International Standards on Auditing within the European Union
International Standards on Auditing within the European Union
International Standards on Auditing within the European Union
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Dries SCHOCKAERT<br />
Senior Manager <strong>Auditing</strong><br />
and Assurance <str<strong>on</strong>g>Standards</str<strong>on</strong>g><br />
IRE-IBR<br />
Nathalie HOUYOUX<br />
Attaché Institut des<br />
Réviseurs d’Entreprises-<br />
Instituut van de<br />
bedrijfsrevisoren (IRE-IBR)<br />
VARIA / DIVERS<br />
<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> <strong>on</strong> <strong>Auditing</strong><br />
<strong>within</strong> <strong>the</strong> <strong>European</strong> Uni<strong>on</strong><br />
The new Audit Directive of 17 th May 2006 enforces <strong>the</strong> use of “<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> <strong>on</strong> <strong>Auditing</strong>”<br />
(ISAs) for all statutory audit to be performed in <strong>the</strong> EU. Aiming at a c<strong>on</strong>sistently high quality for all<br />
statutory audits required by Community law, <strong>the</strong> Audit Directive has given implementing powers to<br />
<strong>the</strong> <strong>European</strong> Commissi<strong>on</strong> (EC) to adopt <strong>the</strong> ISAs in accordance with <strong>the</strong> so-called “Comitology<br />
procedure”. Recently, this procedure has been modified in order for <strong>the</strong> <strong>European</strong> Parliament (EP) to<br />
exercise <strong>the</strong> so-called “scrutiny rights” when overseeing <strong>the</strong> administrative process of endorsement.<br />
This article indicates <strong>the</strong> importance of <strong>the</strong> ISAs, as established by <strong>the</strong> “<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <strong>Auditing</strong> and<br />
Assurance <str<strong>on</strong>g>Standards</str<strong>on</strong>g> Board” (IAASB). It deals with <strong>the</strong> evoluti<strong>on</strong> from <strong>the</strong> genesis of <strong>the</strong> standard<br />
setting process at <strong>the</strong> internati<strong>on</strong>al level to <strong>the</strong> so-called “Clarity Project” whereby <strong>the</strong> ISAs are “clarified”<br />
regarding <strong>the</strong>ir objectives and requirements.<br />
Finally, <strong>the</strong> article provides for a summary of <strong>the</strong> fairly complicated new comitology procedure, now<br />
incorporating a “regulatory procedure with scrutiny”.<br />
The text of this article refers to <strong>the</strong> situati<strong>on</strong> existing <strong>on</strong> <strong>the</strong> 31 st August 2007 1 .<br />
1. The Genesis of IAPC and<br />
IAASB<br />
The process of internati<strong>on</strong>al harm<strong>on</strong>izati<strong>on</strong><br />
of financial reporting started in<br />
October 1972, when during <strong>the</strong> tenth<br />
internati<strong>on</strong>al c<strong>on</strong>gress of accountants (held<br />
in Sydney), <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> Coordinati<strong>on</strong><br />
Committee for <strong>the</strong> Accountancy Professi<strong>on</strong><br />
(ICCAP) was founded. This c<strong>on</strong>gress<br />
laid <strong>the</strong> foundati<strong>on</strong>s for <strong>the</strong> genesis <strong>on</strong><br />
29 June 1973 of <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
Accounting <str<strong>on</strong>g>Standards</str<strong>on</strong>g> Committee (IASC),<br />
<strong>the</strong> predecessor of <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
Accounting <str<strong>on</strong>g>Standards</str<strong>on</strong>g> Board (IASB), based<br />
in L<strong>on</strong>d<strong>on</strong>.<br />
During <strong>the</strong> ninth internati<strong>on</strong>al c<strong>on</strong>gress of<br />
accountants (held in Paris, 1967) an internati<strong>on</strong>al<br />
working party has been created 2<br />
dealing with <strong>the</strong> c<strong>on</strong>vergence of internati<strong>on</strong>al<br />
best practice in auditing. This decisi<strong>on</strong><br />
followed <strong>the</strong> discussi<strong>on</strong>s back in 1962<br />
during <strong>the</strong> eight internati<strong>on</strong>al c<strong>on</strong>gress of<br />
accountants (held in New York) <strong>on</strong> <strong>the</strong><br />
necessity of creating a higher degree of<br />
uniformity in accounting and auditing<br />
standards.<br />
On 8 October 1977, ICCAP took <strong>the</strong><br />
initiative, during <strong>the</strong> eleventh internati<strong>on</strong>al<br />
c<strong>on</strong>gress (held in Munich 3 ) to create <strong>the</strong><br />
<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> Federati<strong>on</strong> of Accountants<br />
(IFAC) 4 . IFAC is <strong>the</strong> organizati<strong>on</strong> that took<br />
over <strong>the</strong> tasks of ICCAP from 1 November<br />
1977 <strong>on</strong>wards, <strong>the</strong>reby serving <strong>the</strong><br />
accounting professi<strong>on</strong> worldwide and<br />
having <strong>the</strong> public interest in mind.<br />
The decisi<strong>on</strong> to create <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<strong>Auditing</strong> Practices Committee (IAPC) was<br />
taken by <strong>the</strong> Board of IFAC <strong>on</strong> 8 October<br />
1977 5 . Being <strong>on</strong>e of <strong>the</strong> most important<br />
committees of IFAC, IAPC developed <strong>the</strong><br />
<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <strong>Auditing</strong> Guidelines (IAGs),<br />
which were in fact <strong>the</strong> predecessors of <strong>the</strong><br />
<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> <strong>on</strong> <strong>Auditing</strong><br />
1. The authors would like to thank Mrs. Karolina Majewska and Mr. Jean-Philippe Rabine (<strong>European</strong> Commissi<strong>on</strong> staff)<br />
for <strong>the</strong>ir valuable comments made to an earlier draft of this article. Any omissi<strong>on</strong>s, misc<strong>on</strong>cepti<strong>on</strong>s or misstatements that<br />
could still be present <strong>within</strong> <strong>the</strong> text fall under <strong>the</strong> direct and sole resp<strong>on</strong>sibility of <strong>the</strong> authors of this article.<br />
2. Cf. IFAC News, February 2007, p. 12.<br />
3. Cf. World C<strong>on</strong>gresses relevant to accounting and Turkish accounting c<strong>on</strong>gresses and symposiums, O. GÜVEMLI et alii,<br />
Chamber of Certified Public Accountants of Instanbul, Yayin n° 67, 2006, p. 131; and “Development of an <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
Federati<strong>on</strong> of Accountants (IFAC)”, UEC Journal 1976, Vol. 11, n° 3, p. 182-185.<br />
4. 63 member bodies signed <strong>the</strong> official protocol. O. GÜVEMLI et alii (2006), ibid., p. 131) refer to a total of 57 member<br />
bodies.<br />
5. Cf. “IFAC. The First Fifteen Years. 1977-1992”, IFAC News May 2007, p. 9.<br />
LARCIER FORUM FINANCIER / REVUE BANCAIRE ET FINANCIÈRE 2007/8 515
INTERNATIONAL STANDARDS ON AUDITING WITHIN THE EUROPEAN UNION DRIES SCHOCKAERT & NATHALIE HOUYOUX<br />
(ISAs). The IAGs represented <strong>the</strong> “best practice” <strong>within</strong><br />
<strong>the</strong> major audit firms at <strong>the</strong> time, <strong>within</strong> <strong>the</strong> field of<br />
auditing and review of historical financial informati<strong>on</strong>.<br />
The first IAG dealt with <strong>the</strong> purpose and <strong>the</strong> scope of an<br />
Table 1: Genesis and Development of ISAs and ISCQ 1<br />
<str<strong>on</strong>g>Standards</str<strong>on</strong>g> Title Genesis Future<br />
ISA 200 Objective and General Principles Governing an Audit of<br />
Financial Statements<br />
Sources: IFAC, Annual reports, 1978-2002, IAASB, Annual reports, 2002-2006, website IFAC (www.ifac.org), update dates from July 2007.<br />
audit and was approved in October 1979. Table 1<br />
provides for a survey of <strong>the</strong> internati<strong>on</strong>al auditing guidelines/standards.<br />
The exposure drafts (ED’s) of <strong>the</strong>se guidelines/standards<br />
are left out of this table.<br />
516 FINANCIEEL FORUM / BANK- EN FINANCIEWEZEN 2007/8 LARCIER<br />
Before<br />
2004<br />
Before<br />
1994<br />
Before<br />
1992<br />
Oct. 1979 ISA-200 ISA-200 ISA-1 IAG-1<br />
Subsequent modificati<strong>on</strong>s<br />
Dec. 2004, Oct. 2003, Mar. 1994, Oct.<br />
1991 (supersedes ex ISA-3, Sep. 1980)<br />
Finalisati<strong>on</strong> date<br />
Clarity Project<br />
Jun. 2008<br />
ISA 210 Terms of Audit Engagements Jun. 1980 ISA-210 ISA-210 ISA-2 IAG-2 Dec. 2004, Feb. 2004, Mar. 1994 Jun. 2008<br />
ISA 220 Quality C<strong>on</strong>trol for Audits of Historical Financial Informati<strong>on</strong><br />
Sep. 1981 ISA-220 ISA-220 ISA-7 IAG-7 Feb. 2004, Nov. 1993 Sep. 2008<br />
ISA 230 Documentati<strong>on</strong><br />
Jan. 1982 ISA-230 ISA-230 ISA-9 IAG-9<br />
Feb. 2004, Mar. 1994, Nov. 1993,<br />
Sep. 2005<br />
Sep. 2007<br />
ISA 240 The Auditor’s Resp<strong>on</strong>sibilities relating to Fraud in an<br />
Audit of Financial Statements<br />
Oct. 1982 ISA-240 ISA-240 ISA-11 IAG-11 Feb. 2004, Mar. 2001 Dec. 2006<br />
ISA 250 C<strong>on</strong>siderati<strong>on</strong> of Laws and Regulati<strong>on</strong>s in an Audit of<br />
Financial Statements<br />
Jul. 1993 ISA-250 ISA-250 ISA-31 - Feb. 2004, Mar. 1994 Mar. 2008<br />
ISA 260 Communicati<strong>on</strong>s of Audit Matters with Those Charged<br />
with Governance<br />
Jun. 1999 ISA-260 ISA-260 - - Feb. 2004 Sep. 2007<br />
ISA 300 Planning an Audit of Financial Statements Feb. 1981 ISA-300 ISA-300 ISA-4 IAG-4 Jun. 2004, Jun. 1993, Dec. 2006 Dec. 2006<br />
ISA 315 Identifying and Assessing <strong>the</strong> Risks of Material Misstate-<br />
ISA-310 ISA-30 - Mar. 1994, created Dec. 1993<br />
ment Through Understanding <strong>the</strong> Entity and Its Envir<strong>on</strong>ment<br />
Oct. 2003 ISA-315 ISA-400 ISA-6 IAG-6<br />
Nov. 1993, Oct. 1991 (supersedes ex-<br />
IAG-20, created Jun. 1985, and ex-<br />
IAG-29, created Jul. 1990), created<br />
Jul. 1981<br />
Dec. 2006<br />
ISA-401 ISA-15 IAG-15 Mar. 1994, created Feb. 1984<br />
ISA 320 Audit Materiality Oct. 1987 ISA-320 ISA-320 ISA-25 IAG-25 Mar. 1994 Dec. 2007<br />
ISA 330 The Auditor’s Resp<strong>on</strong>ses to Assessed Risks<br />
cf. ex-IAG-29 (superseded by ex-ISA-<br />
Oct. 003 ISA-330 ISA-330 - -<br />
6 in Oct. 1991, created Jul. 1990),<br />
Dec. 2006<br />
Dec. 2006<br />
ISA 402 Audit C<strong>on</strong>siderati<strong>on</strong>s Relating to Entities Using Service<br />
Organizati<strong>on</strong>s<br />
Mar. 1994 ISA-402 ISA-402 ISA-6 -<br />
Feb. 2004 (Addendum to ex-ISA-6 in<br />
Oct. 1992)<br />
Sep. 2008<br />
ISA 450 Evaluati<strong>on</strong> of Misstatements Identified During <strong>the</strong> Audit ISA-450 Dec. 2007<br />
ISA 500 Audit Evidence Jan. 1982 ISA-500 ISA-500 ISA-8 IAG-8 Oct. 2003, Nov. 1993, Jan. 1991 Jun. 2008<br />
ISA 501 Audit Evidence – Additi<strong>on</strong>al C<strong>on</strong>siderati<strong>on</strong>s for Specific<br />
Items<br />
Mar. 1994 ISA-501 ISA-501 ISA-8 IAG-8<br />
Feb. 2004, Mar. 1995, and addendum<br />
to ex-ISA-8 in Feb. 1991<br />
Sep. 2008<br />
ISA 505 External C<strong>on</strong>firmati<strong>on</strong>s Jun. 2000 ISA-505 ISA-505 - - Feb. 2004 Sep. 2008<br />
ISA 510 Initial Engagements – Opening Balances Jul. 1990 ISA-510 ISA-510 ISA-28 IAG-28 Feb. 2004, Mar. 1996, Nov. 1993 Mar. 2008<br />
ISA 520 Analytical Procedures Jul. 1983 ISA-520 ISA-520 ISA-12 IAG-12 Feb. 2004, Jun. 1993, Oct. 1990 Sep. 2008<br />
ISA 530 Audit Sampling and O<strong>the</strong>r Means of Testing Feb. 1985 ISA-530 ISA-530 ISA-19 IAG-19 Feb. 2004, Nov. 1997 Mar. 2008<br />
ISA 540<br />
ISA 545<br />
Audit of Accounting Estimates<br />
<strong>Auditing</strong> Fair Value Measurements and Disclosures<br />
Oct. 1987<br />
Jul. 2002<br />
ISA-540<br />
ISA-540<br />
ISA-545<br />
ISA-26<br />
-<br />
IAG-26<br />
-<br />
Feb. 2004, Nov. 1993<br />
Feb. 2004<br />
Dec. 2007<br />
ISA 550 Related Parties Oct. 1984 ISA-550 ISA-550 ISA-17 IAG-17 Feb. 2004, Mar. 1994 Mar. 2008<br />
ISA 560<br />
ISA 570<br />
Subsequent Events<br />
Going C<strong>on</strong>cern<br />
Oct. 1995<br />
Jun. 1986<br />
ISA-560<br />
ISA-570<br />
ISA-560<br />
ISA-570<br />
ISA-21<br />
ISA-23<br />
IAG-21<br />
IAG-23<br />
Dec. 2004, Feb. 2004, Nov. 1993<br />
