Specific requirements regarding statutory audit of public-interest entities

Source: European Commission

November 2011

Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on specific requirements regarding statutory audit of public-interest entities

The measures adopted both in Europe and elsewhere in the direct aftermath of the financial crisis have mainly focused on the urgent need to stabilise the financial system. While the role played by banks¸ hedge funds¸ rating agencies¸ supervisors or central banks has been questioned and analysed in depth in many instances¸ little or no attention had been given to the role auditors played in the crisis – or indeed the role they should have played. Given that many banks revealed huge losses from 2007 to 2009 on the positions they had held both on and off balance sheet¸ it is difficult for many citizens and investors to understand how auditors could give clean audit reports to their clients (in particular banks) for those periods. It is important to note that in a crisis where €4 588.9 billion of taxpayer money was committed to support banks between October 2008 and October 2009 and where such aid accounted for 39% of EU 27 GDP in 20091¸ all components of the financial system need to be improved.

Robust audit is key to re-establishing trust and market confidence. It contributes to investor protection by providing easily accessible¸ cost-effective and trustworthy information about the financial statements of companies. It also potentially reduces the cost of capital for audited companies by ensuring more transparency and reliability of financial statements. It is also important to stress that auditors are entrusted by law to conduct statutory audits of the financial statements of companies which enjoy limited liability and/or are authorised to provide services in the financial sector. This entrustment responds to the fulfilment of a societal role in offering an opinion on the truth and fairness of the financial statements of those companies.

Since 1984¸ EU rules have partially regulated statutory audit when a directive (Directive 1984/253/EEC) harmonized the procedures for the approval of auditors. Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 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 (hereinafter Directive 2006/43/EC) was adopted in 2006 and considerably broadened the scope of the former Directive.

The financial crisis has highlighted weaknesses in the statutory audit especially with regard to Public-Interest Entities (PIE)¸ entities which are of significant public interest because of their business¸ their size¸ their number of employees or their corporate status is such that they have a wide range of stakeholders. Therefore¸ this proposal lays down conditions for carrying out the statutory audit on the financial statements of PIEs.

Read whole Proposal: European Comission Homepage