1.

Directive 2006/43/EC ( 2 ) provides that auditors must be independent of the audited entity and must not be involved in the decision-taking of that entity.

2.

One of the statutory requirements laid down in order to ensure such independence was adopted in 2014, in Directive 2014/56/EU, ( 3 ) which incorporated into Directive 2006/43 a new provision, Article 22a, under which persons having the status of ‘key audit partner’ ( 4 ) are not allowed to take up a key management position in the audited entity for a given period. ( 5 )

3.

Since 2014, that prohibition, which had previously applied, as one would expect, to the period of the key audit partner’s role as the person primarily responsible for the statutory audit of the audited undertaking’s accounts, has also applied to the period (of one or two years, depending on whether or not the undertaking in question is a public-interest entity) ( 6 ) subsequent to that person’s departure from the role of key audit partner.

4.

In this case, a ‘key audit partner’ in an audit firm was recruited, prior to leaving his role as such, to a senior management position in the audited company.

5.

That conduct having been penalised by the competent body (the Audit Committee), ( 7 ) the auditor challenged the fine which had been imposed on him before the referring court. That court has made a reference to the Court of Justice for a preliminary ruling on the interpretation of Article 22a(1)(a) of Directive 2006/43.

6.

The Court’s answer will determine whether the position in the audited undertaking is taken up when the key audit partner signs an employment contract with that undertaking or not until that person actually starts to perform his managerial duties.

7.

Article 2 (‘Definitions’) provides:

‘For the purposes of this Directive, the following definitions shall apply:

…

…

8.

Article 22 (‘Independence and objectivity’) provides:

‘1.   Member States shall ensure that, when carrying out a statutory audit, a statutory auditor or an audit firm, and any legal 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-taking of the audited entity.

Independence shall be required at least during both the period covered by the financial statements to be audited and the period during which the statutory audit is carried out.

Member States shall ensure that a statutory auditor or an audit firm takes all reasonable steps to ensure that, when carrying out a statutory audit, his, her or its independence is not affected by any existing or potential conflict of interest or business or other direct or indirect relationship involving the statutory auditor or the audit firm carrying out the statutory audit and, where appropriate, its network managers, auditors, employees, any other natural persons whose services are placed at the disposal or under the control of the statutory auditor or the audit firm, or any person directly or indirectly linked to the statutory auditor or the audit firm by control.

The statutory auditor or the audit firm shall not carry out a statutory audit if there is any threat of self-review, self-interest, advocacy, familiarity or intimidation created by financial, personal, business, employment or other relationships between:

as a result of which an objective, reasonable and informed third party, taking into account the safeguards applied, would conclude that the statutory auditor’s or the audit firm’s independence is compromised.

2.   Member States shall ensure that a statutory auditor, an audit firm, their key audit partners, their employees, and any other natural person whose services are placed at the disposal or under the control of such statutory auditor or audit firm and who is directly involved in statutory audit activities, and persons closely associated with them within the meaning of Article 1(2) of Commission Directive 2004/72/EC […], do not hold or have a material and direct beneficial interest in, or engage in any transaction in any financial instrument issued, guaranteed, or otherwise supported by, any audited entity within their area of statutory audit activities, other than interests owned indirectly through diversified collective investment schemes, including managed funds such as pension funds or life insurance.

3.   Member States shall ensure that a statutory auditor or audit firm documents in the audit working papers all significant threats to his, her or its independence as well as the safeguards applied to mitigate those threats.

4.   Member States shall ensure that persons or firms referred to in paragraph 2 do not participate in or otherwise influence the outcome of a statutory audit of any particular audited entity if they:

5.   Persons or firms referred to in paragraph 2 shall not solicit or accept pecuniary or non-pecuniary gifts or favours from the audited entity or any entity related to an audited entity unless an objective, reasonable and informed third party would consider the value thereof as trivial or inconsequential.