Feb. 2004, Jun. 1999<br />
Dec. 2007<br />
ISA 580 Management Representati<strong>on</strong>s Oct. 1985 ISA-580 ISA-580 ISA-22 IAG-22 Feb. 2004, Nov. 1993 Dec. 2007<br />
ISA 600 Audit of Group Financial Statements (before: Using <strong>the</strong><br />
work of ano<strong>the</strong>r auditor)<br />
Jul. 1981 ISA-600 ISA-600 ISA-5 IAG-5 Mar. 1994 Jul. 2007<br />
ISA 610 C<strong>on</strong>sidering <strong>the</strong> Work of Internal <strong>Auditing</strong> Jul. 1982 ISA-610 ISA-610 ISA-10 IAG-10 Feb. 2004, Mar. 1994 Dec. 2007<br />
ISA 620 Using <strong>the</strong> Work of an Expert Feb. 1985 ISA-620 ISA-620 ISA-18 IAG-18 Feb. 2004, Nov. 1993 Sep. 2008<br />
ISA 700 The Independent Auditor’s Report <strong>on</strong> a Complete Set of<br />
General Purpose Financial Statements<br />
Oct. 1983 ISA-700 ISA-700 ISA-13 IAG-13<br />
Dec. 2004, Jun. 2001, Nov. 1993, Oct.<br />
1992, Oct. 1989<br />
Jun. 2008<br />
ISA 701 Modificati<strong>on</strong>s to <strong>the</strong> Independent Auditor’s Report Dec. 2004 ISA-705 ISA-700 - - - Jun. 2008<br />
ISA 706 Emphasis of Matter and o<strong>the</strong>r matters paragraphs in <strong>the</strong><br />
Independent Auditor’s Report<br />
ISA-706 ISA-700 - - - Jun. 2008<br />
ISA 710 Comparatives Mar. 1996 ISA-710 ISA-710 - - Feb. 2004 Sep. 2008<br />
ISA 720 O<strong>the</strong>r Informati<strong>on</strong> in Documents C<strong>on</strong>taining Audited<br />
Financial Statements<br />
Feb. 1984 ISA-720 ISA-720 ISA-14 IAG-14 Feb. 2004, Mar. 1996, Nov. 1993 Sep. 2007<br />
ISA 800 The Auditor’s Report <strong>on</strong> Special Purpose Audit Engagements<br />
Oct. 1986 ISA-800 ISA-800 ISA-24 IAG-24 Dec. 2004, Mar. 1994 Jun. 2008<br />
ISA (undet.) C<strong>on</strong>trol deficiencies noted in an audit (new) (undet.) Sep. 2008<br />
ISQC 1 Quality C<strong>on</strong>trol for Firms that Perform Audits and Reviews<br />
of Historical Financial Informati<strong>on</strong>, and O<strong>the</strong>r Assurance<br />
and Related Services Engagements<br />
Feb. 2004 ISQC-1 ISQC-1 - - Sep. 2005 Sep. 2008
DRIES SCHOCKAERT & NATHALIE HOUYOUX INTERNATIONAL STANDARDS ON AUDITING WITHIN THE EUROPEAN UNION<br />
Table 2: Membership of IFAC<br />
Sources: IFAC, Annual report, 1978-2006, IAASB, Annual report, 2002-2006, IFAC, News, February 2007, website IFAC (www.ifac.org).<br />
The evoluti<strong>on</strong> of IFAC membership is illustrated in<br />
table 2. After a period of increased internati<strong>on</strong>alisati<strong>on</strong> of<br />
business activities and capital markets during <strong>the</strong> 1980s,<br />
IFAC counts 106 member bodies <strong>within</strong> 78 countries by<br />
<strong>the</strong> end of 1991, compared to a number of 72 member<br />
bodies <strong>within</strong> 55 countries by <strong>the</strong> end of 1978. In <strong>the</strong><br />
c<strong>on</strong>text of this evoluti<strong>on</strong> and <strong>the</strong> expectati<strong>on</strong> that IAGs<br />
would shortly be recognized by official securities organizati<strong>on</strong>s,<br />
IAPC reformed its framework of standards,<br />
following IFAC’s C<strong>on</strong>stituti<strong>on</strong> created in November<br />
1991. From now <strong>on</strong>, <strong>the</strong> “<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <strong>Auditing</strong> Guidelines”<br />
(IAGs) will be renamed as “<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g><br />
<strong>on</strong> <strong>Auditing</strong>” (ISAs). Doing so, IAPC acknowledges that<br />
its standards have obtained a benchmark status 6 for <strong>the</strong><br />
audit and review engagements related to historical financial<br />
informati<strong>on</strong>. Therefore, IAPC, being <strong>on</strong>e of <strong>the</strong><br />
committees of IFAC, has become <strong>the</strong> auditing standard<br />
setter in <strong>the</strong> internati<strong>on</strong>al marketplace.<br />
In October 1992 <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> Organizati<strong>on</strong> of Securities<br />
COmmissi<strong>on</strong>s (IOSCO) published a resoluti<strong>on</strong><br />
whereby ISAs will be recognized <strong>on</strong> capital markets as an<br />
acceptable alternative for nati<strong>on</strong>al auditing standards, in<br />
<strong>the</strong> c<strong>on</strong>text of cross-border offerings of c<strong>on</strong>tinuous<br />
reporting by foreign issuers 7 .<br />
In July 1994, IAPC laid <strong>the</strong> foundati<strong>on</strong>s for <strong>the</strong> structure of<br />
an ISA 8 , c<strong>on</strong>sisting of basic principles and essential procedures,<br />
which will be indicated by bold lettered paragraphs,<br />
and explanatory and informative guidance, which will be<br />
indicated by grey lettered paragraphs. Fur<strong>the</strong>rmore, <strong>the</strong><br />
ISAs will be numbered per topic, <strong>the</strong>reby following <strong>the</strong><br />
logical sequence of <strong>the</strong> performance of an audit of financial<br />
statements (series 200 <strong>on</strong> <strong>the</strong> resp<strong>on</strong>sibilities of <strong>the</strong> auditor,<br />
until <strong>the</strong> series 700 and 800 <strong>on</strong> reporting).<br />
In November 2001, IAPC was reformed by <strong>the</strong> general<br />
assembly of IFAC in order to become <strong>the</strong> “<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<strong>Auditing</strong> and Assurance <str<strong>on</strong>g>Standards</str<strong>on</strong>g> Board (IAASB)” 9 .<br />
Using its new name, this Board intended to spend more<br />
time <strong>on</strong> standards for “assurance engagements”, which<br />
from January 2004 <strong>on</strong>, will be named <strong>the</strong> “<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<str<strong>on</strong>g>Standards</str<strong>on</strong>g> <strong>on</strong> Assurance Engagements” (ISAEs). At <strong>the</strong><br />
same time, a rigourous due process has been set up <strong>within</strong><br />
IAASB regarding its standard setting functi<strong>on</strong>.<br />
By <strong>the</strong> end of 2004, IFAC counts 163 member bodies<br />
<strong>within</strong> in 119 countries, which represents twice <strong>the</strong><br />
membership from 1978.<br />
6. Cf. IFAC, Annual Report 1993 (p. 1), and IFAC, Annual Report 1995 (p. 2).<br />
7. Following <strong>the</strong> reform of <strong>the</strong> ISAs in July 1994, IOSCO suspended <strong>the</strong> resoluti<strong>on</strong>. IOSCO never officially withdrew this resoluti<strong>on</strong>. Until today, IOSCO discusses<br />
<strong>within</strong> <strong>the</strong> C<strong>on</strong>sultative Advisory Group (CAG) of IAASB <strong>on</strong> <strong>the</strong> evoluti<strong>on</strong> of auditing standards in <strong>the</strong> c<strong>on</strong>text of IAASB’s Clarity Project (cf. infra: par. 3).<br />
8. Cf. IFAC, Annual Report 1994 (p. 3).<br />
9. IAASB, Annual Report 2002 (p. 8).<br />
LARCIER FORUM FINANCIER / REVUE BANCAIRE ET FINANCIÈRE 2007/8 517
INTERNATIONAL STANDARDS ON AUDITING WITHIN THE EUROPEAN UNION DRIES SCHOCKAERT & NATHALIE HOUYOUX<br />
During 2004-2008, IAASB takes care of its “Clarity<br />
Project”, which will be dealt with in paragraph 3 of this<br />
article.<br />
2. Member Obligati<strong>on</strong>s<br />
The creati<strong>on</strong> of IFAC’s c<strong>on</strong>stituti<strong>on</strong> in November 1991<br />
impacted <strong>on</strong> <strong>the</strong> obligati<strong>on</strong>s of its member bodies. In <strong>the</strong><br />
period before November 1991 IAGs c<strong>on</strong>stituted <strong>the</strong><br />
“minimum guidelines” to be followed and promoted by<br />
<strong>the</strong> member bodies <strong>on</strong> <strong>the</strong> nati<strong>on</strong>al level 10 . Of course,<br />
<strong>the</strong>se standards cannot replace existing nati<strong>on</strong>al standards<br />
issued by competent nati<strong>on</strong>al standard setters or authorities<br />
11 :<br />
“<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <strong>Auditing</strong> Guidelines issued by <strong>the</strong> IAPC do<br />
not override <strong>the</strong> local regulati<strong>on</strong>s referred to (..) above<br />
governing <strong>the</strong> audit of financial informati<strong>on</strong> of a particular<br />
country. (..) In <strong>the</strong> event of local regulati<strong>on</strong>s differing<br />
from, or being in c<strong>on</strong>flict with, <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <strong>Auditing</strong><br />
Guidelines <strong>on</strong> a particular subject, member bodies, in<br />
accordance with <strong>the</strong> C<strong>on</strong>stituti<strong>on</strong> of IFAC, should work<br />
towards <strong>the</strong> implementati<strong>on</strong> of <strong>the</strong> Guideline issued by<br />
<strong>the</strong> IAPC, when and to <strong>the</strong> extent practicable”.<br />
After November 1991, IAPC states that, as far as <strong>the</strong>re is<br />
c<strong>on</strong>sistency between <strong>the</strong> IAGs and <strong>the</strong> local law and regulati<strong>on</strong>,<br />
compliance with <strong>the</strong>se nati<strong>on</strong>al laws and regulati<strong>on</strong>s<br />
immediately results in compliance with IAGs. At<br />
that time, IFAC accepted that <strong>the</strong>re were differences<br />
between local legislati<strong>on</strong> and internati<strong>on</strong>al standards.<br />
When IAGs c<strong>on</strong>flicted with nati<strong>on</strong>al law or regulati<strong>on</strong>, <strong>the</strong><br />
member bodies needed to comply with <strong>the</strong> obligati<strong>on</strong>s as<br />
set out in IFAC’s c<strong>on</strong>stituti<strong>on</strong>: each member body, in its<br />
quality of standard setter, should use its best endeavors to<br />
incorporate <strong>the</strong> internati<strong>on</strong>al standards (renamed as<br />
“ISAs”) <strong>within</strong> <strong>the</strong> nati<strong>on</strong>al auditing standards.<br />
In April 2004, <strong>the</strong> ISAs received a benchmark status for<br />
<strong>the</strong> audit of financial statements, namely through <strong>the</strong> new<br />
member obligati<strong>on</strong>s 12 imposed by <strong>the</strong> Statements of<br />
Membership Obligati<strong>on</strong>s (SMO’s). In particular, paragraph<br />
4 of SMO 3 states that member bodies should use<br />
its best endeavors to establish c<strong>on</strong>vergence with <strong>the</strong> internati<strong>on</strong>al<br />
standards, thus c<strong>on</strong>tributing towards <strong>the</strong> eliminati<strong>on</strong><br />
of <strong>the</strong> differences of c<strong>on</strong>tent between nati<strong>on</strong>al and<br />
internati<strong>on</strong>al auditing standards (added bold):<br />
“4. Member bodies should use <strong>the</strong>ir best endeavors:<br />
(a) To incorporate <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> and<br />
related Practice Statements issued by <strong>the</strong> IAASB into<br />
<strong>the</strong>ir nati<strong>on</strong>al standards or related o<strong>the</strong>r pr<strong>on</strong>ouncements,<br />
or where resp<strong>on</strong>sibility for <strong>the</strong> development of<br />
nati<strong>on</strong>al standards or related o<strong>the</strong>r pr<strong>on</strong>ouncements lies<br />
with third parties, to persuade those resp<strong>on</strong>sible to incorporate<br />
<strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> and related Practice<br />
Statements into <strong>the</strong>ir nati<strong>on</strong>al standards or related o<strong>the</strong>r<br />
pr<strong>on</strong>ouncements; and<br />
(b) To assist with <strong>the</strong> implementati<strong>on</strong> of <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<str<strong>on</strong>g>Standards</str<strong>on</strong>g> and related Practice Statements, or nati<strong>on</strong>al<br />
standards and related o<strong>the</strong>r pr<strong>on</strong>ouncements that incorporate<br />
<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> and related Practice<br />
Statements.<br />
Although <strong>the</strong> C<strong>on</strong>stituti<strong>on</strong> of IFAC and this SMO<br />
acknowledge nati<strong>on</strong>al standards, member bodies should,<br />
in implementing <strong>the</strong>ir obligati<strong>on</strong>s of membership, have as<br />
a central objective <strong>the</strong> c<strong>on</strong>vergence of nati<strong>on</strong>al standards<br />
