EU reacts to Parmalat scandal

Shared audit responsibility, allowed at fraud-hit Parmalat, should be banned in the European Union and auditors should report to independent watchdogs, a draft EU Commission proposal said yesterday.

The proposal on the audit profession, obtained by Reuters, also calls on EU audit supervisors to co-operate in investigations. But it falls short of proposing a European counterpart of the US Public Company Accounting Oversight Board, which polices accountants across the Atlantic.

The multi-billion euro accounting scandal which erupted at Italy's main food firm late in December exposed a legal loophole that allows a company's main auditor to escape blame if the problem emerged at a unit it did not audit.

Documents obtained by Reuters showed that the EU executive wants to end this situation by placing responsibility for a company's consolidated accounts at the door of a single audit firm, even when some audit work is outsourced.

"Member states shall ensure that the group auditor bears the full responsibility for the audit report in relation to the consolidated accounts," said the draft document, which could be tightened still further in the wake of the Parmalat debacle.

The Commission's planned directive on statutory audit is parallel to a planned reform on corporate governance that will likely make EU boards of directors collectively responsible for their company's books. All these proposals are being rushed through in the wake of the scandal at Parmalat. A corporate fraud at energy trade giant Enron at the end of 2001 prompted the United States to quickly reform its company law and corporate governance practices.

But experts note it has taken Europe more than two years to introduce reforms that may help prevent future scandals.

The Commission will also call on the 15 EU states, who will be joined by 10 more from May 1, to set up a public oversight system for auditors and that this should be governed by a majority of non-auditors.

Oversight bodies should also have investigative rights as well as the power to impose sanctions.

"The public oversight system must have the right, where necessary, to conduct investigations and to exercise disciplinary powers over statutory auditors and audit firms," the draft said. An accounting scandal at Dutch food retailer Ahold highlighted the fact the Netherlands and several other EU states did not have a supervisory system separate from the profession.

In its proposal, the Commission will make compulsory international auditing rules, drafted by the International Auditing and Assurance Standards Board, to improve and harmonise the quality of auditing.

The EU executive proposal falls short of calling for a strict separation of audit from non-audit business, something experts said would greatly improve competition in a sector dominated by four main companies.