ments are part of the mechanisms for the operation of a single market, but without
common agreement on the role of the auditor and scope of the audit, there is some
doubt as to what degree of reliability is being offered in different countries. The cho-
sen solution was the Committee on Auditing, which includes representatives of mem-
ber states, the auditing profession, and internal auditors, as well as representatives of
user groups.
The first output from this committee was a Recommendation on Quality Assur-
ance (2001/256/EC) published in November 2001. This recommended that all mem-
ber states should institute a system of quality assurance for statutory auditors. The
system could be based on either monitoring by a specialist agency or peer review, and
could look at firms or individual auditors, but the cycle for full review of all auditors
should be a maximum of six years. Quality assurance should be maintained in line
with International Standard on Auditing (ISA) 220, “Quality Control for Audit
Work.”
This was followed in May 2002 by the Commission Recommendation on Statu-
tory Auditors’ Independence in the EU. This says the statutory auditor must be inde-
pendent in mind and appearance. It proposes a principles-based approach where the
auditor should assess both risks to independence and safeguards against these. There
is a detailed discussion of the nature of these risks, how different tasks might inter-
act with them, and what safeguards should be in place. There is no systematic pro-
scription of nonaudit work. The Recommendation, however, calls for disclosure of
fees received by the audit firm from the audit client, analyzed as between audit work,
other assurance work, tax advisory services, and other nonaudit services. At least two
years should elapse before a “key audit partner” can take up a “key management po-
sition” with an audit client. Key audit partners should spend no more than seven
years as part of the audit team of a particular client that is a “public interest entity.”
Different countries have in the past had markedly different approaches to inde-
pendence. In Germany and France in particular, the statutory auditor is expressly pro-
hibited from carrying out nonaudit work for audit clients. While in practice the
Anglo-Saxon concept of the profession as offering a wide range of services has
gained ground and devices exist for effectively circumventing the independence
rules, there is still considerable opposition to such concepts. Questions of auditor in-
dependence and corporate governance structures were included in the ill-fated Fifth
Directive, and while the climate may have changed, the area is not the easiest on
which to make progress. The Recommendation does not bind member states. The
only area where the Commission has moved toward compulsory harmonization is the
audit report, where the 2002 proposed amendments to the accounting directives (see
above) include details of the necessary content of the statutory audit report.
17.5 CAPITAL MARKET ENFORCEMENT. The Commission launched a Financial
Services Action Plan in 1999, which set out a package of legislation for building a
single financial market in the EU. This is primarily aimed at unifying the legal frame-
work on issues such as market abuse, prospectuses and regulations governing finan-
cial conglomerates and pension funds. However the Commission has no concrete
plan to legislate on the issue of surveillance of the financial reports of listed compa-
nies. The Lamfalussy Report, endorsed by the EU Heads of Government in March
2001, laid out the recommendations of the so-called Committee of Wise Men created
by the Commission to review the streamlining of the European securities markets.
However, while it recommended that enforcement should be improved, it suggested
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