6.   If, during the period covered by the financial statements, an audited entity is acquired by, merges with, or acquires another entity, the statutory auditor or the audit firm shall identify and evaluate any current or recent interests or relationships, including any non-audit services provided to that entity, which, taking into account available safeguards, could compromise the auditor’s independence and ability to continue with the statutory audit after the effective date of the merger or acquisition.

As soon as possible, and in any event within three months, the statutory auditor or the audit firm shall take all such steps as may be necessary to terminate any current interests or relationships that would compromise its independence and shall, where possible, adopt safeguards to minimise any threat to its independence arising from prior and current interests and relationships.’

9.

Article 22a (‘Employment by audited entities of former statutory auditors or of employees of statutory auditors or audit firms) reads:

‘1.   Member States shall ensure that a statutory auditor or a key audit partner who carries out a statutory audit on behalf of an audit firm does not, before a period of at least one year, or in the case of statutory audit of public-interest entities a period of at least two years, has elapsed since he or she ceased to act as a statutory auditor or key audit partner in connection with the audit engagement:

2.   Member States shall ensure that employees and partners other than key audit partners of a statutory auditor or of an audit firm carrying out a statutory audit, as well as any other natural person whose services are placed at the disposal or under the control of such statutory auditor or audit firm, do not, when such employees, partners or other natural persons are personally approved as statutory auditors, take up any of the duties referred to in points (a), (b) and (c) of paragraph 1 before a period of at least one year has elapsed since he or she was directly involved in the statutory audit.’

10.

Article 22b (‘Preparation for the statutory audit and assessment of threats to independence’) provides:

‘Member States shall ensure that, before accepting or continuing an engagement for a statutory audit, a statutory auditor or an audit firm assesses and documents the following:

…’

11.

In accordance with Paragraph 11(1) of Chapter 4, a statutory auditor or a key audit partner who carries out an audit on behalf of an audit firm may not take up the positions listed below before at least one year has elapsed since the aforementioned audit:

12.

Paragraph 11(2) of Chapter 4 extends that period to two years where the audited entity is a public-interest undertaking.

13.

In accordance with Paragraph 5(1) of Chapter 10, the Audit Committee may impose a fine if an auditor fails to comply with the period referred to in Article 11 in connection with his engagement by an audited undertaking. Pursuant to Article 5(2), the amount of the fine may be up to EUR 50000.

14.

Paragraph 7(1) of Chapter 10 provides that, when it comes to adopting a decision imposing a penalty, account is to be taken of all relevant circumstances, such as:

15.

Paragraph 7(2) of Chapter 10 provides that, when it comes to adopting a decision imposing a penalty, account must be taken not only of the circumstances provided for in paragraph 1, but also of the following:

16.

KHT A (‘the key audit partner’) had been working as a key audit partner for the audit firm Y Oy (‘the audit firm’) since 2014.

17.

On 5 February 2018, the key audit partner, in the course of services provided by the audit firm to the company X Oyj (‘the audited firm’) in connection with the 2017 financial year (FY), signed the audit report on the latter company’s annual accounts for that year.

18.

On 12 July 2018, the key audit partner signed with the audited company a contract of employment as finance manager and a member of the management team.

19.

One of the clauses of that contract provided that the key audit partner would not actually start working in those management positions until February 2019. Signature of the contract was published via an announcement on the stock exchange.

20.

On 31 August 2018, the key audit partner terminated his employment at the audit firm, that termination having been communicated in a note sent to the Audit Committee on the same date.

21.

The audited company confirmed in writing that the key audit partner would not be working for it in any key management role or any position of financial or accounting responsibility prior to the publication of the audit report for FY 2018.

22.

By decision of 13 November 2018, the Audit Committee imposed on the key audit partner a fine of EUR 50000 for failure to observe the prohibition period laid down in Paragraph 11, Chapter 4, of the Law on Auditing.

23.

In February 2019, once the audited company’s annual accounts for FY 2018 had been signed, the key audit partner commenced his employment as a manager in that company, as agreed in the contract.

24.

The key audit partner challenged the decision imposing the penalty before the Helsingin hallinto-oikeus (Administrative Court, Helsinki, Finland).

25.

