The European Union’s journey towards a single
internal market continues this year when several significant
articles within the Eighth Company Law Directive come into effect.
The International Accounting Bulletin discovers that the
directive’s impact on firms is likely to vary in different
countries.

Grant Thornton International (GTI) recently released its fourth
transparency report, outlining information ranging from financial
data such as fee income and partner remuneration to governance,
management and audit clients.

Although it was the fourth time an annual review was produced,
it was the first time a best practice was followed, GTI chief
operating officer Mike Starr says. “It was our view that the EU
Eighth Directive is a best practice on transparency and as a result
we followed it. The Eighth Directive could be the [only current
regulation] that really sticks to transparency reporting by
accounting firms or accounting organisations,” he says.

The requirement for audit firms within the EU to produce
transparency reports is contained in Article 40 of the Eighth
Directive, which comes into effect for financial periods beginning
on or after 29 June 2008. Expectations of the costs and benefits of
these reports vary among firms from different member states.

Deloitte Sweden chairman Svante Forsberg welcomes the EU Eight
Directive and says it will harmonise the rest of Europe with
Sweden’s already stringent independence and ownership rules. Svante
believes that Article 40 requirements will not have much effect in
Sweden as the country already has a transparent system.

His comments are echoed by Ernst & Young UK regulatory and
public policy directors Andrew Hobbs and David Parrish, who say the
Big Four firm has produced annual reports and accounts since 1998.
Hobbs says PwC will not be required to disclose any information
that is not already publicly available.

Questionable value?

In Denmark, there is a different story. BDO ScanRevision partner
Karl Aage Brasted says most of the information in the transparency
report will not have been disclosed previously. One example is
partner remuneration. “We have around 110 partners in Denmark and
we are divided into five different regions,” Brasted says. “What
partners get in one place is very different from what they get in
another place – it will be quite difficult to tell how we do it.”
Danish firms have also not traditionally disclosed which public
interest entities they audit.

Brasted is not convinced of the benefits of the transparency
report. “I think it will require quite a lot of work. And, I don’t
think we will get any new clients by doing so,” he says.

Although Hobbs says the Article 40 requirements will not have
much effect on UK firms, he warns there are still unanswered
questions. There is scope within the directive for member states to
enhance certain requirements. As some member states are yet to
implement the directive, it remains to be seen whether there will
be significant variations from country to country. If there are, it
could prove a significant burden for firms with clients registered
in multiple markets, Hobbs says.

Hobbs cites Ernst & Young US as an example, estimating the
firm could audit companies that are registered in up to 16 EU
member states. “So [E&Y] faces a risk of having to do 16
different transparency reports if they differ,” he warns.

Another significant Eight Directive article to come into play
this year is Article 44, which dictates that subject to
reciprocity, regulators may approve a third-country auditor or
audit entity as a statutory auditor.

It is unlikely the provision allowing for third-country auditors
will have any effect on the Danish profession, according to
Brasted. Because BDO ScanRevision operates as a member of BDO
International, it is unlikely to pick up work in other countries,
he says. Brasted also predicts few foreign auditors are likely to
work in Denmark due to language barriers.

Hobbs believes provisions relating to the registration of
third-country auditors could prove problematic. “It will
potentially be very tricky for European regulators to work through
as it risks audit firms having to register in multiple countries
where they audit companies that are listed on certain regulated
markets. A lot of the European regulators haven’t really got their
head around how they are going to register third-country audit
firms… which leaves us a little bit in the dark,” he says.

TRANSPARENCY

New reporting requirements

Article 40 of the EU Eighth Company Law Directive says that
statutory auditors or firms should publish an annual transparency
report, which includes:

(a) A description of the legal structure and ownership;

(b) Whether the audit firm belongs to a network, a description
of the network and the legal and structural arrangements in the
network;

(c) A description of the governance structure of the audit
firm;

(d) A description of the internal quality control system of the
audit firm and a statement by the administrative or management body
on the effectiveness of its functioning;

(e) An indication of when the last quality assurance review took
place;

(f) A listing of public interest entities for which a statutory
audit has been carried out during the last year by the audit
firm;

(g) A statement about the audit firm’s independence practices
which also confirms that an internal review of independence
compliance has been conducted;

(h) A statement on the policy followed by the audit firm
concerning continuous education of statutory auditors referred to
in Article 13;

(i) Financial information showing the importance of the audit
firm such as the total turnover divided into fees from the
statutory audit of annual and consolidated accounts, and fees
charged for other assurance services, tax advisory services and
other non-audit services; and

(j) Information about the basis for partners’ remuneration.

Source: European Commission