Firms query Eighth Directive burdens

The EC is expected to soon finalise a decision
on transitional arrangements that are intended to reduce the
regulatory burden for third country audit firms during the process
of determining equivalence between regulators.

While still needing to register in the UK
before they sign a relevant audit report for UK purposes, audit
firms from qualifying jurisdictions will not be subject to the UK’s
systems of inspection and oversight. Audit firms from other
jurisdictions will still have to meet the full regulatory
requirements of the Statutory Audit Directive.

In anticipation of the EU regulations, the UK
Professional Oversight Board (POB) published proposals on how
forthcoming European requirements for the regulation of the
auditors of companies from outside Europe that have issued
securities on regulated markets should be made effective in the

Problematic requirements

Despite the good intentions, there is some
concern among firms. Ernst & Young UK regulatory and public
policy directors Andrew Hobbs and David Parrish believe provisions
relating to the registration of third-country auditors could prove
“problematic”. “It will potentially be very tricky for European
regulators to work through as it risks audit firms having to
register in multiple countries where they audit companies that are
listed on certain regulated markets,” Hobbs said. “A lot of the
European regulators haven’t really got their head around how they
are going to register third-country audit firms… which leaves us a
little bit in the dark.”

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POB director Paul George told The
the UK regulator “fully appreciates there will be
examples of firms having to register with more than one member
state”. “Unfortunately, there isn’t a passport system such that if
you register in one member state, that registration can be used in
another, the statutory audit directive doesn’t provide for

“What we have therefore done in the UK with
support from Germany and increasingly the Netherlands, has been
trying to work on developing a common registration form… so that we
can get as many member states as possible to sign up to following
the same registration,” George said.

“We’re also keen within the [European Group of
Auditor Oversight Bodies] to share to the extent that it is
appropriate, registration decisions, so that we minimise the risk
that one country takes a different decision to another.”

The third country audit provisions are part of
the EU Eighth Company Law Directive on Statutory Audit, which
member states are required to adopt as national law by 29 June
2008. A second provision that has sparked discussion is Article 40,
which stipulates that the auditors of companies with securities
listed on regulated EU markets much produce transparency reports.
Expectations of the costs and benefits of these reports vary among
firms from different member states.

Hobbs and Parrish said the UK Big Four firm
will not be required to disclose any information that is not
already publically available.

In Denmark there is a different story. BDO
ScanRevision partner Karl Aage Brasted said most of the information
in the transparency report will not have been disclosed previously.
One example is partner remuneration. “We have around 110 partners
in Denmark and we are divided into five different regions,” Brasted
said. “What partners get in one place is very different from what
they get in another place – it will be quite difficult to tell how
we do it.” Danish firms have also not traditionally disclosed which
public interest entities they audit.

Brasted is not convinced of the benefits of
the transparency report: “I think it will require quite a lot of
work. And, I don’t think we will get any new clients by doing

Potential burden

Hobbs warned there are still unanswered
questions. There is scope within the directive for enhancements by
individual member states, and as some member states are yet to
implement the directive, it remains to be seen whether there will
be significant variations from country to country.

If there are, it could prove a significant
burden for firms with clients registered in multiple markets, Hobbs
said. He cited Ernst & Young US as an example, estimating the
firm may audit companies that are registered on markets in up to 16
EU member states. “So [E&Y] faces a risk of having to do 16
different transparency reports if they differ.”

The UK POB has not made any material
amendments to the EU requirements. George said he will be surprised
if many significant differences between the different member
states. “If differences do emerge, then I think the firms should
respond to the consultation processes in the individual

George concluded: “This is a two-way process
and it is absolutely right that the firms challenge member states
to make sure that they are looking to avoid duplication of
regulatory effort as much as possible. The questions posed by the
firms… are very reasonable requests.

“In reverse, it’s also reasonable that the
firms… ensure that they don’t put barriers up which create
duplication of effort in reverse. For example sharing of necessary
information on inspection reports.”