It is clear from the order for reference that the action is concerned not with the failure to observe the prohibition but with the gravity of the infringement and the amount of the penalty imposed. In the view of the key audit partner, that penalty should be reduced by at least half.

26.

The arguments put forward by the applicant in support of his claim were as follows: ( 9 )

27.

The Audit Committee opposed the action, on the grounds that: ( 10 )

28.

It was on this basis that the Helsingin hallinto-oikeus (Administrative Court, Helsinki) referred the following questions to the Court for a preliminary ruling:

29.

The request for a preliminary ruling was received at the Court on 17 December 2019.

30.

Written observations have been lodged only by the Commission. It was not considered necessary to hold a hearing.

31.

The referring court is uncertain how to interpret the expression used in Article 22a(1)(a) of Directive 2006/43 to define one of the prohibitions imposed on auditors.

32.

As has already been made clear, that provision prohibits a key audit partner, after having left his role as such, from ‘tak[ing] up a key management position’ in the audited undertaking for a given period. ( 11 )

33.

The question referred (which, although split into two, actually expresses just one point of uncertainty) is very precise and seeks only to determine which date is relevant for the purposes of regarding a position as having been taken up: the date on which the key audit partner’s contract with the audited company was signed (July 2018) or the date on which the key audit partner commenced his employment in that company (February 2019).

34.

According to the account given in the order for reference, the choice of one or other of those dates has no bearing on the recognition of the fact that there has been a punishable infringement. The key audit partner is asking for the fine imposed to be reduced, not cancelled, and thus implicitly accepts that the infringement would have occurred in any event.

35.

It seems, therefore, that the assessment of the relevant date matters only as a factor in calibrating the amount of the fine in accordance with Paragraph 7(1), Chapter 10, of the Law on Auditing.

36.

The harmonised rules on auditing trace their origin back to the Treaty of the European Economic Community, in which it was established that the Council and the Commission would perform their functions in such a way as to coordinate to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms. ( 12 )

37.

This formed the legal basis for the enactment of the Fourth, ( 13 ) Seventh ( 14 ) and Eighth ( 15 ) Council Directives, which respectively establish the harmonised minimum content that must be present in annual accounts and consolidated accounts and the conditions governing the authorisation within the internal market of persons professionally engaged in the auditing of accounts.

38.

The Eighth Directive introduced the first rules on the independence of auditors: persons authorised to carry out the statutory auditing of accounting documents were to be ‘independent and of good repute’. ( 16 )

39.

In the years that followed, the Commission used a number of communications, initiatives and non-binding instruments ( 17 ) to promote the independence of auditors, thus creating an environment conducive to the enactment of Directive 2006/43. ( 18 )

40.

Even in its initial version, Directive 2006/43 offered detailed rules on the independence of auditors, to which some of Chapter IV of that directive (‘Professional ethics, independence, confidentiality and professional secrecy’) was devoted. ( 19 )

41.

In that same initial version, Directive 2006/43 provided for the prohibition period that forms the subject of this dispute, although in Chapter X (‘Special provisions for the statutory audits of public-interest entities’). ( 20 )

42.

The current version of Directive 2006/43 is the product of the reform carried out by Directive 2014/56, which amends Article 22 and adds a new Article 22a, the interpretation of which has been requested by the referring court. ( 21 ) What is more, it contains not only provisions that endeavour to ensure the good repute of auditors but also ones specifically aimed at safeguarding their independence.

43.

Article 22a gives effect to the provision contained in recital 8 of Directive 2014/56 to the effect that ‘the statutory auditor […] should be prevented from taking up duties in the audited entity at managerial or board level until an appropriate period has elapsed since the end of the audit engagement’.

44.

The list of prohibitions contained in Article 22a(1) includes that barring the auditor from ‘tak[ing] up a key management position in the audited entity’ [(a)]. The question referred for a preliminary ruling seeks to dispel the uncertainty as to the point at which the management position is taken up.

45.

A literal interpretation of the provision in question, the various linguistic versions of which differ quite significantly in the terminology they use, does not yield any conclusive results.

