EU outlines changes for auditors' practices

ACCOUNTANCY: Auditors should be prohibited from carrying out statutory audits if they have any relationship with the client company that could compromise their independence, the EU Commission has recommended.

These relationships could include business, employment or other links, or where the auditor provides other non-audit services to the client company, it explained.

Tackling independence issues raised by the collapse of Enron, the recommendation is not legally binding.

But, describing it as "a clear benchmark", the Commission said it expected the recommendation to be applied in member-states.

Market practices will be reviewed in three years at the latest when the Commission will consider whether binding legislation is needed to underpin auditor independence.

In a document issued yesterday, the Commission said auditors should systematically consider for each individual audit the potential threats to their independence and the sagfeguards for mitigating these risks.

Auditors should clearly not conduct a statutory audit where they have a direct or indirect financial interest in the audit client, where a close family member works in a management position in the client company or where they receive an unduly high proportion of their revenue from one client, it stated.

The Commission called for a two-year cooling-off period before partners involved in performing audits could take up employment positions at their client firm.

Auditor independence was fundamental to the public confidence in the reliability of statutory auditors reports, added credibility to published financial information and value to investors, creditors, employees and other stakeholders in EU companies, it stressed.

Welcoming the publication of the recommemdation, the Institute of Chartered Accountants in Ireland (ICAI) said it would require detailed consideration by Government and by the accountancy profession.

"Our preliminary view is that in a significant number of areas the Commission's conclusions are fully in line with our existing rules and guidance, with the recommendations of the Review Group on Auditing and with the provisions of the draft Companies (Audit and Accountancy)(Amendment) Bill". But the cooling-off period recommended before an audit partner could join a client firm would generate debate, particularly about how this could be enforced, he added.