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.

International reliance

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