46.

The language used in some of those versions would support an interpretation which lays emphasis on the actual performance of duties in the management position rather than on the point at which the auditor agrees to work for the audited company by signing a contract with it. ( 22 )

47.

Other versions, on the other hand, militate in favour of the opposite proposition, inasmuch as they do not appear to call for the actual performance of duties in the management position, mere acceptance of that position by contract being sufficient. ( 23 )

48.

The disparity between the language versions thus makes it impossible to use the literal wording of any single one of them in order to determine the true meaning of the provision. ( 24 )

49.

Recourse must therefore be had to the other interpretative criteria usually employed by the Court, ( 25 ) that is to say, the purpose of the provision and the context in which it is located.

50.

Both the Commission ( 26 ) and the Audit Committee ( 27 ) agree on the importance of the external perspective of the independence of auditors and propose a – fundamentally – teleological interpretation of Article 22a of Directive 2006/43.

51.

They emphasise that the prohibition period is aimed at ensuring such independence, which is relevant both internally (in the relationship between the auditor and the audited company) and externally, inasmuch as the public has confidence in the auditor’s independence, which it wouldn’t if the latter, during the auditing engagement or after leaving his role as key audit partner, could immediately (or in the near future) take up a management position in the audited undertaking.

52.

In my view, the prohibition in question is intended to ensure that the auditor (or the audit firm at which he is a key partner) does not give in to the temptation of issuing a report favourable to the audited company which the latter will in the near future reward by recruiting him to a management position.

53.

Understood in this way, the rule at issue pre-empts the risk that the auditor may, either now or in the near future, have self-interests in the companies subject to his accounting scrutiny which might influence his professional work.

54.

The conflict of interest between the auditor’s obligations and his (future) prospects of working for the audited undertaking may arise where the contractual relationship between the two is managed or prepared during the performance of the auditing engagement. In that event, the work of the key audit partner is likely to be dictated by his duties of loyalty to his future employer.

55.

The aforementioned rule therefore seeks to remove, in so far as is possible, any incentive there may be for the auditor to plan or conclude a contractual relationship with the audited entity while still having the status of key audit partner. ( 28 )

56.

What is more, as the Commission and the Audit Committee state, the prohibition preventing a key audit partner, while still acting as such and for a certain period thereafter, from taking up a management position in the audited company protects the confidence of third parties that the audit function will be discharged in a reliable manner. By the same token, that prohibition contributes to the orderly functioning of markets, as is noted in recital 9 of Directive 2006/43. ( 29 )

57.

Public confidence that annual accounts paint a true picture of a company is a key factor for any persons that may have dealings with that company, be they investors, creditors, employees or third parties.

58.

From another point of view, confidence in the reliability of audits of financial statements is a mechanism for protecting the value of the participation of partners or shareholders and an effective instrument in ensuring appropriate corporate management. A lack of such confidence is instrumental in causing the value of that participation to be lost, as a result of both the market’s mistrust of the company’s position and the inability of directors to manage the company without reliable information.

59.

Paragraph 1(1) of the Commission Recommendation emphasises that ‘the main way in which the Statutory Auditor can demonstrate to the public that a Statutory Audit is performed in accordance with these principles is by acting, and being seen to act, independently’. ( 30 )

60.

Those considerations still hold good even if it is accepted that the key audit partner at the audit firm may, in particular cases, not have any actual power to influence the outcome of the analysis of the audited company’s financial statements.

61.

The reason for this is that the need to safeguard the independence and impartiality of his professional work requires, in any circumstances, that the key audit partner should not be able to take up a management position in the audited company before or during the prohibition period.

62.

The good repute of auditors ( 31 ) and the public’s confidence in the integrity (and quality) of their work ( 32 ) are elements which the successive provisions of EU law in this field have endeavoured to protect.

63.

