New Statutory Audit Directive

On 25 April 2006 the Council of the European Union announced that it had adopted the directive on statutory audit of annual accounts and consolidated accounts amending the 4^th and 7^th Company Law Directives. The Council accepted all amendments voted by the European Parliament.

A Council statement said that the directive will, "reinforce the reliability of company financial statements by establishing minimum requirements for statutory audit of annual accounts and consolidated accounts".

Many of the reforms introduced in the directive are designed to enhance the EU’s protection against scandals such as Parmalat and Enron and aim to guarantee the independence of auditors and avoid conflict of interest. The directive includes requirements for:-

• Compulsory auditor rotation for public interest companies (including listed companies) – this will be an obligation to rotate from the audit engagement within 7 years – an auditor may participate in the audit again after two years and the audit firm with which the partner is associated may continue to be the statutory auditor
• Public interest companies to be obliged to set up audit committees (Member States will have discretion to exempt certain entities from this requirement)
• Each EU statutory auditor and audit firm to be identified in a regularly updated electronic public register which will name audit firm owners and managers and note any network membership
• Audit firms to be independent of their audit clients
• Auditors and audit firms to be subject to independent quality assurance

The directive is a minimum harmonisation directive. Member States may impose more stringent requirements if they choose.

The directive comes into force 20 days after publication in the official journal. Member states will then have two years to implement its requirements into domestic law.

The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Readers should not act on the basis of the information in this article without taking appropriate professional advice upon their own particular circumstances.