Adviser: Converging audit regulation in Europe.

The principal legislation governing the conduct of audit in the EU is the eighth company law directive, passed in 1984. This lays down the minimum standards for member states to apply to the education, training and authorisation of those who wish to conduct statutory audits in EU states.

The commission has, however, long identified the need to reinforce standards of audit regulation. The most high profile of its proposals is to work towards a pan-European system of public oversight of the auditing profession.

Instead of one single system, national approaches will be converged through a co-ordinating mechanism conducted by the commission. This mechanism will, in due course, assess the need for the registration and oversight of non-EU firms that wish to carry out audit work for EU-listed companies.

This new, pan-European approach to public oversight is a sensible response to the establishment of the Public Company Accounting Oversight Board in the US. The UK’s oversight infrastructure is, arguably, the most sophisticated in the EU, and the UK could make a case for bilateral recognition agreements with the US authorities.

However, the better, longer-term alternative would be for the EU and the US to put together oversight schemes of comparable rigour and standing, and for these to achieve mutual recognition.

Of more relevance to auditors is the commission’s intention to require the use of international statements on auditing (ISAs) in the conduct of all statutory audits (such as audits of listed and non-listed entities alike) by 2005.

Given that compliance with international financial reporting standards will be mandatory for listed companies by 2005, it is logical for audit standards to also be harmonised. But there is a huge amount to do before then if ISAs are appropriate for the audit of entities outside the listed sector.

To date, ISAs have been prepared with large companies uppermost in mind. Unless they are simplified and broadened in scope, the costs to small firms of complying with them will be prohibitively high.

In the longer term, the commission proposes to carry out another study on auditors’ liability. A study on this subject in 2001 concluded that any move towards harmonisation was likely to be fatally obstructed by the fact that national rules governing auditors’ civil liability are inextricably linked to the fundamental rules of national legal systems.

Hence the EC’s new dispatch rules out any ‘capping’ of auditor liability, a move that has already tied the hands of the DTI here as it wrestles with its options in the course of drafting the new companies bill.

• John Davies is head of business law at ACCA. – Send in your questions for our adviser panel of experts on matters relating to small practices by emailing [email protected].