". In a letter to Commissioner Bolkestein, the British employers' organisation argued that the directive introduces " an inflexible legal framework that overlooks the progress made under the current system of voluntary best practice".