Verbatim report of proceedings

Monday, 26 September 2005 - Strasbourg

15. Statutory audit of annual accounts and consolidated accounts

  President. The next item is the report by Mr Doorn, on behalf of the Committee on Legal Affairs, on the proposal for a Directive of the European Parliament and of the Council on statutory audit of annual accounts and consolidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC [COM(2004)0177 C6-0005/2004 2004/0065(COD)] (A6-0224/2005).

  Charlie McCreevy, Member of the Commission. Mr President, I would like to thank Bert Doorn, and the Legal Affairs Committee, for the excellent work done on this dossier. Efficient cooperation between the institutions should make it possible to adopt this proposal in a single reading.

Statutory audit is a very important subject for Europe. Recent scandals highlighted the need to reply to new challenges. In order to modernise statutory audit, the revised directive will clarify the duties of statutory auditors, their independence and their ethics. It will also require the application of international standards on auditing and will set the criteria for robust public oversight of the audit profession. We must have proper auditors in the EU. This benefits everyone: the companies themselves, investors and savers, both large and small. Economic confidence will grow.

Let me just say a few words on the question of limiting auditor liability. This question has arisen during debates on this directive, although it was not in the Commission’s original proposal. Auditors are wary of taking on new audits because they are afraid of unlimited liability. I can see the arguments in favour of acting at EU level, as there could potentially be an impact on the internal market. I intend to work actively to see what can be done in this regard. As a first step, I intend to launch a study in the near future.

The proposed amendments take account of the discussions in the Council, and also enjoy strong support from the audit industry. The solutions proposed by your rapporteur are, furthermore, well balanced and respect the Commission’s initial intentions with this legislation. So we strongly support the outcome.

As was the case with the previous report that we discussed, comitology is once again the only outstanding issue. The situation is very similar to what was said in the context of Mr Radwan’s report on the capital requirements directive just a few moments ago. I refer to the statements I made in that context so I do not need to repeat myself.

Implementing powers are very important for the eighth company law directive. Many technical issues and adaptations require the availability of comitology powers. This was also confirmed by the Council when it expressed its support for the overall compromise package of amendments. The Committee of Permanent Representatives considered that a sunset clause under which the implementing powers would be suspended could harm the effective implementation of this directive. It therefore asked Parliament to consider the implications of such a sunset clause carefully.

The Commission shares the concerns expressed by the Council. Yet it also recognises Parliament’s view that its role in supervising the exercise of delegated authority must be brought in line with its standing in the codecision procedure. Pending an overall solution for comitology, the Commission understands that Parliament would wish to limit the delegated authority in time. For the Commission it is essential that this period be long enough to ensure proper implementation of the directive. I understand that your rapporteur would propose a sunset clause of two years after the entry into force of the directive, but 1 April 2008 at the latest. This would not, however, apply to Article 26, on international auditing standards. The Commission can agree with this. This solution would correspond with the solution found in Mr Radwan's report on the proposed capital requirements directive. The Commission also calls on the Council to show flexibility, but above all to consider the revision of the 1999 comitology decision as a priority.

  Bert Doorn (PPE-DE), rapporteur. – (NL) Mr President, Commissioner, ladies and gentlemen, as rapporteur for the 8th directive, I can inform you that we have put together an interesting package in the negotiations with the Council and the Commission. For example, we managed to create more room for national solutions in audit committees, which are supervisory committees within enterprises. We spelled out once more that corporate governance is a matter to be negotiated at Member State level and that it is unacceptable for sweeping solutions in this area to be imposed from the European level.

We managed to make accountancy rotation the rule and the rotation of accountancy offices an exception. We also managed to restrict the administrative burden on the small and medium-sized enterprise in some areas and the Commission has undertaken to present a report on liability before the end of 2006. Commissioner McCreevy said a moment ago that he ‘intends to launch a study in the near future’, but we agreed that a report will be on the table before the end of 2006, and I also hope to have his word that that will be done; we would like to exchange views on this matter in this House too.

Liability is a problem on account of the huge differences between the Member States, but we will need to look for solutions here. All in all, it is a vital piece of legislation which, in my view, has become somewhat more pragmatic in the past six months and also more practical in its application, which is, after all, what this is all about.

There is another big obstacle to negotiate, namely comitology, as you, Commissioner, already pointed out. In that respect, we decided in favour of consistency with the Radwan report, as I believe it is the same interests that are at stake.

Further to a remark made by one Member a moment ago – ‘I do not want to take part in the power games between the institutions’ – I would like to repeat that I do not think this is about power games, but simply a modern way of legislating. We must draft framework legislation and delegate the details to the Commission and the experts, but that can only be done provided that Parliament has the call-back right. That is what matters most of all.

