The Commission presents a Staff Working Document on the transposition of Directive 2006/43/EC on statutory audits in the Member States and on European cooperation on auditor oversight. It recalls that in a resolution of 10 March 2009 on the implementation of the Directive, the European Parliament called on the Commission to evaluate the transposition measures for the Directive. The European Parliament’s resolution recalled that the aims of the Directive should be to further enhance harmonisation of the audit market, minimise exemptions in order to avoid fragmentation of the market and improve market stability and address problems of level playing-field between market participants. In addition, in order to tackle the issues related to the economic and financial crisis, the resolution stated that minimum harmonisation is no longer adequate to tackle the issues that appear in the audit market.

The Commission services have evaluated the national legislations transposing the Directive 2006/43/EC in Member States and present the results of that evaluation.

PURPOSE: to modernise EU provisions on the control of statutory audits of annual accounts and consolidated accounts.

LEGISLATIVE ACT: Directive 2006/43/EC of the European Parliament and of the Council 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 .

CONTENT: the Council adopted a Directive updating and introducing additional EU rules on the audit of company accounts aimed at reinforcing the reliability of company financial statements through the establishment of minimum requirements for statutory audit of annual accounts and consolidated accounts. The Council accepted all Parliamentary amendments tabled at first reading.

The Directive broadens the scope of application of existing EU legislation (Directive 84/253/EEC) by specifying the duties of statutory auditors, their independence and ethics, introducing requirements for external quality assurance, with a view to ensuring better public oversight of the audit profession and improving co-operation between oversight bodies in the EU. At the same time it amends Directive 78/660/EEC and 83/349/EEC on accounting.

The new measures are intended to help improve quality audits within the EU and hence underpin confidence in the functioning of EU capital markets. They will also provide a basis for co-operation with oversight bodies of third countries to take account of globally interconnected capital markets.

ENTRY INTO FORCE: 29 June 2006.

TRANSPOSITION: 29 June 2008.

The European Parliament adopted the resolution drafted by Bert DOORN (EPP-ED, NL) making several amendments to the Commission’s proposal. (Please see the summary of 21/06/2005.) The principal points are as follows:

- Commission proposals for all publicly-listed companies to have a separate audit committee to supervise financial reporting procedures were deleted. The amendments give Member States the possibility to determine themselves the way in which firms are to supervise their internal auditing reporting. The Member States could allow a number of exemptions from the obligation to have an audit committee and would also be given discretion to maintain national bodies similar to an audit committee;

-the Directive aims at high level -though not full - harmonisation of statutory audit requirements. The Member State requiring the statutory audit can impose more stringent requirements, unless otherwise indicated in the text of the Directive.

-Parliament has expanded on the matter of an auditor’s independence: examples of threats to the independence of a statutory auditor or audit firm are a direct or indirect financial interest in the audited entity and the provision of additional non-audit services. Also, the level of fees received from one audited entity and/or the structure of the fees can threaten the independence of a statutory auditor or audit firm. Types of safeguards to be applied to mitigate or eliminate these threats include prohibitions, restrictions, other policies and procedures and disclosure. Statutory auditors and audit firms should refuse to undertake any additional non-audit service that compromises their independence. The Commission may, as minimum standards, adopt implementing measures on independence. In order to determine the independence of auditors, the concept of a "network" in which auditors operate needs to be clear. In this regard, various circumstances have to be taken into account such as instances where a structure could be defined as a network because it is aimed at profit or cost sharing. The criteria for demonstrating that there is a network should be judged and weighed on the basis of all factual circumstances available, such as whether there are common usual clients;

-Parliament has amended many of the definitions in the text and inserted new ones, such as "Non-practitioner” and "Key audit partner(s)";

-amendments were also made to the obligation for a public interest company to change auditors every five years and audit firm every seven. The legislation now requires rotation every seven years, only for key audit partner/statutory auditor, and not for the audit firms themselves. Member States must ensure that the key audit partner(s) responsible for carrying out the statutory audit shall rotate from the audit engagement within a maximum period of seven years after the date of appointment and shall be allowed to participate in the audit of the audited entity again after a minimum period of two years.

- In cases of self review or self interest, where appropriate to safeguard the statutory auditor´s or audit firm's independence, it should be for the Member State rather than the statutory auditor or the audit firm to decide whether the statutory auditor or audit firm should resign or abstain from an audit engagement with regard to its audit clients. However, this should not lead to a situation where Member States have a general duty to prevent statutory auditors or audit firms from providing non-audit services to their audit clients. For the purposes of determining whether it is appropriate, in cases of self interest or self review, that a statutory auditor or audit firm should not carry out statutory audits, so as to safeguard the statutory auditor's or audit firm's independence, the factors to be taken into account should include the question whether or not the audited public interest entity has issued transferable securities admitted to trading on a regulated market.

-with regard to public oversight, the system of public oversight must be governed by non-practitioners who are knowledgeable in the areas relevant to statutory audit. Member States may however allow a minority of practitioners to be involved in the governance of the public oversight system. These non-practitioners may be specialists who have never been linked with the audit profession or former practitioners who have left the profession.

-on the issue of auditors’ liability, the Commission shall before the end of 2006 present a report on the impact of the current national liability rules for carrying out statutory audits on the European capital markets and on the insurance conditions for statutory auditors and audit firms, including an objective analysis of the limitations of financial liability.

-with regard to the adoption of technical implementing rules by committee procedure, upon expiry of a two-year period following the adoption of the Directive and on 1 April 2008 at the latest, the application of its provisions requiring the adoption of technical rules, amendments and decisions shall be suspended. Acting on a proposal from the Commission, the European Parliament and the Council may renew the provisions concerned in accordance with the codecision procedure and to that end they must review them prior to the expiry of the period above.

