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European directive to tackle audit liability

6th Apr 2005
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European internal markets commissioner Charlie McCreevy said this week he was considering a Europe-wide approach to limiting auditor liability.

McCreevy set out his agenda for regulation at an ICAEW capital markets conference in Brussels on Tuesday. He told the audience his three priorities for accountancy were:

  • To work for globally accepted international standards both in accounting and auditing
  • To work for equivalence of global accounting standards; and
  • To ensure effective cooperation on implementation and enforcement ' both within and outside the EU.

    "I intend to ensure that in moving forward, the EU does so without stifling the economy and that only regulatory initiatives with real added value are undertaken. There should be no unnecessary red tape which will hinder entrepreneurship," he promised the profession.

    "We have to get the balance right in nurturing an ethical business culture in Europe."

    Taking over the competition mantle from Fritz Bolkestein, McCreevy is responsible for implementing the 8th Company Law Directive, which is due to be introduced this year.

    In his speech, McCreevy referred to the document as the "8th Company Law Directive on Statutory Audit" and explained that it would tackle auditor independence and liability issues.

    "Independence is a vital condition for ensuring objective auditors' reports," he said.

    "The difficult issue here is the provision of non-audit services. Some of the member states want a clear and immediate prohibition on the provision of non-audit services. Others want self-assessment by the audit firm, combined with safeguards to be put in place by and within audit firms and networks of audit firms. The current compromise text strikes a careful balance on this and leaves some flexibility for member states."

    The possibility of limiting auditor liability was not originally considered in the draft directive. But the commission noted that auditors are increasingly wary of taking on new audits because of their exposure to unlimited liability. With the UK government planning to allow contractual liability limits in a Companies Bill later this year, McCreevy commented, " I can see the arguments in favour of acting at an EU level: as there could potentially be an impact on the internal market."

    McCreevy also told the meeting that the European Commission had been working tirelessly in the background to soften the impact of the Sarbanes-Oxley Act on European companies and that he would concentrate on trying to get accounting standards to converge.

    "Imagine the reduction in costs which could be achieved for 300 European companies listed in the US if they could use just one set of accounts," he said.

    The commissioner admitted that many accountants might ask, "How can he say this when the Commission decided to carve out part of IAS 39 on financial instruments?" He responded by saying the commission had to listen to the concerns of the European Central Bank and others on the issue. The carve-out was "limited in scope and time", and McCreevy said progress had been made on finding a solution.

    ICAEW chief executive Eric Anstee commented: "Both sides of the Atlantic believe their standards ' IFRS and US GAAP ' offer investors adequate protection in their respective markets. One way of moving things forward would be for the US to accept IFRS now and for the EU authorities to recognise that US GAAP is equivalent to IFRS. The detail of convergence could then be debated by both over time."

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    By AnonymousUser
    07th Apr 2005 13:00

    Audit reform
    Investors will be worried that the European internal market commissioner Charlie McCreevy is to work tirelessly to soften the blow of the Sarbanes-Oxley Act. Some investors will argue that Europe should be trying to move up to higher US standards in order to compete on the international stage.

    Is it time to bring back Fritz Bolkestein and suggest to Charlie that a soft approach to standards should not be on the agenda?

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