I remember that just before the Dutch referendum on the Constitution, which was, as you know, unsuccessful, there was a large article in one of the Dutch newspapers with the headline ‘Officials in Brussels have the power’. In actual fact, it referred to the executive committees where legislation of all kinds drafted in this House is implemented behind closed doors. That is a typical example that adds to the citizens’ growing dislike for Brussels, where all kinds of things are done behind closed doors.

I think, therefore, that if we discuss this comitology – and I am pleased that the Council has announced that it intends to develop initiatives – that much will need to be done in order to improve matters on this score. In that respect, I endorse the clause setting 1 April 2008 as the ‘sunset’, as also stipulated in the Radwan report. I would like to add, though, that with regard to Article 26, which concerns the adoption of the international accountancy standards, we should make an exception, because these involve, in terms of this sunset clause, international agreements. Needless to say, if and when a new regulation on comitology is introduced, the call-back right will also need to apply to accountancy standards of this kind.

On a final note, I would like to thank my fellow members of the committee for the very constructive collaboration. I think that our negotiations over the past six months have been very useful. I should also like to thank the Commission and the Council for the constructive attitude, and we can be very satisfied with the results achieved.

  Andreas Schwab, on behalf of the PPE-DE Group. – (DE) Mr President, Commissioner, first of all, let me thank Mr Doorn for the excellent work he has done with the assistance of many committees. I see this report as representing a good compromise on this difficult issue. It is evident not least from the number of Members present in the House that this is a highly technical piece of legislation, but I believe it is one that will do a great deal for Europe’s competitiveness, both internal and external. This is a sensitive area, and one that calls for watertight legislation.

There must, of course, be compromises; one that Mr Doorn mentioned has to do with rotation. It is, in essence, right that external rotation should go; the Member States have an alternative to it. Some of them can retain the external rotation that they had before. My basic instinct is to say that the Member States should not be allowed to require external rotation, as I do not believe that it encourages competition.

As my speaking time is limited, I would like to concentrate on Commissioner McCreevy’s proposal for a study into the likely effects of limited liability on the auditing firms’ internal market. The introduction of limited liability would give Europe a definite advantage as a business location, and so I am glad that Commissioner McCreevy has agreed to this study, which needs to be completed soon, that is to say, by the end of 2006.

A whole array of solutions is available to those Member States that specify a limit on liability; there is, for example, proportional liability, upper limits or a combination of the two. What this House wants from the Commission is for the Member States to be able to take their own decisions on liability, and for us in Europe to end up with rules that are harmonious rather than harmonised.

So, as Mr Doorn has said everything that needs to be said about comitology and I agree with him, I will thank you for your attention and express the hope that the directive gets through.

  Antonio Masip Hidalgo, on behalf of the PSE Group. – (ES) Mr President, I believe that the proposal on auditing is a good example of cooperation amongst the different groups in the European Parliament and between Parliament and the other institutions: the Council and the Commission.

The rapporteur has worked hard to involve us in the drawing up of the text and in his meetings with the Council and the Commission, so that this proposal may contribute to the homogenisation of European legislation in such an important field as auditing, which has caused so much concern amongst the public following the Enron and Parmalat scandals. In any event, it will be a minimal framework, for the time being maintaining the competence of the States in areas where they have greater capacity, experience and proximity for the purposes of carrying out inspections.

Of the most controversial points in the European Commission’s proposal, I would like to place the emphasis on the rotation of firms, auditors and partners, with a view to reducing the possibility of conflicts of interest between the auditors and the audited.

After much effort we have managed to open the way to the rotation of firms, and not just of partners, by allowing each State to adopt the rotation of auditing firms, that is to say, external rotation, as an alternative.

Amendments have been accepted in the field of independence. I hope that they are shown to be useful in the future, since they guarantee the confidence that the markets require.

The proposal maintains the same responsibility for auditors as for other professionals. I believe that equality of treatment and the security of citizens and clients should be guaranteed in this field. Nevertheless, I will confess that I have doubts about the capacity of the new legislation to stimulate an increase in the number of large auditing companies, thereby preventing the problems relating to the oligopoly characterising the sector, to which the Commissioner has referred.

The Enron case put an end to Arthur Andersen and only four of the so-called big five were left. A further scandal leading to a loss of confidence in another large auditing firm could be fatal, not just for the company affected, but also for the stability of the system. From the outset, therefore, I have argued that it should not all be left to the auditing firms to control themselves and that we should support control by public authorities, since not only is the viability of a company at stake, but also the health of the financial system.

I would like once again to congratulate Mr Doorn.