or related o<strong>the</strong>r pr<strong>on</strong>ouncements with <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<str<strong>on</strong>g>Standards</str<strong>on</strong>g> and related Practice Statements issued by <strong>the</strong><br />
IAASB.”<br />
Following <strong>the</strong>se obligati<strong>on</strong>s, <strong>the</strong> member bodies of IFAC<br />
have c<strong>on</strong>sidered <strong>the</strong> ISAs as a basis for <strong>the</strong> nati<strong>on</strong>al<br />
auditing standards. In Europe e.g., <strong>the</strong> Belgian, Dutch,<br />
Luxembourg, French and German auditing standards<br />
have been subject to a process of transformati<strong>on</strong> (“transpositi<strong>on</strong>”)<br />
of <strong>the</strong> internati<strong>on</strong>al “guidelines” (or “standards”):<br />
10. Cf. Towards <strong>the</strong> 21 st Century. Strategic Decisi<strong>on</strong>s for <strong>the</strong> Accountancy Professi<strong>on</strong>, IFAC, p. 3.<br />
11. Cf. Explanatory Foreword van de <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <strong>Auditing</strong> Guidelines (p. 3).<br />
12. At <strong>the</strong> time, <strong>the</strong> c<strong>on</strong>stituti<strong>on</strong> of IFAC (p. 2) stated:<br />
“Member bodies shall (...) support <strong>the</strong> work of IFAC by bringing to <strong>the</strong> notice of <strong>the</strong>ir members every pr<strong>on</strong>ouncement developed by IFAC and by using <strong>the</strong>ir best<br />
endeavours:<br />
– to work towards implementati<strong>on</strong>, when and to <strong>the</strong> extent possible under local circumstances, of those pr<strong>on</strong>ouncements and<br />
– specifically to incorporate in <strong>the</strong>ir nati<strong>on</strong>al auditing standards <strong>the</strong> principles <strong>on</strong> which are based <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> <strong>on</strong> <strong>Auditing</strong> developed by IFAC”.<br />
Cf. par. (16) and footnote (1) of <strong>the</strong> Preface to <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <str<strong>on</strong>g>Standards</str<strong>on</strong>g> <strong>on</strong> <strong>Auditing</strong> and Related Services (<strong>the</strong> so-called “Preface of July 1994”), cf. Handbook of<br />
internati<strong>on</strong>al auditing, assurance, and ethics pr<strong>on</strong>ouncements. 2005 Editi<strong>on</strong>, IFAC, p. 119-125.<br />
Art. 4 of <strong>the</strong> revised c<strong>on</strong>stituti<strong>on</strong> of IFAC (November 2005) states that member bodies of IFAC should:<br />
“c. dem<strong>on</strong>strate compliance with <strong>the</strong> obligati<strong>on</strong>s set out in <strong>the</strong> Statements of Membership Obligati<strong>on</strong>s (SMO’s), which may be revised from time to time by a<br />
majority vote of IFAC’s board.”<br />
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DRIES SCHOCKAERT & NATHALIE HOUYOUX INTERNATIONAL STANDARDS ON AUDITING WITHIN THE EUROPEAN UNION<br />
– Belgium: <strong>the</strong> “C<strong>on</strong>troleaanbevelingen” (“Recommandati<strong>on</strong>s de révisi<strong>on</strong>”), <strong>the</strong> overall auditing standards<br />
(“Algemene c<strong>on</strong>trolenormen”, “Normes Générales de révisi<strong>on</strong>”) and <strong>the</strong> “Normen inzake de<br />
certificatie van de gec<strong>on</strong>solideerde jaarrekening”, “Normes relatives à la certificati<strong>on</strong> des<br />
comptes annuels c<strong>on</strong>solidés”) of <strong>the</strong> Instituut van de Bedrijfsrevisoren – Institut des Réviseurs<br />
d’Entreprises (IBR-IRE); all standards of IRE are renamed as “Normen en Aanbevelingen met<br />
betrekking tot de beroepsuitoefening” or “Normes et Recommandati<strong>on</strong>s d’exercice professi<strong>on</strong>nel”).<br />
The official name of <strong>the</strong> standards, as indicated by <strong>the</strong> modified law of 22 July 1953<br />
regarding <strong>the</strong> creati<strong>on</strong> of IRE, is “normen en aanbevelingen” (“normes et recommandati<strong>on</strong>s”) 1 ;<br />
– The Ne<strong>the</strong>rlands: <strong>the</strong> “Accountantsrichtlijnen” of Royal NIVRA (and NOvAA), that have become “Nadere Voorschriften<br />
C<strong>on</strong>trole en Overige Standaarden” (COS) from 20072 <strong>on</strong>wards;<br />
– Luxembourg: <strong>the</strong> “Recommandati<strong>on</strong>s de révisi<strong>on</strong>” of <strong>the</strong> Institut des Réviseurs d’Entreprises (IRE Luxembourg);<br />
– France: until 1987 <strong>the</strong> “Recommandati<strong>on</strong>s relatives à l’exercice des missi<strong>on</strong>s”, from 1996 <strong>on</strong> “Normes<br />
professi<strong>on</strong>nelles”, that have become (after <strong>the</strong> entry into force of <strong>the</strong> French law (“loi de sécurité<br />
financière”) 3 <strong>the</strong> “normes d’exercice professi<strong>on</strong>nel” of <strong>the</strong> Compagnie Nati<strong>on</strong>ale des Commissaires<br />
aux Comptes (CNCC);<br />
– Germany: <strong>the</strong> “Prüfungsstandards” of <strong>the</strong> Institut der Wirtschaftsprüfer (IDW).<br />
1. Cf. art. 44 of <strong>the</strong> Royal Decree of 21 April 2007 “tot omzetting van bepalingen van de Richtlijn 2006/43/EG van het Europees Parlement en de Raad van 17 mei 2006 betreffende de wettelijke<br />
c<strong>on</strong>troles van jaarrekeningen en gec<strong>on</strong>solideerde jaarrekeningen, tot wijziging van de Richtlijnen 78/660/EEG en 83/349/EEG van de Raad, en houdende intrekking van Richtlijn 84/253/EEG<br />
van de Raad”, B.S. 27 april 2007, p. 22932.<br />
2. Following <strong>the</strong> entry into force <strong>on</strong> 1 October 2006 of <strong>the</strong> new Law “Wet Toezicht Accountantsorganisaties (WTA)”.<br />
3. Cf. art. L.821-1. of <strong>the</strong> Law n° 2003-706 du 1 er août 2003 de sécurité financière (J.O. n° 177 of 2 August 2003, p. 13220).<br />
3. The “Clarity Project”<br />
The so-called “Clarity project” of <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<strong>Auditing</strong> and Assurance <str<strong>on</strong>g>Standards</str<strong>on</strong>g> Board (IAASB) has<br />
been created following <strong>the</strong> comments in 2003 <strong>on</strong> <strong>the</strong><br />
exposure draft (ED), “Operati<strong>on</strong>s Policy n° 1 – Bold Type<br />
Lettering Exposure Draft”. In this ED, <strong>the</strong> need to use<br />
black and grey lettering <strong>within</strong> <strong>the</strong> ISAs was debated.<br />
Significant comments were given by <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
Organizati<strong>on</strong> of Securities COmmissi<strong>on</strong>s (IOSCO). This<br />
project was set up to deal with <strong>the</strong> comments <strong>on</strong> <strong>the</strong><br />
setting of auditing standards that, back in 1994, regardless<br />
of IAPC’s c<strong>on</strong>siderati<strong>on</strong> of <strong>the</strong>se comments, were not<br />
followed by a corresp<strong>on</strong>ding modificati<strong>on</strong> of <strong>the</strong> ISAs.<br />
In September 2004, IAASB issued a Policy Statement<br />
“Clarifying Professi<strong>on</strong>al Requirements in <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<str<strong>on</strong>g>Standards</str<strong>on</strong>g> Issued by <strong>the</strong> IAASB”, followed by a C<strong>on</strong>sultati<strong>on</strong><br />
Paper “Improving <strong>the</strong> Clarity and Structure of<br />
IAASB <str<strong>on</strong>g>Standards</str<strong>on</strong>g> and Related C<strong>on</strong>siderati<strong>on</strong>s for Practice<br />
Statements” 13 .<br />
Already in October 2005, 4 EDs were issued, namely<br />
ED ISA 300 <strong>on</strong> planning an audit of financial statements,<br />
ED ISA 315 <strong>on</strong> <strong>the</strong> auditor’s risk assessment, ED ISA 330<br />
<strong>on</strong> <strong>the</strong> reducti<strong>on</strong> of <strong>the</strong> audit risk to an acceptably low<br />
level by performing audit procedures fur<strong>the</strong>r to <strong>the</strong><br />
auditor’s risk assessment 14 , and ISA 240 <strong>on</strong> <strong>the</strong> auditor’s<br />
resp<strong>on</strong>sibilities regarding fraud during an audit of financial<br />
statements. Medio 2006, <strong>the</strong> comment period expired<br />
and in December 2006 IAASB issued <strong>the</strong> final ISAs 240,<br />
300, 315 and 330, which, for <strong>the</strong> first time in history, were<br />
named “Clarified ISAs”. In July 2007, <strong>the</strong> IAASB<br />
approved ISA 600, “Audit of Group Financial Statements”.<br />
The o<strong>the</strong>r ISAs will be subject to a “clarificati<strong>on</strong>” process<br />
until <strong>the</strong> presumed final date of <strong>the</strong> project, namely<br />
December 2008.<br />
The essence of <strong>the</strong> “Clarity project” can be summarized as<br />
follows:<br />
1) The ISAs and ISQC 1 are based <strong>on</strong> clear principles or<br />
objectives;<br />
2) The objectives should be met <strong>on</strong> <strong>the</strong> basis of a number<br />
of requirements representing <strong>the</strong> essential procedures<br />
to be performed by <strong>the</strong> auditor in “virtually all” circumstances<br />
of <strong>the</strong> (audit) engagement;<br />
3) The necessary guidance (applicati<strong>on</strong> guidance) is given<br />
to <strong>the</strong> auditor in order for him to apply <strong>the</strong>se requirements<br />
in all circumstances of <strong>the</strong> (audit) engagement<br />
(small and less complex entities, public sector entities,<br />
larger entities, public interest entities, etc.);<br />
13. These standards, including <strong>the</strong> exposure drafts, can be c<strong>on</strong>sulted freely <strong>on</strong> IAASB’s website (www.ifac.org/iaasb), cf. “exposure drafts”.<br />
14. These standards are <strong>the</strong> revised versi<strong>on</strong>s of <strong>the</strong> IAASB standards approved in October 2003.<br />
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INTERNATIONAL STANDARDS ON AUDITING WITHIN THE EUROPEAN UNION DRIES SCHOCKAERT & NATHALIE HOUYOUX<br />
4) In order to distinguish clearly between requirements<br />
and applicati<strong>on</strong> material, IAASB decided in October<br />
2005 to use <strong>the</strong> word “shall” <strong>within</strong> <strong>the</strong> requirements<br />
secti<strong>on</strong>, and to use <strong>the</strong> present tense when dealing with<br />
explanatory material <strong>within</strong> <strong>the</strong> applicati<strong>on</strong> guidance.<br />
IOSCO’s comments, dating back from 1994, have<br />
proven to be significant. The difference between requirements<br />
and applicati<strong>on</strong> material will replace <strong>the</strong><br />
existing difference between <strong>the</strong> “bold” and <strong>the</strong> grey<br />
lettering;<br />
5) Each “clarified” ISA is set following a structure c<strong>on</strong>sisting<br />
of a purpose, a requirements’ secti<strong>on</strong> and finally<br />
<strong>the</strong> applicati<strong>on</strong> material. A short introducti<strong>on</strong> and a<br />
set of definiti<strong>on</strong>s of key words will be provided for at<br />
<strong>the</strong> beginning of each ISA. Thus, <strong>the</strong> former “bold lettering”<br />
paragraphs are regrouped at <strong>the</strong> beginning of<br />
each ISA.<br />
The ISAs will be subject to this new structure in a progressive<br />
way: <strong>the</strong> more recent standards will be dealt with in<br />
<strong>the</strong> first stage of <strong>the</strong> project, and <strong>the</strong> older standards will<br />
follow.<br />
IAASB will check which of <strong>the</strong> existing bold and grey<br />
lettering paragraphs corresp<strong>on</strong>d with <strong>the</strong> newly created<br />
requirements and applicati<strong>on</strong> guidance secti<strong>on</strong>s. A paragraph<br />
in a “to be clarified” ISA will be c<strong>on</strong>sidered part of<br />
<strong>the</strong> requirements secti<strong>on</strong> if:<br />
1) <strong>the</strong> requirement is necessary to achieve <strong>the</strong> objective<br />
stated in <strong>the</strong> Standard;<br />
2) <strong>the</strong> requirement is expected to be applicable in virtually<br />
all engagements to which <strong>the</strong> Standard is relevant;<br />
