Consultation on Implementation of Articles 45 47 of the Directive on Statutory Audit

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CMB/BLC-SUB/mb

Mr Jürgen Tiedje

The European Commission

DG Internal Market and Services

Unit 4 – Auditing

SPA 2 (JII) 02/085

B-1049 BRUSSELS

Belgium

e-mail:

5 March 2007

Dear Mr Tiedje

Consultation on Implementation of Articles 45 – 47 of the Directive on Statutory Audit (2006/43/EC)

Cooperation with non-EU jurisdictions on auditor oversight

The Business Law Committee is the Institute’s committee which monitors developments in the rules and regulations affecting businesses generally and considers legislative and other proposals deriving from bodies such as the DTI, the European Commission, IFAC and the UK Listing Authority. The Committee is broadly based, with members representing different sizes of accountancy practice, industry, the investment community, and the legal profession.

General Comments

The Committee welcomes this consultation and the Commission’s adoption of a pro-active position regarding the implementation of Articles 45 -47 of the 8th Directive. Maximum co-ordination between Member States is vital and we believe the Commission is the appropriate body to lead and facilitate this implementation.

The key objectives with this Directive must be to promote audit quality, and to promote public confidence in the audit function and hence in the capital markets. At the same time this must be done in an effective manner, without excessive cost. In order to strike the right balance between investor and issuer, and to implement workable procedures it is essential that maximum use is made of Article 46. We welcome and encourage the Commission with its work programme to establish equivalence in third countries, and to focus on key principles rather than on a narrow or legalistic interpretation. In a similar vein, full use of transitional measures should be used wherever a third country has started to take initial steps to comply with the 8th Directive requirements and shows a willingness to work towards an adequate regulatory framework.

We strongly advocate that if equivalence is established in a third country under Article 46 then every member state should agree not to apply Article 45 in relation to that country. In our view, if there is equivalence, but Article 45 is used to make modifications, perhaps in different ways by different states, then harmonisation across the single market is weakened. It is hoped that the equivalence route will prevail and that member states will then rely on the equivalent home regulation in the third country.

Specific Questions

Question 1: Do you have further comments, or concerns to share, on the equivalence?

We agree with the analysis in the consultation paper and that decisions about equivalence on an EU wide basis would be beneficial. We also strongly support the notion of using principles when assessing the horizontal criteria of independent external quality assurance, effectiveness of domestic investigations and penalties, and a comprehensive set of responsibilities of the public oversight.

Question 2: Do you have comments on the need for transitional measures?

Transitional measures will be important and we agree that the second avenue is preferable as discussed in 3.1.2, for the reasons given. We would anticipate transitional measures being available for up to five years.

Question 3: Do you have any comments or observations on the above list of third countries? Do you have specific information on those third countries which you would like to share with the European Commission services and if so, which?

The discussion in section 3.1.3 appears to adopt a sensible approach.

Question 4: Do you have any comments or observations that you wish to bring to the European Commission’s attention as regards the explanation in section 3.2?

Strenuous efforts need to be made by all parties to have a uniform application of Articles 45 and 46 by Member States. Guidance from the Commission on uniform implementation in such scenarios as described in Case 2 and 3 would be helpful.

Question 5: Do you have comments on a concept for co-operation in registration procedures that would aim at reducing administrative burdens and cost?

There ought to be cooperation between the different Member State Oversight Boards. We would hope that if a third country auditor could be registered under Article 45 in one Member State, then that auditor should automatically be eligible to register in other Member States, and this could well be coordinated by EGAOB. Without this type of measure there is a huge cost and administrative burden for oversight boards and for third country auditors.

Question 6: Do you have comments on the use of International Standards on Auditing and US auditing standards (US GAAS) by third country audit firm for registration purposes for a limited transitional period?

It would appear sensible to have a period in which the use of both ISAs and US GAAS is acceptable. Also, when assessing recipocracy, the Commission should give consideration and credit for how far ISAs are accepted as equivalent standards in the third country.

Question 7: Do you have comments on independence issues under Article 45?

We would encourage the Commission to use the IFAC Code of Ethics.

Question 8: Do you have concerns which you would like to make European Commission services aware of?

The transfer of audit working papers should be restricted to investigation cases and should not normally be applicable for quality assurance reviews of routine inspections. We would encourage the maximum use of relying on home country oversight where audit papers may be available for inspection, rather than the transferring papers from one jurisdiction to another. The transfer of papers may lead to disruption of the auditors’ work.

Question 9: Do you have comments on the conditions set up in the adequacy test?

We have no comments.

Question 10: Which circumstances could, in your view, be considered as exceptional?

We have no comments.

Please do not hesitate to contact me should you wish further clarification on any of the above points.

Yours sincerely

CHARLOTTE BARBOUR

Assistant Director, Accounting & Auditing

cc Mr Richard Leyland, DTI

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