  Wolf Klinz, on behalf of the ALDE Group. – (DE) Mr President, ladies and gentlemen, I hope that the Auditors Directive will help to restore the confidence in year-end results and the operation of the markets that has been shattered by various scandals over various years. It might well give investors greater security – the security they once enjoyed – and make European businesses more competitive. If one compares the main points from the opinion I drafted for the Committee on Economic and Monetary Affairs and the final version that Mr Doorn, the rapporteur, presented us with after the troika negotiations, one sees that they overlap to a great degree, for example as regards rotation, the costs incurred by small and medium-sized businesses, and liability. I welcome the proposal that the Commission should produce a study on the liability issue by the end of 2006, and I agree with what Mr Schwab had to say about this.

I would have liked to hear a more positive message in relation to two other important matters, those being the establishment of an audit committee and the provision of additional non-audit services. The Committee on Economic and Monetary Affairs gave an enthusiastic welcome to the requirement that audit committees be set up and endorsed the Commission’s thinking. Taken as a whole, Mr Doorn’s report is a step in the right direction, and I am grateful to him for the work he has done as rapporteur. The vote we are about to hold is crucial to the successful completion of the fast-track procedure, and so the markets will soon get the signal they have been eagerly awaiting.

I am also glad that Mr Doorn, in his report, addresses the issue of comitology, although I would expect the date for the sunset clause to be 1 January rather than 1 April 2008.

It strikes me, though, that it will be difficult to accept the proposed approach to implementing International Standards on Auditing, known as IAS or ISA. Here, too, Parliament must hold fast to its right of callback. Although Mrs Wallis, my group’s shadow rapporteur on the lead Committee, recommends that we approve this report, I myself will be abstaining from voting by reason of the reservations I have already adduced.

  Giuseppe Gargani (PPE-DE). – (IT) Mr President, ladies and gentlemen, the aim of my speech is above all to emphasise, without rhetoric or clichés, the important work that Mr Doorn has done; moreover, as I said in committee and will repeat here, the work he has done is, in my opinion, intelligent, balanced and far-sighted.

I believe that the directive is really important, because the problem of market security exists, as the scandals that have come to light have highlighted even more. For some time there has been a need for a directive like the one that we are putting forward, which is proving to be a success at first reading and establishes the balance that we have reached in Parliament.

There are new guarantees for savers, on whom, as with consumers, we must focus our main attention, since the financial relationship between banks, issues and savers remains a fundamental factor in maintaining a country’s social stability.

I also thank the rapporteur for the intelligent solution put forward for the rotation of auditing firms. My country is very much in favour of that solution and very pleased with it – I speak from my own experience, of course, but I believe other countries will have come to the same conclusion. That is another point on which we must acknowledge the balance achieved by Mr Doorn and his colleagues. The agreement on enforcement measures gives a measure of just how important Parliament can and must be in finding that tricky operational balance that the directive requires.

To conclude, I agree with all the positive assessments that have been made; I am very pleased to state in formal terms that the report has been worthwhile, and the rapporteur and I put it to this House.

  Arlene McCarthy (PSE). – Mr President, when we first discussed the issue of corporate governance following the high-level group's report, it was in the context of Enron and the WorldCom scandals. Experts from the EU accounting industry said that 'it could never happen in Europe', but then we had Parmalat, which had an audit committee – as did Enron – made up of eminent independent professors. The problem was that they did not show any independence of mind in challenging culpable business partners and the executive board.

Prescriptive audit committees were never the answer under this proposal, which is more about changing audit culture and practice. Thanks to the pragmatism of our rapporteur, Bert Doorn, and good cooperation with the Commission and Presidency, we now have a flexible EU instrument that will raise the quality and consistency of audits across Europe while also respecting the good domestic company law provisions already in place.

A principles-based threats and safeguards approach will lead to a much more effective and robust EU regime. This will prove much better than the Sarbanes-Oxley rules-based system which may make it easier to lock someone up but does not improve the ethics, independence and public supervision of auditing structures.

It was sensible to remove the prescriptive obligation for mandatory audit committees and replace it with a proposal to assign those functions to a body that meets audit standards and objectives and can implement the requirements in a transparent way. I also welcome compromises around the issue of audit partner rotation and the issue of non-audit work.

However, we have to deal with the issue of comitology. The Commission and successive Presidencies, including the United Kingdom Presidency, have stepped up their efforts to achieve better regulation by improving the quality of EU laws and transposition and implementation. Parliament has to be involved in this better regulation agenda and must have the right as co-legislator to ensure that the expert laws voted through this House can be scrutinised and monitored.

It also has a role in transposition and implementation. I welcome the initiative by the Presidency and the offers to take forward the reform of the 1999 comitology procedures to ensure we can play a role in the better regulation and regulatory process, and I look forward to amendments to be put forward by Parliament being accepted in this area so that we can genuinely can play our role in the cooperation process.