and<br />
3) <strong>the</strong> objective stated in <strong>the</strong> Standard is unlikely to have<br />
been met by <strong>the</strong> requirements of o<strong>the</strong>r <str<strong>on</strong>g>Standards</str<strong>on</strong>g>;<br />
4) <strong>the</strong> requirements of an ISA as a whole is proporti<strong>on</strong>ate<br />
to <strong>the</strong> importance of <strong>the</strong> subject of <strong>the</strong> ISA, in order to<br />
realize <strong>the</strong> objective of an audit.<br />
A survey of <strong>the</strong> progress up to July 2007 made during<br />
IAASB’s “Clarity” Project is being given in table 1. The<br />
ISAs (ISQC-1 included) will be clarified following <strong>the</strong><br />
planning provided by <strong>the</strong> “Clarity” Project:<br />
– 11 standards are to be revised completely (clarified<br />
structure + full revisi<strong>on</strong> of <strong>the</strong> c<strong>on</strong>tent, i.e. “clarified<br />
and revised”, namely ISAs 260, 320 (and 450), 402,<br />
450, 505, 540 (and 545), 550, 580, 600, 620 and 800;<br />
– <strong>the</strong> o<strong>the</strong>r standards will <strong>on</strong>ly be clarified. Part of those<br />
standards have been recently rewritten and will thus<br />
<strong>on</strong>ly be subject to <strong>the</strong> clarificati<strong>on</strong> exercise (e.g.<br />
ISAs 230, 240, 300, 315, 330, 500, 700 and 701). In<br />
<strong>the</strong> c<strong>on</strong>text of <strong>the</strong> presumed deadline of <strong>the</strong> Clarity<br />
Project of December 2008, <strong>the</strong> remaining standards<br />
will <strong>on</strong>ly be clarified, without <strong>the</strong> c<strong>on</strong>tent of those<br />
standards being subject to a complete revisi<strong>on</strong> (e.g.<br />
ISAs 210, 510, 520, 530, 710 and 720). Such a revisi<strong>on</strong><br />
might be c<strong>on</strong>sidered by IAASB in a later stage.<br />
4. Harm<strong>on</strong>isati<strong>on</strong> of <strong>Auditing</strong> <str<strong>on</strong>g>Standards</str<strong>on</strong>g><br />
<strong>within</strong> <strong>the</strong> <strong>European</strong> Uni<strong>on</strong>:<br />
The Objective<br />
After financial reporting scandals (Enr<strong>on</strong>, WorldCom,<br />
Ahold, etc.), investors’ c<strong>on</strong>fidence in capital markets<br />
worldwide has weakened and public credibility of <strong>the</strong><br />
audit professi<strong>on</strong> has been impaired. In resp<strong>on</strong>se of those<br />
scandals and in order to restore investors’ c<strong>on</strong>fidence, <strong>the</strong><br />
US have adopted <strong>the</strong> Sarbanes-Oxley Act in 2002.<br />
Already from 1996, <strong>the</strong> <strong>European</strong> Commissi<strong>on</strong> (EC)<br />
developed an approach regarding <strong>the</strong> statutory audit<br />
functi<strong>on</strong>, which has been accelerated after <strong>the</strong>se scandals<br />
and ultimately led to <strong>the</strong> approval in <strong>the</strong> EU of <strong>the</strong> Audit<br />
Directive, ten years later 15 .<br />
The initiative of a harm<strong>on</strong>ised approach to statutory<br />
auditing in <strong>the</strong> EU was initiated by <strong>the</strong> EC’s 1996 Green<br />
Paper 16 <strong>on</strong> “The Role, Positi<strong>on</strong> and Liability of <strong>the</strong> Statutory<br />
Auditor in <strong>the</strong> EU”.<br />
The Policy c<strong>on</strong>clusi<strong>on</strong>s, which <strong>the</strong> EC drew from <strong>the</strong>se<br />
reflecti<strong>on</strong>s, were included in <strong>the</strong> 1998 Communicati<strong>on</strong><br />
“The Statutory Audit in <strong>the</strong> <strong>European</strong> Uni<strong>on</strong>, <strong>the</strong> way<br />
forward 17 ”. That Communicati<strong>on</strong> proposed <strong>the</strong> creati<strong>on</strong><br />
of an EU Committee <strong>on</strong> <strong>Auditing</strong> which would develop<br />
fur<strong>the</strong>r acti<strong>on</strong> in close co-operati<strong>on</strong> between <strong>the</strong><br />
accounting professi<strong>on</strong> and member states. The objective<br />
of this Committee was to improve <strong>the</strong> quality of <strong>the</strong> statutory<br />
audit by promoting quality assurance, <strong>the</strong> use of<br />
internati<strong>on</strong>al auditing standards and auditor independence.<br />
On <strong>the</strong> basis of <strong>the</strong> work of this Committee, <strong>the</strong> EC issued<br />
<strong>the</strong> 2000 Recommendati<strong>on</strong> <strong>on</strong> “Quality Assurance for <strong>the</strong><br />
Statutory Auditor in <strong>the</strong> EU” 18 and <strong>the</strong> 2002 Recommen-<br />
15. Cf. D. SCHOCKAERT (2004b), “ISA. Een antwoord op de vertrouwenscrisis”, Bank Fin. September 2004, n° 4, p. 219-224.<br />
16. Green Paper of 28 October 1996, O.J.E.U., C 321, p. 1.<br />
17. Commissi<strong>on</strong>’s Communicati<strong>on</strong> of 8 May 1998, O.J.E.U., C 143, p. 12-16.<br />
18. Recommendati<strong>on</strong> of 31 March 2001, O.J.E.U., L 091, p. 91.<br />
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DRIES SCHOCKAERT & NATHALIE HOUYOUX INTERNATIONAL STANDARDS ON AUDITING WITHIN THE EUROPEAN UNION<br />
dati<strong>on</strong> about “Statutory Auditors’ Independence in <strong>the</strong><br />
EU” 19 .<br />
In its communicati<strong>on</strong> in 2003 <strong>on</strong> “Modernising Company<br />
Law and Enhancing Corporate Governance in <strong>the</strong> EU – A<br />
plan to move forward” 20 , <strong>the</strong> EC defined its priorities:<br />
“... streng<strong>the</strong>ning public oversight of auditors at Member<br />
State and EU level, requiring ISAs for all EU statutory<br />
audits (...) and <strong>the</strong> creati<strong>on</strong> of an EU Regulatory<br />
Committee <strong>on</strong> Audit, to complement <strong>the</strong> revised legislati<strong>on</strong><br />
and allow <strong>the</strong> speedy adopti<strong>on</strong> of more detailed<br />
binding measures” and<br />
“The Commissi<strong>on</strong> envisaged <strong>the</strong> use of ISAs as a requirement<br />
for all EU statutory audits (...). However a<br />
successful implementati<strong>on</strong> of a binding requirement to<br />
apply ISAs in <strong>the</strong> EU (...) requires <strong>the</strong> completi<strong>on</strong> of a<br />
number of preliminary acti<strong>on</strong>s: <strong>the</strong> update and completi<strong>on</strong><br />
of <strong>the</strong> analysis of differences between ISAs and<br />
nati<strong>on</strong>al audit requirements; <strong>the</strong> development of a set of<br />
principles (“framework”) for <strong>the</strong> assessment of ISAs; <strong>the</strong><br />
availability of high quality translati<strong>on</strong>s into all Community<br />
languages. As to audit reporting, <strong>the</strong> Commissi<strong>on</strong><br />
plans to use <strong>the</strong> forthcoming revisi<strong>on</strong> of ISA 700 (audit<br />
reporting) as a starting-point for analyzing differences<br />
between nati<strong>on</strong>al audit reports by EU professi<strong>on</strong>al bodies,<br />
facilitated by <strong>the</strong> <strong>European</strong> Federati<strong>on</strong> of Accountants<br />
(FEE).”<br />
Despite those n<strong>on</strong>-biding instruments, <strong>the</strong> EC required<br />
fur<strong>the</strong>r initiatives in order to reinforce investor c<strong>on</strong>fidence<br />
in capital markets and to enhance public trust in <strong>the</strong> statutory<br />
audit functi<strong>on</strong> in <strong>the</strong> EU taking into account that<br />
auditing is an important part of good corporate governance<br />
practice.<br />
On 17 th May 2006, <strong>the</strong> EP and <strong>the</strong> Council have adopted<br />
<strong>the</strong> new Directive <strong>on</strong> statutory audit (<strong>the</strong> “Audit Directive”)<br />
of annual accounts and c<strong>on</strong>solidated accounts 21 ,<br />
which replaces <strong>the</strong> “8 th ” Council Directive 84/253/EEC of<br />
10 April 1984.<br />
The Audit Directive of 2006 reflects a principles-based<br />
approach <strong>on</strong> auditing matters and aims at reinforcing and<br />
harm<strong>on</strong>ising <strong>the</strong> statutory audit functi<strong>on</strong> throughout <strong>the</strong><br />
EU. The purpose of <strong>the</strong> Directive is to reinforce <strong>the</strong> c<strong>on</strong>fidence<br />
in <strong>the</strong> functi<strong>on</strong>ing of <strong>the</strong> <strong>European</strong> capital markets<br />
by<br />
– clarifying <strong>the</strong> duties of statutory auditors, <strong>the</strong> independence<br />
and o<strong>the</strong>r ethical requirements;<br />
– by introducing a requirement for external quality assurance;<br />
– by ensuring public oversight over <strong>the</strong> audit professi<strong>on</strong><br />
by improving co-operati<strong>on</strong> between competent authorities<br />
in <strong>the</strong> EU; and<br />
– by enforcing <strong>the</strong> use of ISAs for all statutory audits to<br />
be c<strong>on</strong>ducted in <strong>the</strong> EU, trough a process of adopti<strong>on</strong><br />
of <strong>the</strong> ISAs, named “endorsement”.<br />
5. Harm<strong>on</strong>isati<strong>on</strong> of <strong>Auditing</strong> <str<strong>on</strong>g>Standards</str<strong>on</strong>g><br />
<strong>within</strong> <strong>the</strong> <strong>European</strong> Uni<strong>on</strong>: The Means<br />
5.1. Comitology: The Genesis<br />
The Audit Directive of 17 th May 2006 is important in<br />
order to ensure a high quality for all statutory audits<br />
required by Community law requiring all statutory audits<br />
be carried out <strong>on</strong> <strong>the</strong> basis of all 22 internati<strong>on</strong>al auditing<br />
standards 23 . The Directive has given implementing<br />
powers to <strong>the</strong> <strong>European</strong> Commissi<strong>on</strong> (EC), in order to<br />
adopt “en bloc” 24 <strong>the</strong> ISAs 25 in accordance with <strong>the</strong><br />
Council Decisi<strong>on</strong> of 28 June 1999, also known as <strong>the</strong><br />
“Comitology Decisi<strong>on</strong>” 26 . Within this c<strong>on</strong>text, <strong>the</strong> EC<br />
will need to be satisfied:<br />
– that <strong>the</strong> ISAs have been developed with proper due<br />
process, public oversight and transparency, and are<br />
generally accepted internati<strong>on</strong>ally;<br />
– that <strong>the</strong>y c<strong>on</strong>tribute to a high level of credibility and<br />
quality in relati<strong>on</strong> to <strong>the</strong> true and fair view of <strong>the</strong> annual<br />
or c<strong>on</strong>solidated accounts;<br />
– that <strong>the</strong>y are c<strong>on</strong>ducive to <strong>the</strong> <strong>European</strong> public good.<br />
19. Recommendati<strong>on</strong> of 19 July 2002, O.J.E.U., L 191, p. 22.<br />
20. Commissi<strong>on</strong>’s Communicati<strong>on</strong> of 21 May 2003, COM(2003) 284 final, O.J.E.U., C 236, p. 2-13.<br />
21. The Directive 2006/43/EC of <strong>the</strong> <strong>European</strong> Parliament and of <strong>the</strong> Council of 17 May 2006 <strong>on</strong> statutory audits of annual accounts and c<strong>on</strong>solidated accounts,<br />
amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, O.J.E.U., 9 June 2006, L 157/87.<br />
22. It refers also to related standards such as <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> Standard of Quality C<strong>on</strong>trol, Legislative Resoluti<strong>on</strong> from EP regarding <strong>the</strong> proposal for a directive <strong>on</strong><br />
statutory audit of annual accounts and c<strong>on</strong>solidated accounts and amending Council Directives 78/660/EEC and 83/349/EEC, PE 357.947v01-00, 2 June 2005,<br />
p. 5.<br />
23. Recital 13 of <strong>the</strong> Directive <strong>on</strong> statutory audit.<br />
24. Legislative Resoluti<strong>on</strong> from EP, o.c., p. 5.<br />
25. Art. 26 (2) of <strong>the</strong> Directive <strong>on</strong> statutory audit.<br />
26. Art. 26 (1) of <strong>the</strong> Directive <strong>on</strong> statutory audit.<br />
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For many observers, Comitology c<strong>on</strong>stitutes a complex<br />
