The European Commission has granted a transitional period for the registration requirements for audit firms from 30 non-EU countries.
A requirement in Article 45 of the EU Eighth Company Law Directive, which was due to be transposed into member states’ national law by 29 June this year, was that the audit regulator in each jurisdiction was to register third-country auditors and audit firms of companies listed on the national securities markets. Member states were also directed to subject the third-country auditors and audit firms to their systems of oversight, quality assurance, investigations and penalties.
The transitional period is for audit reports concerning annual or consolidated accounts for financial years beginning during the period from 29 June 2008 to 1 July 2010.
During this period, third-country auditors can continue their audit activities in the EC without being registered under Article 45 provided they supply information about themselves and the auditing standards and independence requirements applied to when carrying out audits. The EC said information about the outcome of individual quality assurance reviews is also desirable.
During the transitional period, the EC will continue to assess the equivalence of third country oversight, quality assurance, and investigation and penalties systems of certain non-EU countries. If those systems are recognised as equivalent, member states may exempt the relevant third-country auditors and audit entities from registering, and will not be required to oversee auditors and audit firms from those jurisdictions on the basis of reciprocity.
Nick Jeffrey from Grant Thornton UK is part of a team that is advising Grant Thornton International member firms on their EU audit registration requirements. He called the transitional period a “pragmatic solution that gives everybody a little bit of breathing space to do the right thing by the capital markets”.
“The worse solution would have been to rush into something which was inappropriate and actually harms the capital markets in the European Union, rather than supporting the confidence and robustness,” he said. The jurisdictions included in the transitional period cover most Grant Thornton member firms that are involved in the audit of listed companies in the EU – the Netherlands Antilles could be one exception.
Jeffrey said the decision will have a positive effect on the network’s member firms. “There was a regrettable degree of confusion around what information the regulators in each of the member states would want and we now understand the nature of the information,” he explained. “What we were hoping for was if you were an auditor from outside the European Union, you’d only need to register once, in one [member state], with one set of information, and that would be satisfactory for every member state regulator.
“The regulators in the member states haven’t been able to get to that position. But [following the decision on the transition period] we are now in a position where auditors have to register in each member state, but only need to give broadly the same information in each instance, and that is very good news.”
Deloitte Australia currently has eight clients listed on EU capital markets, although that number fluctuates. Caithlin McCabe, an audit partner at the Big Four firm, said registration requirements could have represented a significant burden on Deloitte if member states had worked individually.
“We were concerned that they would differ, and in fact there is still the possibility that some differences may arise once the individual member states finalise their requirements,” she said.
“Differing requirements by jurisdiction adds to the complexity of our compliance obligations. We believe that it is important that audit regulators via the Independent Forum of Independent Audit Regulators strive for consistency and mutual recognition to the fullest extent possible.”
McCabe said that fortunately the transitional registration requirements are relatively straightforward and will have limited additional impact on the firm. She is also confident that by the end of the transition period the EU and the Australian regulator will have reached a reliance agreement.
Jeffrey said Grant Thornton is now looking beyond the transitional period to reliance between regulators.
“I am not sure it will be as many as 30 that have maximum reliance [by the end of the transitional period], so at that point we will be very interested in what the next stage is from the European Commission. We will be very interested to see what they do with that list of 30,” he said.
REGULATION Jurisdictions granted transitional period for EU third-country audit registration requirements. Argentina, Australia, the Bahamas, the Bermudas, Brazil, Canada, the Cayman Islands, Chile, China, Croatia, Guernsey, Jersey, the Isle of Man, Hong Kong, India, Indonesia, Israel, Japan, Kazakhstan, Malaysia, Mauritius, Mexico, Morocco, New Zealand, Pakistan, Russia, Singapore, South Africa, South Korea, Switzerland, Taiwan, Thailand, Turkey, Ukraine, the United Arab Emirates and the US. Carolyn Canham