  Paul Rübig (PPE-DE). – (DE) Mr President, ladies and gentlemen, in view of this matter’s relevance to the competitiveness of European industry, the Committee on Industry, Research and Energy has devoted a great deal of attention to it. It is important particularly to those companies quoted on stock exchanges that ownership rights should be given the highest priority when the auditors are appointed. It is here, in particular, that national sensitivities come into play.

There is also, of course, the question of costs to be considered. These can be enormous, particularly for small and medium-sized businesses that seek a stock exchange quotation, take the necessary steps and endeavour to be as transparent as they are required to be, and so I urge that limited liability be discussed with the insurers, so that the auditors can act with the necessary responsibility.

  Andrzej Jan Szejna (PSE). – (PL) Mr President, a series of recent scandals has dented the confidence of consumers and investors. I could mention events concerning Enron or Parmalat, for example. The magnitude of these scandals was alarming, and they involved various kinds of fraud. The European Commission’s initiative constitutes a welcome response to the situation.

The Commission’s draft on statutory audits is the result of many years of preparation and incorporates recommendations made in 2000 and 2002. This directive is to replace the 1984 eighth directive concerning statutory auditors, which only contains the principles of accreditation of auditors, but does not refer to the audit procedure, supervision or external quality control. The new draft directive defines the duties of statutory auditors clearly and lays down certain ethical principles. The aim is to ensure the professionalism and independence of statutory auditors, which implies their honesty, professional competence, trustworthiness, professional secrecy and overall responsibility.

The Commission’s proposal on the principle of rotation of firms and partners is yet another contentious issue to be added to the list of those that have given rise to strong opinions. In general, the principle of rotation deserves support, as it ensures independence and encourages an objective assessment. The negative aspects of rotation are additional costs, loss of know–how, and the consequent risk of errors. Audit firms should be changed at least every seven years, and the break between contracts should last at least two years. Every effort should be made to ensure healthy competition, reduce the risk of fraud and provide high quality services.

The procedures presented in the report seem to represent a balanced and sensible response to the need to guarantee both the quality of audits and the independence of auditors.

In conclusion, I should like to emphasise that we should be aiming to restore confidence to the market, and also to strengthen shareholders’ rights, so as to make investments safer and European businesses more competitive.

  Charlie McCreevy, Member of the Commission. Mr President, I would like to thank the honourable Members for their contributions and for their great work in getting this very important Directive dealt with.

At the outset I probably should have declared that in my past life I was an auditor and I still pay an annual subscription to the Irish Institute of Chartered Accountants, even though, as I have said to many people, I would not like to be too reliant on any set of accounts I would now prepare for anybody. I suppose I should have said that at the outset.

Mr Doorn and others raised the question of audit reliability and personally I take a great interest in this particular area. I have urged my services to treat this issue with great urgency. The study will be commissioned shortly so that we should be ready to put forward our findings before the end of 2006. That is our intention and hopefully it will be possible to adhere to that timetable with some ease.

The question was also raised about audit committees. Audit committees are often necessary to help auditors keep their backs straight against possible pressure from management. The European Parliament and the Council support the view that as much leeway as possible should be left to the Member States of the EU to invent their own system for audit committees of listed companies as long as they perform all the functions listed in our Directive. We have been flexible here to accommodate these concerns as far as possible.

Perhaps, as Mrs McCarthy said, you can have to best rules-based system in the world, or at least think you have the best rules-based system in the world, but it will never prevent a scandal or fraud if more than two people collude in trying to ensure that some fraudulent activity takes place; no matter whether or not we have a rules-based system – and remember, they had a rules-based system in the United States for some time and it did not prevent any of the scandals on that side of the Atlantic, and nor of course will an absolutely principles-based system either. No auditing procedures in the world and no internal control mechanisms put in place will be able to 100% guarantee that fraud or financial wrongdoing will never take place. However, it should, after the shortest possible period of time, allow people to find out exactly what is going on. It is very important for business and for everybody that people have confidence in the auditing profession, confidence in the independence of auditors, in the type of standards that they adhere to and in the ethics of the profession.

I am afraid that I would have to accept, as an erstwhile member of that profession, that the scandals of recent years have undermined the public's confidence in the auditing and accounting profession. I think that goes without saying and it is the job of the profession to make sure that confidence is restored and that the various changes that have been made, both within the profession and now by the European institutions, as well as what hopefully the Members States will do, will give people greater cause to believe that the standards of the auditing profession are as high as we can make them.

Again as I have said, the question of comitology was raised as it was in the previous debate, and I repeat that the proposal to suspend it after two years, except for Article 26, is acceptable to the Commission in this particular Directive.

I thank the Members for their detailed contributions.

  President. The debate is closed.

The vote will take place on Wednesday at 12 noon.