The European Commission signaled on Tuesday that it might settle a longstanding dispute with the United States next week that would pave the way for joint supervision of the auditing profession.
“We have come to a compromise'' with the Public Company Accounting Oversight Board, an independent body created after the Enron scandal, Frits Bolkestein, the European Union's internal market commissioner, said after a meeting at the European Parliament.
“This will mean we will supervise in a joint effort the whole auditing profession,'' he added.
The chairman of the Public Company Accounting Oversight Board, William J. McDonough, is scheduled to visit Brussels next week, “at which time I hope I will be able to hammer out the final details,'' Mr. Bolkestein said.
Part of the problem the sides hope to resolve is the information that United States authorities would try to seize during an investigation. The commission wants the American authorities to agree to involve European audit regulators in any such inquiry.
In Washington, the European Commission action was applauded by Mr. McDonough. “The directive offered today by the European Commission is a highly constructive step toward our mutual goal of protecting investors,'' he said.
“The system of accounting oversight described in the directive will mesh quite well with the accounting oversight we are putting in place here in the United States. I applaud the work of my friend Frits Bolkestein and his staff,” Mr. McDonough added.
Christi Harlan, a spokeswoman for the oversight board, said the American body insisted on the registration of foreign audit firms, and said a number had already registered.
“What we are discussing with the E.C. representatives are the circumstances of inspections and investigations,'' she said.
She said the board was willing to accept the work of European regulators in inspecting and investigating auditing firms based in Europe, so long as it was clear the regulators were both independent and vigorous.
News of a possible compromise came after Mr. Bolkestein proposed earlier in the day a unionwide law on corporate auditing that calls for similar standards to those being imposed in the United States.
“No one is naïve enough to think any directive will stop accounting fraud at a stroke – you cannot abolish crime,'' Mr. Bolkestein said. “But what we are proposing would inject more rigor and a stronger dose of ethics into the audit process, bolstering that defense on which all market economies rely.''
The collapse of the Italian dairy giant Parmalat just three months ago “was a reminder of what happens when that defense fails,'' he added.
Like its American counterpart, the Sarbanes-Oxley Act, which was passed in 2002 largely in response to the Enron scandal, the European directive aims to tighten the regulation of the auditing profession to deter future corporate misdeeds.
Companies will be required to appoint audit committees that act independently of management. These committees would appoint the audit firm, and to prevent the relationship's becoming too cozy, companies would have to rotate their chief auditor once every five years if it has more than one firm working for it, or once every seven years if there is only one auditor, the commission said in a statement.
The directive would pave the way for the creation of a network of national public accounting oversight boards in each country in the European Union. At present, most countries allow the accounting profession to regulate itself.
The national regulators would keep a register of all auditors, whether European or from elsewhere, practicing in their country. The commission initially fought to exempt European auditors active in the United States from registering with the American regulator, the oversight board, arguing that similar supervision in Europe would make additional supervision in the United States unnecessary.
With this directive, the commission is effectively imposing the same conditions on American auditors practicing in Europe.
The directive is expected to form the basis for cooperation agreements with auditing authorities from other parts of the world, the commission said, including the oversight board.
The unionwide law would call for national regulators to impose criminal sanctions for serious offenses, the commission said.
The financial meltdown of one of Europe's biggest food companies, and a similar crisis at the Dutch retailer Royal Ahold had a direct influence on the shape of the proposal, Jonathan Todd, a spokesman for the internal market commission, said. “The requirement for companies to have an independent audit committee was added after the Parmalat affair,'' he said.
But momentum to reform the law in Europe began long before Parmalat, Mr. Todd said. Efforts began after the Enron scandal in 2001, more or less when the United States starting writing the Sarbanes-Oxley Act. Quicker off the mark, the American law became the yardstick for Europe.