THE NUMEROUS ACCOUNTING SCANDALS IN the United States and the European Union (EU) have shaken the global capital markets. The U.S. response has been to enact legislation such as the Sarbanes-Oxley Act of 2002 and other corporate governance reforms. The EU is taking similar steps, issuing a proposal that broadens the scope of the 8th Council Directive on Company Law, which primarily pertains to the approval of statutory auditors in EU member states. The expanded directive, which will impact the 25 EU member countries, is expected to be adopted later this year.
The current 8th Council Directive, which was adopted April 10, 1984, does not address requirements on how a statutory audit should be conducted or the public oversight or external quality assurance that is necessary to ensure quality audits. The proposed additions to the directive remedy that situation by clarifying the required duties, independence, and ethics of statutory auditors and by calling for public oversight of the accounting profession and external quality assurance of both audit and financial reporting processes. In addition, the proposal strives to improve cooperation between EU oversight bodies and provides for effective and balanced international regulatory cooperation with oversight bodies outside the EU regulatory infrastructure (e.g., the U.S. Public Company Accounting Oversight Board).
The changes to the directive are designed to restore investor confidence in the European capital markets, which have 7,000 listed firms subject to annual statutory audits, through an efficient and transparent securities market system. The major thrust of the reforms is to create a new regulatory and legal environment and corporate accountability framework that would be recognized on a global scale. Internal auditors need to understand the revisions to the directive and how they relate to the accounting and audit standards of the International Accounting Standards Board and the International Auditing and Assurance Standards Board (IAASB) to better inform their boards and audit committees on the quality of their organizations' audit and financial reporting processes.
BROADENING THE SCOPE OF THE STATUTORY AUDIT
The conditions for approval of statutory auditors and audit firms remain basically the same in the expanded 8th Directive. The new requirements pertain to audit structure and process and require statutory auditors or audit firms to:
* Be approved in any member state. This change is...