The statutory audit – ensuring accurate company financial statements

SUMMARY OF:

Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts

WHAT IS THE AIM OF THE DIRECTIVE?

In its original form, it merges two existing pieces of legislation (Directive 78/660/EEC on individual financial statements and Directive 83/349/EEC on consolidated financial statements) so as to improve the reliability of companies’ financial statements.
In its amended form, it lays down the European Union (EU) rules, including minimum requirements, for the statutory audit * of annual and consolidated accounts and the assurance of annual and consolidated sustainability reporting. It also defines the role of statutory auditor *.
It seeks to ensure that company financial statements give a true and fair picture of businesses’ assets, liabilities, financial position and profit or loss. It also seeks to ensure the compliance of the management report, including sustainability reporting, with applicable legal requirements.

KEY POINTS

Public register of auditors

Statutory audits may only be carried out by statutory auditors or audit firms approved by EU Member States’ competent authorities.
Member States must keep a public register of these.
The register also records whether the statutory auditor is also approved for carrying out the assurance of sustainability reporting.

Recognition of audit firms outside their home country

An audit firm wishing to carry out statutory audits in a Member State other than its home Member State must register with the competent authority in the host country.
The competent authority in the host country must register the audit firm if it has been registered with the competent authority in its home country.

Approval of statutory auditors from another Member State

Auditors from other Member States may have to complete an adaptation period (no more than 3 years) and/or tests. This ensures they have adequate knowledge of matters such as company law, tax law and social law. Once they have been approved, they must be entered in the public register.

Continuing education

Statutory auditors are required to take part in continuing education to maintain and upgrade their theoretical knowledge, skills and values.
If they fail to respect these continuing education requirements, they will be subject to sanctions.

Independence and objectivity

Member States have to ensure that, when carrying out their work, a statutory auditor or an audit firm, and any natural person in a position to directly or indirectly influence the outcome of the statutory audit, is independent of the audited entity and is not involved in the decision-making of the audited entity.
Independence is required during both:
- the period covered by the financial statements to be audited; and
- the period when the statutory audit is carried out.

Organisation of the work

Member States must ensure that, when the statutory audit is carried out by an audit firm, that audit firm designates at least one key audit partner, and that the firm provides the key audit partner(s) with sufficient resources and with personnel that have the necessary competence and capabilities to carry out their duties appropriately. A similar rule applies when a firm is carrying out the assurance of sustainability reporting.

Confidentiality and professional secrecy

Auditors are bound by strict rules to respect the privacy of their clients; however, these rules should not impede the proper enforcement of the directive.
These rules continue to apply to audit firms which have ceased to be involved in a specific audit task.

International standards

All statutory audits should be carried out on the basis of international auditing standards, if and when adopted by the European Commission. The Commission has discretionary power to adopt these standards, and it can adopt them only if they respect certain conditions. As long as the Commission has not adopted any international standards, Member States may apply national standards.

Appointment and dismissal

The statutory auditor or audit firm is appointed by the general meeting of shareholders or members of the audited entity, although Member States may allow alternatives as long as the independence of the statutory auditor or audit firm from the audited entity is assured.
Auditors or audit firms may be dismissed only where there are proper grounds. Divergence of opinions on accounting treatments or audit procedures is not a proper ground for dismissal.

Auditing of consolidated accounts

In the case of consolidated accounts (i.e. of a parent company and subsidiaries), there is a clear definition of responsibilities between the auditors who audit components of the group. The group auditor (i.e. the statutory auditor or audit firm carrying out the audit of the consolidated accounts) bears full responsibility for the audit report.

Quality assurance

Member States must introduce a system of quality assurance that is independent of the reviewed auditors and subject to public oversight.
The system includes an assessment of:
- compliance with applicable auditing standards and independence requirements;
- the quantity and quality of resources spent;
- the audit fees charged and, where applicable, the fees charged for the assurance of sustainability reporting;
- the internal quality control systems of the audit firms.
The funding for the quality assurance system must be secure and free from any possible undue influence by statutory auditors or audit firms.
Reviewers for specific quality assurance review assignments must be selected by means of an objective procedure designed to ensure that there are no conflicts of interest between the reviewers and the statutory auditor or audit firm under review.

Assurance standards for sustainability reporting

Member States must require statutory auditors and audit firms to carry out the assurance of sustainability reporting in line with assurance standards that will be adopted by the Commission.
Member States may, however, apply national assurance standards, procedures or requirements as long as the Commission has not adopted an assurance standard covering the same subject matter.

Audit report and assurance report on sustainability reporting

The directive sets out in detail specific rules as to how the statutory auditor presents the results of the statutory audit and of the assurance of sustainability reporting. In addition, these reports must be prepared in accordance with the requirements of assurance standards adopted by the Commission and/or the Member States.

Member States may allow an independent assurance services provider (IASP)* established in their territory to carry out the assurance of sustainability reporting provided that the provider is subject to requirements that are equivalent to the ones set out for auditors by Directive 2006/43/EC.

Investigations and sanctions

Member States must have in place effective systems of investigations and sanctions to detect, correct and prevent inadequate execution of the statutory audit.
Measures taken and sanctions imposed on statutory auditors and audit firms must be appropriately disclosed to the public. Sanctions must include the possibility of withdrawal of approval.

Small businesses

There is no EU requirement for small companies to have a statutory audit.
Where Member States do require statutory audits of small businesses, these should be conducted taking into account the scale and activities of the companies in question.

Public-interest entities (PIEs)*

The statutory audit of PIEs – because of the need for reliable information and their relevance to the public and investors – is subject to strict rules. These include:

a more detailed audit report which includes information about the conduct of the audit;
auditors / auditing firms must rotate;
a list of non-audit services that cannot be provided by the statutory auditor or audit firm to the audited entity, which must be drawn up by Member States;
limits must be placed on fees charged for non-audit services;
an audit committee is created which has a key role in appointing the auditor and monitoring the audit.

Regulation (EU) No 537/2014 contains further rules specifically applicable to PIEs.

Implementing and delegated acts

The directive allows the Commission to adopt implementing acts and delegated acts regarding the international aspects of the directive. These can further specify how Member States’ authorities and the various market participants must comply with the obligations laid down in the directive in this regard.

FROM WHEN DO THE RULES APPLY?

The directive had to be transposed into national law by 29 June 2008.

BACKGROUND

For more information, see:

Auditing of companies’ financial statements (European Commission)
Reform of the EU statutory audit market – frequently asked questions (European Commission).

KEY TERMS

Statutory audit. A legally required review of financial records which aims to provide shareholders with an opinion on the accuracy of companies’ or public entities’ accounts.

Statutory auditor. A natural person who is approved by the competent authorities of a Member State, in accordance with Directive 2006/43/EC, to carry out statutory audits and, where applicable, the assurance of sustainability reporting.

Independent assurance services provider (IASP). A conformity assessment body accredited in accordance with Regulation (EC) No 765/2008 for carrying out assurance on sustainability-related information pursuant to Article 34(1) of Directive 2013/34/EU.

Public-interest entities (PIEs). These include:

companies which are listed on a stock exchange in any Member State;
credit institutions;
insurance companies;
companies designated by Member States as public-interest entities because of the nature of their business, their size or their number of employees.

MAIN DOCUMENT

Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157, 9.6.2006, pp. 87–107).

Successive amendments to Directive 2006/43/EC have been incorporated into the original text. This consolidated version is of documentary value only.