procedure <strong>within</strong> <strong>the</strong> decisi<strong>on</strong>-making process of <strong>the</strong> <strong>European</strong><br />
Uni<strong>on</strong> (EU). Some experts even compared <strong>the</strong> subject<br />
of comitology to a kind of “Da Vinci Code” c<strong>on</strong>tained<br />
<strong>within</strong> <strong>European</strong> Law 27 . Comitology is in fact <strong>the</strong> area<br />
where most of <strong>the</strong> interinstituti<strong>on</strong>al struggles take place, in<br />
particular those between <strong>the</strong> Council and <strong>the</strong> <strong>European</strong><br />
Parliament (EP). Both instituti<strong>on</strong>s are legislative bodies<br />
and <strong>the</strong> Council c<strong>on</strong>stitutes an executive body as well.<br />
“Comitology” is <strong>the</strong> term used in order to refer to <strong>the</strong><br />
working of committees, in c<strong>on</strong>creto <strong>within</strong> <strong>the</strong> EU. The<br />
first committees were established in 1962, in <strong>the</strong> c<strong>on</strong>text<br />
of <strong>the</strong> Comm<strong>on</strong> Agricultural Policy. As <strong>the</strong> Council recognized<br />
that it lacked resources in order to set <strong>the</strong> necessary<br />
implementati<strong>on</strong> rules, it ultimately decided to delegate<br />
implementing powers to <strong>the</strong> EC. Following this delegati<strong>on</strong>,<br />
it was possible for <strong>the</strong> <strong>European</strong> legislator (Council)<br />
to c<strong>on</strong>centrate <strong>on</strong> <strong>the</strong> setting of essential rules, leaving <strong>the</strong><br />
technical implementati<strong>on</strong> process in <strong>the</strong> hands of <strong>the</strong> EC<br />
and of experts <strong>within</strong> <strong>the</strong> committees. However, <strong>the</strong><br />
Council did not intend to delegate <strong>the</strong>se powers without<br />
keeping a certain c<strong>on</strong>trol <strong>the</strong>reover. Therefore, it started<br />
using committees composed of experts originating from<br />
each member state.<br />
The decisi<strong>on</strong> to delegate implementing powers to <strong>the</strong> EC,<br />
was made <strong>on</strong> an “ad hoc” basis 28 following <strong>the</strong> absence<br />
of any juridical basis <strong>the</strong>reto (<strong>the</strong>re was no formal<br />
“Comitology Decisi<strong>on</strong>” taken at <strong>the</strong> time). However, in<br />
<strong>the</strong> year 1970, <strong>the</strong> <strong>European</strong> Court of Justice declared<br />
that this system did not upset <strong>the</strong> instituti<strong>on</strong>al balance of<br />
<strong>the</strong> Community, as <strong>the</strong> interventi<strong>on</strong> of a committee was<br />
<strong>on</strong>ly tasked with <strong>the</strong> forming of opini<strong>on</strong>s ra<strong>the</strong>r than<br />
with <strong>the</strong> making of decisi<strong>on</strong>s. Fur<strong>the</strong>rmore, <strong>the</strong> separati<strong>on</strong><br />
between executive and legislative powers remained<br />
intact, as <strong>on</strong>ly implementing powers regarding “n<strong>on</strong>-<br />
essential elements” of <strong>the</strong> legislati<strong>on</strong> were delegated to<br />
<strong>the</strong> EC 29 .<br />
This “ad hoc” system of Comitology developed rapidly<br />
throughout <strong>the</strong> 1970s and 1980s mainly in o<strong>the</strong>r sectors<br />
than agriculture.<br />
In order to create a juridical basis for <strong>the</strong> delegati<strong>on</strong> of<br />
<strong>the</strong>se implementing powers to <strong>the</strong> EC, article 202 (former<br />
145) of <strong>the</strong> Treaty establishing <strong>the</strong> <strong>European</strong> Community<br />
(EC Treaty) was expanded trough <strong>the</strong> Single <strong>European</strong><br />
Act of 1986. Trough this Act, <strong>the</strong> Council was mandated<br />
to impose requirements <strong>on</strong> <strong>the</strong> EC’s use of its implementing<br />
powers 30 .<br />
In July 1987, <strong>the</strong> Council adopted <strong>the</strong> so-called “1987<br />
Comitology Decisi<strong>on</strong>” (<strong>the</strong> first Comitology Decisi<strong>on</strong>)<br />
defining different committees as well as procedures for<br />
exercising <strong>the</strong> implementing powers. However, this Decisi<strong>on</strong><br />
didn’t provide for any guidance as to which of <strong>the</strong><br />
procedures needed to be applied in which situati<strong>on</strong>.<br />
Fur<strong>the</strong>rmore, <strong>the</strong> 1987 Comitology Decisi<strong>on</strong> neglected<br />
<strong>the</strong> role of <strong>the</strong> EP whose powers have increased in <strong>the</strong><br />
c<strong>on</strong>text of <strong>the</strong> co-decisi<strong>on</strong> making process following <strong>the</strong><br />
Maastricht Treaty of 1992.<br />
The 1987 Comitology Decisi<strong>on</strong> was replaced by a (June)<br />
1999 Comitology Decisi<strong>on</strong> 31 . The 1999 Decisi<strong>on</strong> led to <strong>the</strong><br />
reducti<strong>on</strong> of <strong>the</strong> number of procedures to three (namely<br />
advisory 32 , management 33 and regulatory 34 procedures),<br />
and at <strong>the</strong> same time introduced criteria according to<br />
which <strong>the</strong> <strong>European</strong> legislator (Council and EP) selects <strong>the</strong><br />
procedure to be applied in a given situati<strong>on</strong>.<br />
The 1999 Decisi<strong>on</strong> allowed for <strong>the</strong> EP to play a minor role<br />
in <strong>the</strong> comitology procedures. Indeed, <strong>on</strong>ly for measures<br />
proposed by <strong>the</strong> EC in order to implement measures from<br />
basic acts 35 adopted under <strong>the</strong> codecisi<strong>on</strong> procedure (see<br />
27. See <strong>the</strong> speech of <strong>the</strong> Austrian Chancellor Wolfgang Schüssel at <strong>the</strong> press c<strong>on</strong>ference after <strong>the</strong> <strong>European</strong> Council in Brussels held <strong>on</strong> 16 th June 2006, http://<br />
c<strong>on</strong>silium.clients.telemak.com/60073/160606/archive_uk.html.<br />
28. <strong>European</strong> Informati<strong>on</strong> <strong>on</strong> Opini<strong>on</strong> & Governance, “Comitology”, 11 June 2003, http://www.euroactiv.com/en//comitology/article-117454; G. SCHUSTERSCHITZ<br />
and S. KOTZ, “The Comitology Reform of 2006: increasing <strong>the</strong> Powers of <strong>the</strong> <strong>European</strong> parliament Without Changing <strong>the</strong> Treaties”, <strong>European</strong> C<strong>on</strong>stituti<strong>on</strong>al Law<br />
Review, 3, 2007, 68-74; J.H.H. WEILER and M. KOCJAN, o.c., p. 3-5; Dr GEORG HAIBACH, “Council Decisi<strong>on</strong> 199/468 – A New Comitology Decisi<strong>on</strong> for <strong>the</strong> 21 st<br />
Century!?”, Eipascope 99/3, p. 10-18.<br />
29. E.C.J., December 17, 1970, (Koester), 25/70, Rec., p. 1161, pt. 9.<br />
30. The Single <strong>European</strong> Act introduced <strong>the</strong> so-called “Cooperati<strong>on</strong> procedure” (which replaced <strong>the</strong> “C<strong>on</strong>sultati<strong>on</strong> procedure”) according to which <strong>the</strong> Council could,<br />
with <strong>the</strong> support of <strong>the</strong> RP and acting <strong>on</strong> a proposal by <strong>the</strong> EC adopt a proposal by a qualified majority, or could overrule a rejecti<strong>on</strong> of a particular <strong>European</strong> law<br />
proposed by <strong>the</strong> EC by adopting this proposal unanimously. It marked <strong>the</strong> first step toward power by <strong>the</strong> EP. Within <strong>the</strong> c<strong>on</strong>text of <strong>the</strong> Maastricht Treaty (1992),<br />
<strong>the</strong> “Cooperati<strong>on</strong> procedure” was replaced by <strong>the</strong> “Codecisi<strong>on</strong> procedure” according to which <strong>the</strong> Council and <strong>the</strong> EP jointly adopt legislati<strong>on</strong> based <strong>on</strong> a proposal<br />
by <strong>the</strong> EC. The codecisi<strong>on</strong> procedure was amended by <strong>the</strong> Treaty of Amsterdam (1997) and <strong>the</strong> number of legal bases where <strong>the</strong> procedure applied was increased<br />
by both <strong>the</strong> Treaty of Amsterdam and <strong>the</strong> Treaty of Nice (2001).<br />
31. Council Decisi<strong>on</strong> 1999/468/EC of 28 June 1999 laying down <strong>the</strong> procedures for <strong>the</strong> exercise of implementing powers c<strong>on</strong>ferred <strong>on</strong> <strong>the</strong> Commissi<strong>on</strong>, O.J.E.U.,<br />
L 184/23.<br />
32. Art. 3 of Council Decisi<strong>on</strong> 1999/468/ EC.<br />
33. Art. 4 of Council Decisi<strong>on</strong> 1999/468/EC.<br />
34. Art. 5 of Council Decisi<strong>on</strong> 1999/468/EC.<br />
35. The term “basic act” refers to a legal instrument such as a Regulati<strong>on</strong> or a Directive taken by <strong>the</strong> Council or both Council and EP under of codecisi<strong>on</strong> procedure.<br />
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footnote 30), <strong>the</strong> Comitology Decisi<strong>on</strong> enabled <strong>the</strong> EP to<br />
adopt a “resoluti<strong>on</strong>” in order to indicate that <strong>the</strong> measure<br />
exceeded <strong>the</strong> implementing powers c<strong>on</strong>ferred by <strong>the</strong> basic<br />
act. The EP issued <strong>the</strong>se resoluti<strong>on</strong>s especially in areas in<br />
which it had an interest in voicing its opini<strong>on</strong> 36 , given <strong>the</strong><br />
fact that <strong>the</strong> EP could not oppose directly to <strong>the</strong>se measures<br />
37 .<br />
In 2001, <strong>the</strong> Nice Treaty changed nothing <strong>on</strong> <strong>the</strong> level of<br />
comitology. However, at <strong>the</strong> same time, a new way of<br />
legislating and implementing financial services regulati<strong>on</strong>s<br />
followed <strong>the</strong> recommendati<strong>on</strong>s of <strong>the</strong> Lamfalussy<br />
Group 38 . This group proposed a more complex c<strong>on</strong>sultati<strong>on</strong><br />
procedure for <strong>the</strong> adopti<strong>on</strong> by <strong>the</strong> EC of implementing<br />
measures, which included not <strong>on</strong>ly a comitology<br />
committee but also a separate expert advisory committee,<br />
composed of representatives from nati<strong>on</strong>al regulatory<br />
agencies in this expert area 39 . Under this proposal, <strong>the</strong> EC<br />
needs to c<strong>on</strong>sult with an advisory committee. This<br />
committee prepares its advice in c<strong>on</strong>sultati<strong>on</strong> with market<br />
practiti<strong>on</strong>ers, end-users and c<strong>on</strong>sumers and ultimately<br />
submits its advice to <strong>the</strong> EC. On <strong>the</strong> basis of this advice,<br />
<strong>the</strong> EC <strong>the</strong>n communicates a proposal to <strong>the</strong> comitology<br />
committee.<br />
Ano<strong>the</strong>r innovati<strong>on</strong> introduced by <strong>the</strong> Lamfalussy Group<br />
was <strong>the</strong> introducti<strong>on</strong> of <strong>the</strong> “sunset clause” in <strong>the</strong> <strong>European</strong><br />
legislati<strong>on</strong>. That clause sets a time-limit for <strong>the</strong> delegati<strong>on</strong><br />
of implementing powers to <strong>the</strong> EC as <strong>the</strong> EP<br />
c<strong>on</strong>sidered <strong>the</strong> Comitology Decisi<strong>on</strong> not to “preserve its<br />
legislative prerogatives”. The sunset clause thus became<br />
<strong>the</strong> weap<strong>on</strong> of <strong>the</strong> EP in order to obtain rights aimed at<br />
stopping <strong>the</strong> delegated powers given to <strong>the</strong> EC.<br />
The EP decided to introduce a sunset clause (with a timelimit<br />
of 2 years) <strong>within</strong> <strong>the</strong> Audit Directive of 17 th May<br />
2006 in particular regarding article 48 § 4 of this Directive.<br />
After this period of 2 years has come to an end, <strong>the</strong><br />
applicati<strong>on</strong> of those measures shall be suspended.<br />
