-The European Commission issued a Recommendation on 'Statutory auditors' independence in the EU'.
The Recommendation features a set of demanding, high level principles and in particular recommends that auditors should be prohibited from carrying out a statutory audit one required by law - if the auditors have any relationship with their client that might compromise the auditor's independence. This may include any financial, business, employment or other link, or any situations where the auditors provide to the same client services additional to the audit.
The Recommendation deals with two key independence issues raised by the collapse of Enron:
'provision of additional services' by auditors, and their
'employment with the audit client'.
According to the Recommendation, statutory auditors should be required to consider and to document, for each individual audit engagement, any potential risks or threats to their independence, as well as the safeguards for mitigating those risks.
The Recommendation also indicates clearly what is not acceptable. For example, auditors should not conduct a statutory audit:
if they have any direct or significant indirect financial interest in the audit client
a close family member working in a management position in the audit client or
if they receive an unduly high proportion of their revenue from one client.
Also, partners involved in performing audits should not join the audit client before the end of a two year cooling-off period. Key audit partners must also 'rotate' within seven years. Member States would remain free to establish stricter rules than those laid down in the Recommendation.
Threats to independence vary in nature and in seriousness and auditors need to put in place different safeguards depending on the circumstances. The ultimate safeguard ('prohibition') is not to enter into certain relationships or not to provide certain additional services to the audit client.
Although the Recommendation is not legally binding, it will serve as a clear benchmark of good practice that the Commission expects to be immediately applied throughout the EU audit industry.
In three years time, the Commission will review how the Recommendation has been applied in practice and will consider whether binding EU legislation may then be required. However, the Commission may act earlier if it is not satisfied with Member States' application of the Recommendation.
Recommendation on Independence of Statutory Auditors
Auditor independence - frequently asked questions
Commission press release
© European Commission
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