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August 28, 2008updated 29 Apr 2022 12:32pm

Firms applaud EC transitional period for third-country auditors

Audit firms outside the EU have welcomed a transition period that simplifies registration requirements for firms auditing companies listed in EU member states.

The EC has granted a transitional period for audit reports concerning annual or consolidated accounts for financial years from 29 June 2008 to 1 July 2010.

During this period, third-country auditors can continue their audit activities in the EU without being registered under Article 45 of the EU Eighth Company Law Directive provided they supply information about themselves, and the auditing standards and independence requirements adhered to when carrying out audits.

Third-country auditors were concerned about burdensome registration requirements, which could be vastly different from one European country to another. Article 45, which had been due to come into effect on 29 June, also required third-country firms and auditors to be subject to member state systems of oversight, quality assurance, investigations and penalties.

Pragmatic solution

Nick Jeffrey from Grant Thornton UK is part of a team advising Grant Thornton International member firms on their EU audit registration requirements. He called the transitional period a pragmatic solution that provides market participants with breathing space “to do the right thing” by the capital markets.

“The worse solution would have been to rush into something which was inappropriate and actually harms the capital markets in the European Union, rather than supporting the confidence and robustness,” he said.

Jeffrey added that the jurisdictions included in the transitional period cover most Grant Thornton member firms that are involved in the audit of listed companies in the EU – the Netherlands Antilles might be one exception. He said the decision will have a positive effect on the network’s member firms.

“There was a regrettable degree of confusion around what information the regulators in each of the member states would want and we now understand the nature of the information required,” he explained.

“What we were hoping for was ideally if you were an auditor from outside the European Union, you’d only need to register once, in one [member state], with one set of information and that would be satisfactory for every member state regulator. The regulators in the member states haven’t been able to get to that position.

“But [following the EU decision on the transition period] we are now in a position where auditors have to register in each member state, but only need to give broadly the same information in each instance, and that is very good news.”

Deloitte Australia currently has eight clients listed on EU capital markets, although that number fluctuates significantly. Audit partner Caithlin McCabe said she was concerned registration requirements would represent a significant burden on Deloitte if member states worked individually.

“We were concerned that they would differ, and in fact there is still the possibility that some differences may arise once the individual member states finalise their requirements,” she said.

“Differing requirements by jurisdiction adds to the complexity of our compliance obligations. We believe that it is important that audit regulators, via the Independent Forum of Independent Audit Regulators, strive for consistency and mutual recognition to the fullest extent possible.”

McCabe said the transitional registration requirements are relatively straightforward and will have limited impact on the firm.

During the transitional period, the EC will continue to assess the equivalence of third-country oversight, quality assurance and investigation and penalties systems of certain non-EU countries.

Firms hope the extra time will encourage regulators to establish reliance agreements whereby firms registered in one country would satisfy the requirements of others within the EU. McCabe is confident that by the end of the transition period the EU and the Australian regulator will have reached a reliance agreement.

Jeffrey said Grant Thornton is now looking beyond the transitional period to reliance between regulators.

“I am not sure it will be as many as 30 that have maximum reliance [by the end of the transitional period], so at that point we will be very interested in what the next stage is from the European Commission. We will be very interested to see what they do with that list of 30,” he said.

Carolyn Canham

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