However, this article states clearly that <strong>the</strong> sunset clause is<br />
not applicable for <strong>the</strong> implementing measures related to<br />
<strong>the</strong> ISAs (laid down in art. 26) 40 . The interpretati<strong>on</strong><br />
<strong>the</strong>reof by <strong>the</strong> authors of this article is that <strong>the</strong> EP doesn’t<br />
intend to create obstacles for <strong>the</strong> adopti<strong>on</strong> (by <strong>the</strong> EC) of<br />
<strong>the</strong> so-called “<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> <strong>Auditing</strong> <str<strong>on</strong>g>Standards</str<strong>on</strong>g>”.<br />
Some soluti<strong>on</strong>s to <strong>the</strong>se interinstituti<strong>on</strong>al problems have<br />
been suggested by <strong>the</strong> draft <strong>European</strong> C<strong>on</strong>stituti<strong>on</strong> of<br />
2004 41 , which hasn’t been accepted in <strong>the</strong> wake of <strong>the</strong><br />
negative results from <strong>the</strong> related referenda in <strong>the</strong> Ne<strong>the</strong>rlands<br />
and in France. In August 2007, <strong>the</strong> member states<br />
are still negotiating a new draft Treaty. Never<strong>the</strong>less, after<br />
it became clear that <strong>the</strong> draft C<strong>on</strong>stituti<strong>on</strong>al Treaty would<br />
not enter into force, negotiati<strong>on</strong>s had started <strong>on</strong> a reform<br />
of <strong>the</strong> Comitology Decisi<strong>on</strong> of 1999.<br />
5.2. Comitology: A New Procedure Called<br />
“Regulatory Procedure with Scrutiny”<br />
On 17 th July 2006, <strong>the</strong> Council adopted <strong>the</strong> Decisi<strong>on</strong><br />
2006/512 42 amending, but not replacing, <strong>the</strong> 1999 Comitology<br />
Decisi<strong>on</strong>. A new procedure was created, named<br />
“Regulatory procedure of scrutiny” (art. 5a), giving <strong>the</strong><br />
right for <strong>the</strong> EP to oppose to <strong>the</strong> draft measures proposed<br />
by <strong>the</strong> EC 43 .<br />
The formal modificati<strong>on</strong> to <strong>the</strong> Comitology Decisi<strong>on</strong> was<br />
accompanied by a multilateral declarati<strong>on</strong> of <strong>the</strong> three<br />
instituti<strong>on</strong>s: “Statement by <strong>the</strong> EP, <strong>the</strong> Council and <strong>the</strong><br />
Commissi<strong>on</strong> c<strong>on</strong>cerning <strong>the</strong> Council Decisi<strong>on</strong> of 17 th July<br />
2006” 44 . The joint Statement’s objective is to apply <strong>the</strong><br />
new regulatory procedure of scrutiny to basic acts that are<br />
adopted under a regime of codecisi<strong>on</strong> and have entered<br />
into force 45 , such as <strong>the</strong> Audit Directive 46 . The modificati<strong>on</strong><br />
to <strong>the</strong> Audit Directive introducing <strong>the</strong> new comitology<br />
procedure for <strong>the</strong> purpose of adopting <strong>the</strong> ISAs will<br />
probably be voted by <strong>the</strong> EP in November 2007.<br />
36. J. ALMER, “The reform of Comitology and <strong>the</strong> Parallel Reform of <strong>the</strong> <strong>European</strong> Financial Services Sector”, New Modes of Governance, http://www.eu-newgov.org.<br />
37. Here lies <strong>the</strong> difference between <strong>the</strong> Council and <strong>the</strong> EP, in <strong>the</strong> sense that <strong>the</strong> first can oppose to <strong>the</strong> EC measures, and <strong>the</strong> latter can’t.<br />
38. Final report of <strong>the</strong> Lamfalussy committee of 15 th February 2001 submitted to <strong>the</strong> Stockholm <strong>European</strong> Council (23-24 March 2001) and approved by a Resoluti<strong>on</strong><br />
of <strong>the</strong> <strong>European</strong> Parliament, B5-0173/2001.<br />
39. For more informati<strong>on</strong> about this subject cf. E. GUALANDRI and A.G. GRASSO, “Towards a New Approach to Regulati<strong>on</strong> and Supervisi<strong>on</strong> in <strong>the</strong> EU: Post-FSAP and<br />
Comitology”, Bank Fin. 2006/3, p. 157.<br />
40. Art. 26 of <strong>the</strong> Directive 2006/43/EC.<br />
41. O.J.E.U., 16 th December 2004, C 310/1, for more informati<strong>on</strong> of <strong>the</strong> soluti<strong>on</strong> founded see J.H.H. WEILER and M. KOCJAN, “<strong>European</strong> Community System:<br />
Comitology”, Unit 1-3 2004/2005, p. 45-46.<br />
42. Council Decisi<strong>on</strong> of 17 July 2006 amending Decisi<strong>on</strong> 1999/468/EC laying down <strong>the</strong> procedures for <strong>the</strong> exercise of implementing powers given to <strong>the</strong> Commissi<strong>on</strong>.<br />
43. Art. 202 of <strong>the</strong> EC Treaty however does not provide for <strong>the</strong> EP to participate in <strong>the</strong> drawing up and adopti<strong>on</strong> of implementing powers. For fur<strong>the</strong>r informati<strong>on</strong><br />
see G. SCHUSTERSCHITZ and S. KOTZ, o.c., p. 77-79.<br />
44. Statement by <strong>the</strong> <strong>European</strong> Parliament, <strong>the</strong> Council and <strong>the</strong> Commissi<strong>on</strong> c<strong>on</strong>cerning <strong>the</strong> Council Decisi<strong>on</strong> of 17 July 2006 amending Decisi<strong>on</strong> 1999/468/EC laying<br />
down <strong>the</strong> procedures for <strong>the</strong> exercise of implementing powers given to <strong>the</strong> Commissi<strong>on</strong> (2006/512/EC), O.J., C 255/1, 21 October 2006.<br />
45. Par. 4 of <strong>the</strong> Statement. In fact, 26 legislative acts will be revised in accordance with <strong>the</strong> Statement, according to a communicati<strong>on</strong> from <strong>the</strong> EC to <strong>the</strong> Parliament<br />
and <strong>the</strong> Council, COM(2006) 900, 22 December 2006.<br />
46. Par. 5 (d) of <strong>the</strong> Statement, COM(2006) 9003, 22 December 2006.<br />
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In resp<strong>on</strong>se of <strong>the</strong>se measures, <strong>the</strong> EP agreed to set aside<br />
<strong>the</strong> use of <strong>the</strong> “sunset clause”. In o<strong>the</strong>r words, <strong>the</strong> Council<br />
and <strong>the</strong> EP both recognized that, according to <strong>the</strong> principles<br />
of good legislati<strong>on</strong>, implementing powers should be<br />
given to <strong>the</strong> EC without a time-limit 47 .<br />
According to article 202 of <strong>the</strong> EC Treaty, <strong>the</strong> basic acts<br />
adopted by <strong>the</strong> Council, ei<strong>the</strong>r al<strong>on</strong>e or jointly with <strong>the</strong> EP<br />
under <strong>the</strong> regime of codecisi<strong>on</strong>, may c<strong>on</strong>tain provisi<strong>on</strong>s<br />
c<strong>on</strong>ferring <strong>the</strong> power to implement measures <strong>on</strong> <strong>the</strong> EC<br />
and defining <strong>the</strong> procedures <strong>the</strong>reto.<br />
In <strong>the</strong> c<strong>on</strong>text of <strong>the</strong> ISAs, <strong>the</strong> basic act is <strong>the</strong> Audit Directive,<br />
which c<strong>on</strong>fers <strong>on</strong> <strong>the</strong> EC implementing powers to<br />
adopt <strong>the</strong> ISAs (art. 26) in accordance with <strong>the</strong> comitology<br />
procedure. Fur<strong>the</strong>rmore, <strong>the</strong> EC can dispose of <strong>the</strong><br />
assistance of a committee. According to article 48 (1) <strong>the</strong><br />
“Audit Regulatory Committee” (AuRC), composed of <strong>the</strong><br />
representatives of <strong>the</strong> member states and chaired by <strong>the</strong><br />
EC, has been set up.<br />
According to <strong>the</strong> comitology procedure, it is mandatory<br />
for <strong>the</strong> EC to c<strong>on</strong>sult with <strong>the</strong> AuRC in relati<strong>on</strong> to <strong>the</strong><br />
adopti<strong>on</strong> of ISAs. The AuRC is <strong>the</strong>n expected to form an<br />
opini<strong>on</strong> <strong>on</strong> <strong>the</strong> measures proposed by <strong>the</strong> EC.<br />
The Audit Directive also introduces a requirement for<br />
member states to organize an effective system of public<br />
oversight for statutory auditors and audit firms and to<br />
establish co-ordinati<strong>on</strong> of public oversight systems at <strong>the</strong><br />
community level 48 .<br />
In order to reach <strong>the</strong> goals outlined in <strong>the</strong> Audit Directive,<br />
<strong>the</strong> EC needed to call up<strong>on</strong> an expert group, which would<br />
c<strong>on</strong>tribute to <strong>the</strong> co-ordinati<strong>on</strong> and <strong>the</strong> development of<br />
public oversight systems <strong>within</strong> <strong>the</strong> EU as well as to <strong>the</strong><br />
technical preparati<strong>on</strong> of <strong>the</strong> implementing measures 49 .<br />
Following <strong>the</strong> Decisi<strong>on</strong> of 14 December 2005 50 , <strong>the</strong> EC<br />
set up a “<strong>European</strong> Group of Auditors Oversight Bodies”<br />
(EGAOB). The EGAOB is composed of high-level representatives<br />
from <strong>the</strong> entities resp<strong>on</strong>sible for public oversight<br />
of statutory auditors and audit firms in member<br />
states or, in <strong>the</strong>ir absence, of representatives from <strong>the</strong><br />
competent nati<strong>on</strong>al ministries 51 . Only n<strong>on</strong>-practiti<strong>on</strong>ers<br />
are allowed to become members of <strong>the</strong> EGAOB.<br />
The EC may c<strong>on</strong>sult with this group <strong>on</strong> any questi<strong>on</strong><br />
relating to <strong>the</strong> preparati<strong>on</strong> of implementing measures<br />
provided for by <strong>the</strong> Audit Directive 52 .<br />
Fur<strong>the</strong>rmore <strong>the</strong> task of this group is to:<br />
“... c<strong>on</strong>tribute to <strong>the</strong> technical examinati<strong>on</strong> of internati<strong>on</strong>al<br />
auditing standards, including <strong>the</strong> processes for <strong>the</strong>ir<br />
elaborati<strong>on</strong>, with a view to <strong>the</strong>ir adopti<strong>on</strong> at <strong>the</strong> community<br />
level” 53 .<br />
The EGAOB also created a sub-group dealing with ISAs,<br />
namely <strong>the</strong> “ISA sub-group” 54 . The objective of this<br />
subgroup is to provide technical expertise to <strong>the</strong> EGAOB<br />
and <strong>the</strong> EC <strong>on</strong> items and issues encompassing <strong>the</strong> need to<br />
c<strong>on</strong>sider <strong>the</strong> drafting, <strong>the</strong> adopti<strong>on</strong>, and <strong>the</strong> use of ISAs,<br />
and to allow <strong>the</strong> EC to provide for a proactive input into<br />
<strong>the</strong> standard setting process set up <strong>within</strong> <strong>the</strong> IAASB. A<br />
small delegati<strong>on</strong> of practiti<strong>on</strong>ers is regularly invited to <strong>the</strong><br />
meetings of EGAOB’s ISA Subgroup, e.g. representatives<br />
from <strong>the</strong> <strong>European</strong> Federati<strong>on</strong> of Accountants (FEE).<br />
5.3. Differences Between <strong>the</strong> Extant and <strong>the</strong> New<br />
Regulatory Procedure<br />
The first difference between <strong>the</strong> extant regulatory procedure<br />
and <strong>the</strong> new “regulatory procedure with scrutiny” is<br />
<strong>the</strong> fact that <strong>the</strong> latter is compulsory 55 in <strong>the</strong> following<br />
cases:<br />
– <strong>the</strong> implementati<strong>on</strong> of acts adopted under <strong>the</strong> regime<br />
of co-decisi<strong>on</strong> (art. 251 of <strong>the</strong> EC Treaty);<br />
– <strong>the</strong> adopti<strong>on</strong> of measures of a general scope; and<br />
– <strong>the</strong> adopti<strong>on</strong> of measures designed to amend n<strong>on</strong>-essential<br />
elements of a basic act, inter alia, by deleting<br />
some of those elements or by supplementing <strong>the</strong> basic<br />
act by adding new n<strong>on</strong>-essential elements, namely<br />
“quasi-legislative” measures.<br />
Of course, <strong>the</strong> EP would be tempted to define <strong>the</strong> quasilegislative<br />
