The European Commission will unveil on Wednesday plans to overhaul audit practices and boost corporate governance to better protect investors and restore market confidence after scandals at Enron and Ahold.
The United States reacted swiftly to an accounting fraud at former oil trader Enron in 2001 by toughening its corporate governance and audit rules. It wants companies doing business with the United States to apply the same standards.
Although the European Union (EU) executive has always said Europe was well protected against corporate fraud, a scandal at Dutch retailer Ahold in February has exposed some weaknesses and regulatory gaps in the 15-nation EU, prompting calls for action.
“The objectives would be to ensure that investors and other interested parties can rely fully on the accuracy of auditors' accounts, prevent conflict of interest from auditors, and enhance protection against Enron-type scandals,” Commission spokesman Reijo Kemppinen told a news briefing.
The Commission will also outline a strategy on corporate governance which will recommend that company board members be held jointly responsible for the fairness of financial statements, that executive pay be disclosed, and that a company's audit, nomination and remuneration committees remain independent.
EU sources said the Commission is expected to introduce minimum standards for public oversight of audit practices at a national level. Governments would be expected to ensure, for instance, that audit supervisors are independent and not fully funded by the audit profession.
“The present erosion of confidence is partly based on a public perception that any self-regulating profession runs a risk of conflict of interests in dealing with its shortcomings,” the Commission said in a working document.
“Therefore, a credible element of public oversight to the audit profession is crucial to the present environment.”
The Commission will also propose a co-ordination mechanism to link-up national oversight bodies, useful in cross-border cases.
And it will call for EU-wide adoption of international audit standards by 2005 to remove national discrepancies. The Commission will also propose to make binding independence and quality requirements, such as the disclosure of non-audit fees and the regular rotation of audit teams.
It will propose setting up an Audit Regulatory Committee charged with drafting technical legislation for auditors.
The strategy could convince the United States that EU audit firms do not need to register with the newly-created US Public Company Oversight Board and be subject to its supervision. EU firms complain that double registration will be costly.