Article 22(2) of Directive 2006/43 averts the risk of conflicts of interest between the auditor (or the audit firm) and the audited company. Such risks may be created by ‘… financial, personal, business, employment or other relationships’ between the two as a result of which ‘an objective, reasonable and informed third party, taking into account the safeguards applied, would conclude that the statutory auditor’s or the audit firm’s independence is compromised’.

64.

Paragraph 4 of the same article precludes an auditor or an audit firm from performing his or its professional duties for an audited company with which it has ‘had an employment, or a business or other relationship […] within the period referred to in paragraph 1 that may cause, or may be generally perceived as causing, a conflict of interest’.

65.

Those precautions highlight the fact that, from a schematic point of view, the interpretation of Directive 2006/43 must preserve one of the essential components of the good repute or reputation of auditors without which the public’s confidence would disappear: the absence of any actual or reasonably foreseeable conflicts of interest that affect or are capable of affecting their professional work.

66.

For the EU legislature, the auditor’s independence at an external level is as important as it is at an internal level and any suspicion that there is too much proximity between the auditor and the audited must be removed from public perception. ( 33 )

67.

Those precautions are logical in the light of the purpose of, and justification for, audits, and in the light of the very function which the disclosure of companies’ financial statements perform in a market economy.

68.

Third-party perception in this context is also referred to in Article 22(1), in fine, of Directive 2006/43: the relationship between the auditor (or the audit firm) and the audited undertaking must not have as its result that ‘an objective, reasonable and informed third party, taking into account the safeguards applied, would conclude that the statutory auditor’s or the audit firm’s independence is compromised’.

69.

In short, a relationship which may give rise to a conflict of interests is as undesirable as one which is reasonably perceived as being a potential cause of a conflict of interests.

70.

The premiss from which we must start in this case is that the key audit partner could not take up a key management position in the audited undertaking either while still in his role as auditor or for a subsequent period of two years following his departure from that role.

71.

As has already been explained, that prohibition was infringed, a fact acknowledged, at least implicitly, by the person concerned himself, who is seeking only to have the fine imposed on him reduced (not cancelled).

72.

The fact that a key audit partner in an audit firm signs a contract of employment (in a key management position) with an audited company while still in his role at the audit firm is evidence of a potential conflict of interests sufficient to affect his independence.

73.

That assessment is not precluded by the fact that the entry into force of that contractual relationship, which was agreed upon at a point in time when the person concerned had not yet left his role as key audit partner (from which he resigned on 31 August 2018), was postponed by several months until the publication of the audit report for FY 2018.

74.

What matters (and what an ‘objective, reasonable and informed’ third party would be able to infer) is that, even at the point when the contract was signed on 12 July 2018, after the audit report had been signed, the professional relationship between the key audit partner (or the audit firm) responsible for the engagement and the audited company remained in being.

75.

It is also logical to infer from the foregoing that the process of negotiating the terms of employment with the audited undertaking was conducted not only by someone who was a key audit partner at the audit firm but also at a time when that person was responsible for the audit work being undertaken for the company subject to his scrutiny. An ‘objective, reasonable and informed’ third party would be able to draw this inference too.

76.

The decisive factor in this assessment, therefore, is not when the key audit partner actually commences employment in his management position in the audited company, but the date on which he agrees to take on that role.

77.

That contract itself creates a number of reciprocal obligations which are incompatible with the key audit partner’s ongoing role as responsible auditor at the firm commissioned to audit the accounts of the audited company.

78.

That agreement, moreover, casts its shadow backwards, inasmuch as it will logically be perceived, externally, as expressing a real or potential conflict, at odds with the independence and impartiality of the key audit partner himself and the audit firm, which might have impacted on the reliability of the audit of the audited firm’s accounts.

79.

In the light of the foregoing, I suggest that the Court’s answer to the Helsingin hallinto-oikeus (Administrative Court, Helsinki, Finland) should be as follows:

Article 22a(1)(a) of Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on the statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/CEE, as amended by Directive 2014/56/EU, must be interpreted as meaning that the key audit partner in an audit firm takes up a key management position in the audited company when he signs the contract of employment in that position, even if he does not actually join the audited company until a number of months after that contract has been signed.