EU Proposes New Accounting/Auditing Reform Package in Wake of Scandals

In the United States, it’s Enron. In Europe it’s Ahold and Parmalat. The company names are now synonymous with scandal and all three have spurred wide-scale reforms designed to keep it from happening again.

Yesterday, the European Commission proposed stricter auditing standards in the fight against the corporate scandals that are now affecting Europe, after blowing up here in 2001 and 2002. The U.S. took steps to reign in the accounting profession in 2002 with passage of the Sarbanes-Oxley Act, which among other things created the Public Company Accounting Oversight Board.

The U.S. has demanded that foreign auditors comply with its new rules, which the EU had initially resisted. These new EU rules, written by an EU executive, should help to resolve the differences that remain between the EU and the U.S.

"The directive allows for the provision of supervisory authorities in the EU," Internal Market Commissioner Frits Bolkestein told reporters. "This is very much material to our efforts to provide a common (EU-U.S.) position on oversight of auditors."

The new rules would end self-regulation by the auditing profession by requiring independent oversight bodies to supervise accountants in each EU state, Reuters reported, adding that the rules will enhance cooperation among EU supervisors, will create audit committees for all firms listed on stock markets, will require regular auditor rotation and will crack down harder on rule-breaking accountants.

Like the U.S. rules, the EU’s proposal would also require that non-EU audit firms, including U.S. firms, register with EU officials in the countries where they will be performing audits, Reuters reported.

"Auditors are our major line of defence against crooks who want to cook the books," Bolkestein said. "No one is naive enough to think any directive will stop accounting fraud at a stroke -- you cannot abolish crime -- but what we are proposing would inject more rigour and a stronger dose of ethics into the audit process."

The proposed rules need approval of the EU states and the European Parliament to become law, Reuters reported, adding that most believe the rules will be adopted by mid-2005.

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