category as broadly as possible, given <strong>the</strong> fact<br />
that this will result in more extensive scrutiny rights 56 and<br />
47. Par. 3 of <strong>the</strong> Statement.<br />
48. Art. 33 of <strong>the</strong> Audit Directive. Recital 1 of <strong>the</strong> Commissi<strong>on</strong> Decisi<strong>on</strong> of 14 December 2005.<br />
49. Recital 2 of <strong>the</strong> Commissi<strong>on</strong> Decisi<strong>on</strong> of 14 December 2005.<br />
50. Commissi<strong>on</strong> Decisi<strong>on</strong> of 14 December 2005 setting up a group of experts to advise <strong>the</strong> Commissi<strong>on</strong> and to facilitate cooperati<strong>on</strong> between public oversight systems<br />
for statutory auditors and audit firms, O.J.E.U., L 329/38.<br />
51. Art. 3 of <strong>the</strong> Commissi<strong>on</strong> Decisi<strong>on</strong> of 14 December 2005.<br />
52. Art. 2 of <strong>the</strong> Commissi<strong>on</strong> Decisi<strong>on</strong> of 14 December 2005.<br />
53. Art. 2 of <strong>the</strong> Commissi<strong>on</strong> Decisi<strong>on</strong> of 14 December 2005.<br />
54. Art. 4 (3) of <strong>the</strong> Commissi<strong>on</strong> Decisi<strong>on</strong> of 14 December 2005<br />
55. Recital 5 and art. 2 § 2 of <strong>the</strong> Comitology Decisi<strong>on</strong> and recitals 6 and 7 of <strong>the</strong> Comitology Decisi<strong>on</strong>. This is also reflected in <strong>the</strong> use of <strong>the</strong> imperative “shall be<br />
adopted” in <strong>the</strong> art. 2 § 2, as opposed to “should be adopted” in <strong>the</strong> § 1.<br />
56. T. CHRISTIANSEN and B. VACCARI, o.c., p. 15; for a definiti<strong>on</strong> of “quasi-legislative” measure, see G. SCHUSTERSCHITZ and S. KOTZ, o.c., p. 81.<br />
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thus in extended powers for <strong>the</strong> EP aimed at exercising<br />
c<strong>on</strong>trol <strong>on</strong> <strong>the</strong> implementing measures taken by <strong>the</strong> EC. In<br />
order to avoid more discussi<strong>on</strong> <strong>on</strong> <strong>the</strong> topic, <strong>the</strong> Statement<br />
of 17 th July 2006 clarifies that some basic acts, including<br />
<strong>the</strong> Audit Directive, will need to be modified in order to<br />
provide for <strong>the</strong> new regulatory procedure.<br />
The sec<strong>on</strong>d difference with <strong>the</strong> new regulatory procedure<br />
is <strong>the</strong> right for <strong>the</strong> EP to oppose to <strong>the</strong> draft measures<br />
proposed by <strong>the</strong> EC.<br />
Table 3: Regulatory Procedure with Scrutiny<br />
5.4. The Different Stages of <strong>the</strong> Regulatory<br />
Procedure with Scrutiny<br />
The regulatory procedure with scrutiny provides for two<br />
separate stages (cf. table 3):<br />
– an executive stage in which <strong>the</strong> EC submits its draft<br />
measures to <strong>the</strong> Committee who forms its opini<strong>on</strong><br />
<strong>the</strong>re<strong>on</strong>; and<br />
– a supervisory stage during which draft measures are<br />
submitted to <strong>the</strong> EP as well as to <strong>the</strong> Council.<br />
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During <strong>the</strong> executive stage, <strong>the</strong>re are two possible<br />
scenarios.<br />
The first scenario deals with a positive opini<strong>on</strong> <strong>on</strong> <strong>the</strong><br />
draft measures proposed by <strong>the</strong> EC 57 . These measures are<br />
submitted to <strong>the</strong> Council and <strong>the</strong> EP who both can object<br />
<strong>the</strong>reto 58 <strong>within</strong> a period of three m<strong>on</strong>ths.<br />
Both instituti<strong>on</strong>s have to justify <strong>the</strong>ir objecti<strong>on</strong>, if any,<br />
<strong>the</strong>reby indicating that <strong>the</strong> draft measures proposed by <strong>the</strong><br />
EC 59 :<br />
a) exceed <strong>the</strong> implementing powers provided for by <strong>the</strong><br />
basic act; or<br />
b) are not compatible with <strong>the</strong> aim or <strong>the</strong> c<strong>on</strong>tent of <strong>the</strong><br />
basic act; or<br />
c) do not respect <strong>the</strong> principles of subsidiarity or proporti<strong>on</strong>ality.<br />
An objecti<strong>on</strong> for political reas<strong>on</strong>s, for instance in order to<br />
achieve compromises with regard to o<strong>the</strong>r issues, is <strong>the</strong>refore<br />
not possible 60 . In <strong>the</strong> case of an objecti<strong>on</strong>, <strong>the</strong> EC has<br />
three possibilities:<br />
a) to make a new (and modified) proposal under <strong>the</strong><br />
comitology procedure;<br />
b) to leave <strong>the</strong> comitology procedure and to present a legislative<br />
proposal to <strong>the</strong> EP and Council <strong>on</strong> <strong>the</strong> basis of<br />
<strong>the</strong> EC Treaty; or<br />
c) to drop <strong>the</strong> proposal.<br />
If nei<strong>the</strong>r <strong>the</strong> Council nor <strong>the</strong> EP object to <strong>the</strong>se measures,<br />
<strong>the</strong> EC is free to adopt those.<br />
The sec<strong>on</strong>d scenario deals with a negative opini<strong>on</strong> or with<br />
<strong>the</strong> absence of such an opini<strong>on</strong> from <strong>the</strong> Committee. The<br />
proposal is subject to <strong>the</strong> decisi<strong>on</strong> of <strong>the</strong> Council and will<br />
be sent to <strong>the</strong> EP, for informati<strong>on</strong> purposes. If <strong>the</strong> Council<br />
objects to <strong>the</strong> proposed measures <strong>within</strong> a subsequent<br />
period of two m<strong>on</strong>ths, <strong>the</strong>re is no possibility for <strong>the</strong> EC to<br />
adopt <strong>the</strong> draft measures. In <strong>the</strong>se cases <strong>the</strong> EC faces <strong>the</strong><br />
three possibilities described in <strong>the</strong> first scenario.<br />
If <strong>the</strong> Council approves <strong>the</strong> proposal, or at least does not<br />
oppose to it, <strong>the</strong> EP has <strong>the</strong> right to oppose to <strong>the</strong> proposal<br />
provided it justifies its oppositi<strong>on</strong> <strong>the</strong>reto.<br />
The new procedure, ra<strong>the</strong>r than providing for a simplificati<strong>on</strong><br />
of comitology, significantly increased <strong>the</strong><br />
complexity of comitology, a system that was already<br />
known for its lack of simplicity.<br />
Most importantly, <strong>the</strong> procedure of implementing measures<br />
will take a significantly l<strong>on</strong>ger time to be executed 61 .<br />
5.5. Article 8 of <strong>the</strong> Comitology Decisi<strong>on</strong><br />
Regardless of <strong>the</strong> existence of “scrutiny right” following<br />
<strong>the</strong> new comitology procedure, <strong>the</strong> EP preserves its right,<br />
according to article 8 of <strong>the</strong> Comitology Decisi<strong>on</strong>, to issue<br />
a Resoluti<strong>on</strong>, in order to indicate that <strong>the</strong> draft implementing<br />
measures of <strong>the</strong> EC exceed <strong>the</strong> implementing<br />
powers of <strong>the</strong> EC provided for in <strong>the</strong> basic act.<br />
Article 8 must be read in relati<strong>on</strong> to Rule 81 of Parliament’s<br />
Rules of Procedure 62 . The latter states that <strong>the</strong> EP<br />
may adopt a Resoluti<strong>on</strong> in relati<strong>on</strong> to all draft implementing<br />
measures and without prejudice to <strong>the</strong>ir time of<br />
adopti<strong>on</strong>. One of <strong>the</strong> most important aspects is <strong>the</strong> fact<br />
that <strong>the</strong> EP can make general objecti<strong>on</strong>s to <strong>the</strong> draft which<br />
are not necessarily restricted to situati<strong>on</strong>s where <strong>the</strong> EC<br />
has exceeded its implementing powers.<br />
Never<strong>the</strong>less, such a Resoluti<strong>on</strong> is solely based <strong>on</strong> Parliament’s<br />
internal procedural rules and <strong>the</strong>refore does not<br />
impose any obligati<strong>on</strong> <strong>on</strong> <strong>the</strong> EC, not even an obligati<strong>on</strong><br />
to re-examine <strong>the</strong> draft measures in <strong>the</strong> light of <strong>the</strong> Resoluti<strong>on</strong>.<br />
A resoluti<strong>on</strong> <strong>on</strong>ly represents a political message<br />
requesting <strong>the</strong> EC to react in a certain way, and has no<br />
legally binding effect 63 .<br />
Before <strong>the</strong> reform of <strong>the</strong> Comitology Decisi<strong>on</strong> in 2006,<br />
this rule provided for <strong>the</strong> <strong>on</strong>ly way for <strong>the</strong> EP to scrutinize<br />
<strong>the</strong> implementing powers of <strong>the</strong> EC. In many cases, <strong>the</strong> EP<br />
has adopted such a Resoluti<strong>on</strong>, following <strong>the</strong> Comitology<br />
Decisi<strong>on</strong> of 1999. The measure of “last resort” for <strong>the</strong> EP<br />
is a more rigorous legal acti<strong>on</strong>, for example, an acti<strong>on</strong> for<br />
annulment before <strong>the</strong> <strong>European</strong> Court of Justice in <strong>the</strong><br />
57. This positive opini<strong>on</strong> is being taken with a qualified majority of <strong>the</strong> members of <strong>the</strong> committee.<br />
58. The Council can object by a qualified majority and <strong>the</strong> EP, by a majority of its members.<br />
59. Art. 5(a) par. 4(e) of <strong>the</strong> Comitology Decisi<strong>on</strong>.<br />
60. Never<strong>the</strong>less, <strong>the</strong> EP can camouflage political reas<strong>on</strong>s by legal arguments, G. SCHUSTERSCHITZ and S. KOTZ, o.c., p. 84.<br />
61. T. CHRISTIANSEN and B. VACCARI, o.c., p. 15.<br />
62. Rules of Procedure of <strong>the</strong> <strong>European</strong> Parliament, December 2006 of <strong>the</strong> Resoluti<strong>on</strong> <strong>on</strong> <strong>the</strong> agreement between <strong>the</strong> <strong>European</strong> Parliament and <strong>the</strong> Commissi<strong>on</strong> <strong>on</strong><br />
procedures form implementing Council Decisi<strong>on</strong> 1999/468/EC of 28 June 1999 laying down <strong>the</strong> procedures for <strong>the</strong> exercise of implementing powers c<strong>on</strong>ferred <strong>on</strong><br />
<strong>the</strong> Commissi<strong>on</strong>. The Resoluti<strong>on</strong> is annexed to <strong>the</strong> Inter-instituti<strong>on</strong>al agreement of 2000.<br />
63. P. LINTNER and B. VACCARI, “The <strong>European</strong> Parliament’s Right of Scrutiny over Commissi<strong>on</strong> Implementing Acts: A Real Parliamentary C<strong>on</strong>trol?”, EIPASCOPE<br />
2005/1, p. 17.<br />
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case of implementing measures proposed by <strong>the</strong> EC not<br />
being in c<strong>on</strong>formity with <strong>the</strong> basic act 64 .<br />
6. The Adopti<strong>on</strong> of <strong>the</strong> ISAs:<br />
The Audit Directive<br />
6.1. Article 26 of <strong>the</strong> Audit Directive<br />
According to article 26 (1) of <strong>the</strong> Audit Directive, member<br />
states may apply a nati<strong>on</strong>al auditing standard as l<strong>on</strong>g as<br />
<strong>the</strong> EC has not adopted an internati<strong>on</strong>al auditing standard<br />
covering <strong>the</strong> same subject matter.<br />
When <strong>the</strong> EC will adopt <strong>the</strong> ISAs, all standards related to<br />
<strong>the</strong> same subject matter dealt with by <strong>the</strong> ISAs are no<br />
l<strong>on</strong>ger applicable. However, member states always<br />
dispose of <strong>the</strong> possibility to adopt a standard <strong>on</strong> a subject<br />
matter that is not related to an ISA adopted by <strong>the</strong> EC.<br />
According to article 26 (3-4) of <strong>the</strong> Audit Directive,<br />
member states may impose audit procedures or requirements<br />
in additi<strong>on</strong> – or in excepti<strong>on</strong>al case, by carving out<br />
parts of – <strong>the</strong> ISAs, and <strong>on</strong>ly:<br />
