The European Commission has issued its first major recommendations on auditors' independence since t...
The European Commission has issued its first major recommendations on auditors' independence since the Enron scandal brought down the once mighty Arthur Andersen.
The EC's "Statutory auditors' independence in the EU" recommendations specifically urge member states to prohibit auditors from carrying out statutory audits where there are any other financial or business links between the auditor and the client.
The Enron case brought up two specific issues, the EC says, which were the sale of additional services to clients being audited, and the issue of auditors being "employed" by the end client.
The recommendations are not law, but the EC expects auditors active in the EU to follow this new best practice or it threatens to implement new laws within three years if there is no improvement within the industry.
"I now expect its rapid application throughout the EU. Let me be clear: if that does not happen, the Commission will not hesitate to propose more robust, binding measures," Fritz Bolkestein, EU competition commissioner says.
In order to maintain their independence, auditors will be forced to document for each and every "engagement, any potential risks or threats to their independence, as well as the safeguards for mitigating those risks."
The EC also demands that auditors not conduct statutory audits where there are any significant financial interest tied up in the client, where a family member is working in a management position for the client, where an undue proportion of total income derives from a single client.
Auditing firm partners must be rotated at least every seven years between different clients, and they will be required to fully publish, at least once a year, the fees paid by clients for auditing and non-auditing work.
Statutory audits will also be required to undergo external quality assurance reviews that will examine adherence to ethical principles and rules designed to ensure independence.
Auditors will also be required to provide their clients' boards with a written undertaking that their audits are done independently.
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