Lastly, the date of transposition has been put back to 24 months of entry into force of the Directive, rather than 1 January 2006.

The European Parliament adopted the resolution drafted by Bert DOORN (EPP-ED, NL) making several amendments to the Commission’s proposal. (Please see the summary of 21/06/2005.) The principal points are as follows:

- Commission proposals for all publicly-listed companies to have a separate audit committee to supervise financial reporting procedures were deleted. The amendments give Member States the possibility to determine themselves the way in which firms are to supervise their internal auditing reporting. The Member States could allow a number of exemptions from the obligation to have an audit committee and would also be given discretion to maintain national bodies similar to an audit committee;

-the Directive aims at high level -though not full - harmonisation of statutory audit requirements. The Member State requiring the statutory audit can impose more stringent requirements, unless otherwise indicated in the text of the Directive.

-Parliament has expanded on the matter of an auditor’s independence: examples of threats to the independence of a statutory auditor or audit firm are a direct or indirect financial interest in the audited entity and the provision of additional non-audit services. Also, the level of fees received from one audited entity and/or the structure of the fees can threaten the independence of a statutory auditor or audit firm. Types of safeguards to be applied to mitigate or eliminate these threats include prohibitions, restrictions, other policies and procedures and disclosure. Statutory auditors and audit firms should refuse to undertake any additional non-audit service that compromises their independence. The Commission may, as minimum standards, adopt implementing measures on independence. In order to determine the independence of auditors, the concept of a "network" in which auditors operate needs to be clear. In this regard, various circumstances have to be taken into account such as instances where a structure could be defined as a network because it is aimed at profit or cost sharing. The criteria for demonstrating that there is a network should be judged and weighed on the basis of all factual circumstances available, such as whether there are common usual clients;

-Parliament has amended many of the definitions in the text and inserted new ones, such as "Non-practitioner” and "Key audit partner(s)";

-amendments were also made to the obligation for a public interest company to change auditors every five years and audit firm every seven. The legislation now requires rotation every seven years, only for key audit partner/statutory auditor, and not for the audit firms themselves. Member States must ensure that the key audit partner(s) responsible for carrying out the statutory audit shall rotate from the audit engagement within a maximum period of seven years after the date of appointment and shall be allowed to participate in the audit of the audited entity again after a minimum period of two years.

- In cases of self review or self interest, where appropriate to safeguard the statutory auditor´s or audit firm's independence, it should be for the Member State rather than the statutory auditor or the audit firm to decide whether the statutory auditor or audit firm should resign or abstain from an audit engagement with regard to its audit clients. However, this should not lead to a situation where Member States have a general duty to prevent statutory auditors or audit firms from providing non-audit services to their audit clients. For the purposes of determining whether it is appropriate, in cases of self interest or self review, that a statutory auditor or audit firm should not carry out statutory audits, so as to safeguard the statutory auditor's or audit firm's independence, the factors to be taken into account should include the question whether or not the audited public interest entity has issued transferable securities admitted to trading on a regulated market.

-with regard to public oversight, the system of public oversight must be governed by non-practitioners who are knowledgeable in the areas relevant to statutory audit. Member States may however allow a minority of practitioners to be involved in the governance of the public oversight system. These non-practitioners may be specialists who have never been linked with the audit profession or former practitioners who have left the profession.

-on the issue of auditors’ liability, the Commission shall before the end of 2006 present a report on the impact of the current national liability rules for carrying out statutory audits on the European capital markets and on the insurance conditions for statutory auditors and audit firms, including an objective analysis of the limitations of financial liability.

-with regard to the adoption of technical implementing rules by committee procedure, upon expiry of a two-year period following the adoption of the Directive and on 1 April 2008 at the latest, the application of its provisions requiring the adoption of technical rules, amendments and decisions shall be suspended. Acting on a proposal from the Commission, the European Parliament and the Council may renew the provisions concerned in accordance with the codecision procedure and to that end they must review them prior to the expiry of the period above.

Lastly, the date of transposition has been put back to 24 months of entry into force of the Directive, rather than 1 January 2006.

The committee adopted the report by Bert DOORN (EPP-ED, NL) amending the proposal under the 1st reading of the codecision procedure. The report sought to clarify a number of provisions, in particular on audit committees and on the independence and liability of auditors. Following a series of trialogue meetings, a number of amendments also aimed to approximate Parliament's position to that of the Council with a view to reaching agreement at 1st reading. The main amendments were as follows:

- statutory audit committee : MEPs were opposed to an EU-level requirement to set up statutory audit committees for public interest entities and instead wanted to leave it to the legislation of the Member States to determine the manner in which firms are to regulate and supervise their own internal reporting. The Member States could allow a number of exemptions from the obligation to have an audit committee and would also be given discretion to maintain national bodies similar to an audit committee;

- independent auditors : the committee amended the text of the proposal with the aim of clarifying the requirements for the auditor's independence from the entity being audited, including membership-based auditing entities. On the rotation of auditors, the committee stipulated that the key audit partners should rotate from the audit engagement within a maximum period of seven years rather than five years as laid down in the Commission proposal;

- limitation of liability : the committee proposed a new Article 30a providing that the Commission should report by the end of 2006 on "the impact of the current national liability rules for carrying out statutory audits on the European capital markets and on the insurance conditions for statutory auditors and audit firms, including an analysis of the limitations of financial liability". In the light of that report, the Commission should submit recommendations to the Member States if it considers it appropriate.

Lastly, the committee introduced a new Article 52a making it clear that this directive is a minimum harmonisation directive and that the Member States requiring the statutory audit can impose more stringent requirements unless otherwise indicated in the text.