Letter from... Brussels

With auditor liability lurking in the shadows, moves are now afoot in Europe to strengthen auditor oversight. This could be on lines pioneered by the US Public Company Accounting Oversight Board (PCAOB), the body set up under the Sarbanes-Oxley Act of 2002. The EU move will make for another link in the struggle to improve investor confidence in European capital markets.

Another step in the same direction is Europe’s Eighth Directive on Statutory Audit, due for implementation by European national governments before mid-2008. In the UK, it is being taken into the new Companies Act, which received Royal Assent on 8 November and which is due for complete implementation by October 2008.

Auditor oversight was covered at a recent Brussels conference on audit regulation organised by the European Federation of Accountants (FEE). The subject has been under discussion in Brussels since at least 2003. In that year, FEE came up with a paper on the Co-ordination of Oversight of the Audit Profession. FEE then advocated a two-tier system for Europe. It proposed retaining public oversight structures organised at member-state level, but above the national institutions’ strong EU oversight to oversee the national institutions.

As it happens, in 2005 the Commission decided to set up the European Group of Auditors’ Oversight Bodies (EGAOB). This is tasked with facilitating co-operation between the public oversight systems of EU national governments and bringing about an exchange of good practice. The EGAOB also looks into international co-operation, with a view to furthering best practice in the EU.

However, it is limited as it is merely an advisory body, having no legal status or permanence. Also, it has no enforcement powers. Hence, FEE continues to stress the need for its idea of an EU equivalent to the US’ PCAOB. This would propose common principles, support the convergence of good practice and provide a cross-border co-ordination function.

FEE has the strong support of Charlie McCreevy, European Commissioner for the Internal Market. This would be ‘a sea change for most EU member states and for the profession’, the commissioner said.

Currently, about half of EU member states do now have in place their own oversight bodies, McCreevy stated. The others were in the process of setting them up. ‘They should do so quickly and at the very latest by mid-2008,’ he added. He commended a trend towards international standards on auditing (ISAs).

Also, at the Brussels conference, delegates were anxious about the safety of the Big Four. In fact, some EU governments (including Germany, Austria, Greece and Belgium) have now capped auditors’ liability against the danger of the collapse of one or more of the international firms. Others (Denmark and the Netherlands) have introduced, or are introducing, proportional liability combined with some limitations on who can sue auditors.

Elaboration on the danger of the collapse of an international auditing firm was given in Brussels by Patrice Muller of London Economics. He said that his firm’s recently published study, carried out for the European Commission, concluded that a limitation on auditor liability would ‘reduce risk caused by potential catastrophic claims’ against one of the Big Four.

However, the study generally paints a bleak scenario, indeed, for the main auditors in Europe, if not elsewhere. It notes that, at present, firms in the EU face 11 claims in the range of £100m–£530m and five claims in excess of £530m. The risk of a major award against one of the Big Four firms has increased substantially in recent years. The biggest single claim that the largest firm in Europe could sustain is about £360m.

Perhaps proffering some comfort to auditors, McCreevy said that ‘a limitation of auditors’ liability’ could cut back the risk of a collapse of one, or even two, of the Big Four, ‘without reducing incentives for audit quality’.

Jeremy Woolfe is a Brussels-based independent journalist, specialising in financial legislation.