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On October 11th last, the Council of the European Union reached political agreement on the Revised Eighth Company Law Directive1 on statutory audit thereby giving further impetus to the process towards convergence. The Revised Eighth Directive broadens the scope of application of former EU legislation (Directive 84/253/EEC)2 by specifying the duties of statutory auditors, their independence and ethics, by introducing requirements for external quality assurance, ensuring better public oversight over the audit profession and improving co-operating between oversight bodies in the EU. It also amends existing directives 78/660/EEC3 and 83/349/EEC.4

Formal consideration by the Council of the European Union followed approval, with amendments, by the European Parliament on 28th September last, of the Commission’s proposal for a Directive. The amendments put forward by the European Parliament include granting member states the discretion to exempt certain public interest entities from the obligation to have an audit committee; requiring the key audit partner to rotate from the audit engagement within seven years (rather than within 5 as the Commission had proposed).

While the accountancy profession has welcomed proposals on key issues (such as the application of international standards on auditing (ISAs), quality assurance, audit committees and new arrangements for the public oversight of the profession which underpin audit quality in the EU), Irish experts are not without some concerns. The Institute of Chartered Accountants in Ireland (ICAI) has warned that Irish accounting firms will be at a critical disadvantage against their European counterparts because they can’t avail of the more advantageous corporate structures available elsewhere. ICAI also remains concerned about the level of the small company audit exemption in the Republic of Ireland.

Commending on the audit provisions, Aidan Lambe, ICAI’s Director of Representation and Technical Policy recently said that “the application of these new standards is somewhat problematic in the Republic of Ireland where the audit exemption threshold is comparatively low in European terms. This will mean that these new standards, designed primarily with the complexity of the capital markets in mind, will now be applied to much smaller entities in Ireland than elsewhere in Europe.”

Noting that the devil is, as always, in the detail, Mr Lambe said ICAI will have to consider carefully all of the issues raised by the Directive and “make sure that our views are heard by Government when considering transposition into domestic law”.

Auditor Liability is also a concern. Writing in our last issue, Mr Lambe pointed out that there are major differences in the liability regimes affecting statutory auditors throughout the EU. Calling on the Irish Government to ‘pay serious attention’ to this issue, Mr Lambe argued that “if the current UK proposals relating to auditor liability are accepted by Parliament, we will have a situation where audit firms in the Republic of Ireland will be faced with a significantly different model by which to conduct their business carrying much higher risks than their counterparts in Northern Ireland.”5

CONVERGENCE Developments on International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISAs) are part and parcel of the convergence process with the bottom line being all about confidence in the EU's capital markets.

While the reforms in auditing that will be implemented by the Revised Eighth Directive will help restore confidence, there are other issues to address. David Devlin, President of FEE, the European Federation of Accountants, pointed out recently, for example, that differences between IFRSs as adopted for use in the EU and IFRSs as adopted by the IASB, risk causing uncertainty in the market and could potentially undermine investor confidence in financial reporting. FEE has called on the European Commission to issue authoritative guidance for referring to the financial reporting framework arguing that there is ‘a clear need for a standard wording’

INFLUENCE OF THE PROFESSION Observers within the accountancy profession will be interested to see the extent to which the provisions of the Revised 8th directive appear to have been influenced by their work. It is somewhat unusual to see specific reference in legislation to documents produced by private organisations but on ethics, for example, the directive makes specific reference to IFAC’s Code of Ethics and the directive's reference to ‘threats’ to independence echoes the 'threats and safeguards' approach that underpins IFAC's Code.

SARBOX REVENGE Perhaps the most controversial provision of the Revised 8th Directive comes under the 'International' heading where a new requirement is being introduced for auditors and/or audit firms from third countries that issue audit reports in relation to securities traded in the EU. These auditors/ audit firms will now have to register in the EU and be subject to member state systems of oversight, quality assurance and investigations and sanctions. That could mean US firms seeking an authorisation mechanism that will allow them to carry out statutory audits in Ireland. It will be interesting to see what mutual recognition developments may come out of these provisions.

AUDIT COMMITTEES Initially the European Commission had proposed that all publicly listed companies should have a separate audit committee. That proposal has been somewhat diluted. For example in member states where companies have a two-tier board structure (an operational or administrative board and a supervisory board) the member state will be able to decide whether to make audit committees mandatory or whether an existing supervisory board can perform the audit committee functions.

Member states may also decide to exempt public interest entities, which are collective investment undertakings whose transferable securities are admitted to trading on a regulated market (UCITS), from the requirement to have an audit committee.

CONCLUSION For Irish Chartered Accountants, the good news is that the revised Eighth Directive is not going to bring too many changes. That said, there is still much representational work to be done by the profession in areas like small company audit exemption and auditor liability if Irish accounting firms are to compete on equal terms with their counterparts elsewhere in Europe.

Notes 1 The Council agreed on a draft directive updating rules on the audit of company accounts, accepting all amendments voted by the European Parliament in first reading. This means the new directive will be adopted without discussion once the text has been finalised. Bear in mind that finalising the text involves 25 languages so implementation may take some time.

2 The Eighth Council Directive 84/253/EEC of 10 April 1984 based on Article 54 (3) (g) of the Treaty on the approval of persons responsible for carrying out the statutory audits of accounting documents.

3 The Fourth directive on the annual accounts of companies with limited liability

4 The Seventh directive on consolidated accounts.

5 Aidan Lambe, “Auditor Liability - Time for Reform?”, Accountancy Ireland, Vol 37, No 5, October 2005, pages 19-20.