– if <strong>the</strong> procedures or requirements have not been covered<br />
by adopted ISAs65 ;<br />
– if <strong>the</strong>se stem from specific nati<strong>on</strong>al legal requirements<br />
relating to <strong>the</strong> scope of statutory audits, meaning that<br />
those<br />
comply with a high level of credibility and quality<br />
to <strong>the</strong> annual or c<strong>on</strong>solidated accounts in c<strong>on</strong>formity<br />
with <strong>the</strong> principle of true and fair view and with<br />
<strong>the</strong> <strong>European</strong> public good;<br />
shall be communicated to <strong>the</strong> EC and <strong>the</strong> member<br />
states before <strong>the</strong>ir adopti<strong>on</strong> 66 .<br />
The Directive also provides for a time-limit for <strong>the</strong><br />
member states to impose <strong>the</strong>se additi<strong>on</strong>al requirements<br />
(but not for <strong>the</strong> carves out): 29 June 2010 67 .<br />
If <strong>the</strong> adopted internati<strong>on</strong>al auditing standards c<strong>on</strong>tain<br />
audit procedures that would create a specific legal c<strong>on</strong>flict<br />
with nati<strong>on</strong>al law, stemming from specific nati<strong>on</strong>al<br />
requirements related to <strong>the</strong> scope of <strong>the</strong> statutory audit,<br />
member states may carve out <strong>the</strong> c<strong>on</strong>flicting part of <strong>the</strong><br />
internati<strong>on</strong>al auditing standard as l<strong>on</strong>g as <strong>the</strong>se c<strong>on</strong>flicts<br />
exist 68 , provided that:<br />
– <strong>the</strong>y communicate <strong>the</strong> specific nati<strong>on</strong>al legal requirements,<br />
as well as <strong>the</strong> ground for maintaining <strong>the</strong>m, to<br />
<strong>the</strong> EC and <strong>the</strong> o<strong>the</strong>r member states at least six m<strong>on</strong>ths<br />
before <strong>the</strong>ir nati<strong>on</strong>al adopti<strong>on</strong>, or in <strong>the</strong> case of requirements<br />
already existing at <strong>the</strong> time of adopti<strong>on</strong> of<br />
an internati<strong>on</strong>al auditing standard, at <strong>the</strong> latest <strong>within</strong><br />
three m<strong>on</strong>ths of <strong>the</strong> adopti<strong>on</strong> of <strong>the</strong> relevant ISA 69 ;<br />
– <strong>the</strong> carve-outs comply with a high level of credibility<br />
and with <strong>the</strong> <strong>European</strong> public good 70 .<br />
We believe that carve-outs provide for a dangerous tool in<br />
<strong>the</strong> c<strong>on</strong>text of <strong>the</strong> harm<strong>on</strong>isati<strong>on</strong> of auditing standards<br />
<strong>within</strong> <strong>the</strong> EU 71 .<br />
The objective for <strong>the</strong> EC is to analyze <strong>the</strong> c<strong>on</strong>tent of <strong>the</strong><br />
ISAs in order to determine whe<strong>the</strong>r <strong>the</strong> c<strong>on</strong>diti<strong>on</strong>s specified<br />
by <strong>the</strong> Audit Directive have been met, e.g. <strong>the</strong> fact<br />
whe<strong>the</strong>r <strong>the</strong>se standards “are c<strong>on</strong>ducive to <strong>the</strong> <strong>European</strong><br />
public good” (cf. supra, par. 5.1). In August 2007, <strong>the</strong> EC<br />
launched a tender to create a study 72 regarding a cost/<br />
benefit analysis related to a possible implementati<strong>on</strong> of<br />
ISAs as well as a study <strong>on</strong> <strong>the</strong> differences between <strong>the</strong><br />
“clarified ISAs” and <strong>the</strong> PCAOB <strong>Auditing</strong> <str<strong>on</strong>g>Standards</str<strong>on</strong>g>.<br />
6.2. Article 28 (2) of <strong>the</strong> Audit Directive<br />
As l<strong>on</strong>g as <strong>the</strong> EC did not adopt ISAs 700 and 701 relating<br />
to <strong>the</strong> auditor’s report, <strong>the</strong> Directive c<strong>on</strong>fers <strong>the</strong> power <strong>on</strong><br />
<strong>the</strong> EC to adopt a comm<strong>on</strong> standard for audit reports for<br />
(annual or c<strong>on</strong>solidated) accounts which have been<br />
prepared in accordance with IFRS as adopted by <strong>the</strong> EU 73 .<br />
Firstly, this opti<strong>on</strong> for <strong>the</strong> EC could provide for <strong>the</strong> creati<strong>on</strong><br />
of an auditor’s report for financial statements<br />
64. In <strong>the</strong> Report 2005, <strong>the</strong> EP has used this power to adopt two Resoluti<strong>on</strong>s in which it claimed that <strong>the</strong> EC exceeded <strong>the</strong> implementing powers c<strong>on</strong>ferred <strong>on</strong> it when<br />
adopting specific implementing measures. Fur<strong>the</strong>rmore, we can also see that EC brought acti<strong>on</strong> against <strong>the</strong> EC before <strong>European</strong> Court of Justice claiming annulment<br />
of a Commissi<strong>on</strong> Decisi<strong>on</strong>, Case-law “DecaBDE”, Report from <strong>the</strong> commissi<strong>on</strong> <strong>on</strong> <strong>the</strong> working of committees during 2005, SEC(2006)1065; see also P.<br />
LINTNER and B. VACCARI, o.c., p. 15-25.<br />
65. Recital 13 of <strong>the</strong> Audit Directive<br />
66. Art. 26 (3) of <strong>the</strong> Audit Directive<br />
67. Art. 26 (4) of <strong>the</strong> Audit Directive<br />
68. Recital 13 of <strong>the</strong> Audit Directive<br />
69. Art. 26 (3) of <strong>the</strong> Audit Directive<br />
70. Recital 13 of <strong>the</strong> Audit Directive<br />
71. Recital 13 of <strong>the</strong> Audit Directive<br />
72. The Tender can be c<strong>on</strong>sulted <strong>on</strong> <strong>the</strong> following secti<strong>on</strong> regarding <strong>the</strong> Official Journal of <strong>the</strong> <strong>European</strong> Uni<strong>on</strong>:<br />
ted.europa.eu/Exec;jsessi<strong>on</strong>id=2D70FBBE8401C0CA0C625F79C7DA78D1.instance_2?DataFlow=ShowPage.dfl&Template=TED/N_<strong>on</strong>e_result_detail_curr.htm<br />
&docnumber=191087-2007&docId=191087-2007&StatLang=EN.<br />
73. Art. 28 (5) of <strong>the</strong> Audit Directive.<br />
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prepared in accordance with IFRS that could be different<br />
from <strong>the</strong> auditor’s report <strong>on</strong> o<strong>the</strong>r financial statements<br />
prepared in accordance with a financial reporting framework,<br />
o<strong>the</strong>r than IFRS as adopted by <strong>the</strong> EU. If so, will an<br />
audit still be an audit?<br />
Sec<strong>on</strong>dly, <strong>the</strong> ISAs are to be c<strong>on</strong>sidered as a set of standards,<br />
as ISAs build <strong>on</strong> each o<strong>the</strong>r, starting with <strong>the</strong> ISAs <strong>on</strong><br />
<strong>the</strong> auditor’s resp<strong>on</strong>sibilities (ISA-series 200-260) and<br />
ending with <strong>the</strong> ISAs <strong>on</strong> reporting by <strong>the</strong> auditor (ISAseries<br />
700-805).<br />
Thirdly, ISA 700 clearly states that in order to report <strong>on</strong><br />
<strong>the</strong> true and fair view of <strong>the</strong> financial statements in<br />
accordance with ISAs, all ISAs should be applied during<br />
<strong>the</strong> audit.<br />
Therefore, not adopting even <strong>on</strong>e ISA <strong>within</strong> <strong>the</strong> <strong>European</strong><br />
c<strong>on</strong>text would necessarily lead to <strong>the</strong> n<strong>on</strong>-adopti<strong>on</strong><br />
of ISA 700. One might questi<strong>on</strong> such a “n<strong>on</strong>-adopti<strong>on</strong>”<br />
by <strong>the</strong> EC, in <strong>the</strong> c<strong>on</strong>text of <strong>the</strong> objective of <strong>the</strong> Audit<br />
Directive to quest for a high level of quality of all statutory<br />
audits <strong>within</strong> <strong>the</strong> EU, including <strong>the</strong> audit of financial<br />
statements of small entities.<br />
7. O<strong>the</strong>rs Matters Related to <strong>the</strong> Adopti<strong>on</strong><br />
of ISAs<br />
7.1. ISAs as Part of a Legal System<br />
The most important change regarding <strong>the</strong> adopti<strong>on</strong> by <strong>the</strong><br />
EC of ISAs is <strong>the</strong> fact that <strong>the</strong>se standards will become<br />
part of a legal system. However, ISAs aren’t drafted from<br />
a legislative point of view. It is of course of paramount<br />
importance for <strong>the</strong> EC to communicate its comments as<br />
early as possible to <strong>the</strong> IAASB. It is essential for <strong>the</strong> EC<br />
that ISAs do not interfere with corporate law applicable in<br />
<strong>the</strong> individual jurisdicti<strong>on</strong>s, such as <strong>European</strong> or nati<strong>on</strong>al<br />
company law 74 .<br />
7.2. C<strong>on</strong>flicts of Law<br />
The Audit Directive provides for <strong>the</strong> possibility to carve<br />
out parts of ISAs for an indeterminate period 75 in case of<br />
a c<strong>on</strong>flict of law (cf. infra, par. 10). Carve-outs will impair<br />
<strong>the</strong> credibility of auditing standards as well as <strong>the</strong> harm<strong>on</strong>izati<strong>on</strong><br />
of auditing standards <strong>on</strong> a <strong>European</strong> level.<br />
7.3. Status of <strong>the</strong> Applicati<strong>on</strong> Material<br />
Following <strong>the</strong> “Clarity Project” of <strong>the</strong> IAASB, ISAs are<br />
restructured in order to incorporate an Objective, a<br />
Requirements secti<strong>on</strong> and an Applicati<strong>on</strong> Material secti<strong>on</strong><br />
(cf. infra, par. 3). The authority of <strong>the</strong> Applicati<strong>on</strong> Material<br />
is described in paragraph 22 of <strong>the</strong> proposed redrafted<br />
preface of ISAs:<br />
“While <strong>the</strong> professi<strong>on</strong>al accountant has a resp<strong>on</strong>sibility to<br />
c<strong>on</strong>sider <strong>the</strong> whole text of a standard, such guidance is not<br />
intended to impose a requirement for <strong>the</strong> professi<strong>on</strong>al<br />
accountant to perform <strong>the</strong> suggested procedures or<br />
acti<strong>on</strong>s.”<br />
According to <strong>the</strong> authors of this article, <strong>the</strong> adopti<strong>on</strong> of<br />
ISAs in <strong>the</strong> EU should not change <strong>the</strong> authority of <strong>the</strong><br />
Applicati<strong>on</strong> Material.<br />
Fur<strong>the</strong>rmore, <strong>the</strong> text of an ISA should be read as a whole,<br />
including <strong>the</strong> applicati<strong>on</strong> material, in order to create a<br />
c<strong>on</strong>sistent applicati<strong>on</strong> of ISAs <strong>within</strong> <strong>the</strong> EU.<br />
7.4. Translati<strong>on</strong> Process<br />
Under <strong>the</strong> new system, <strong>the</strong> EC has to transmit to <strong>the</strong> EP all<br />
linguistic versi<strong>on</strong>s of <strong>the</strong> draft measures before <strong>the</strong> scrutiny<br />
rights become applicable, following <strong>the</strong> new Rule 81<br />
of <strong>the</strong> EP’s Rules of procedures 76 . This will unavoidably<br />
increase <strong>the</strong> timeframe <strong>within</strong> which an ISA will be<br />
adopted, by several m<strong>on</strong>ths.<br />
It is expected that <strong>the</strong> EC will establish translati<strong>on</strong>s of<br />
ISAs, in cooperati<strong>on</strong> with <strong>the</strong> services offered by DG<br />
Translati<strong>on</strong>s. We welcome <strong>the</strong> actual ideas favoring <strong>the</strong><br />
extensi<strong>on</strong> of this cooperati<strong>on</strong> to “experts” <strong>on</strong> <strong>the</strong> translati<strong>on</strong><br />
of ISAs and would like to refer to <strong>the</strong> already existing<br />
list of key terms for some translati<strong>on</strong> projects, such as <strong>the</strong><br />
translati<strong>on</strong> projects from <strong>the</strong> Belgian Institut des Réviseurs<br />
d’Entreprises / Instituut van de Bedrijfsrevisoren,<br />
regarding <strong>the</strong> French and Dutch language in cooperati<strong>on</strong><br />
with <strong>the</strong> Compagnie Nati<strong>on</strong>ale des Commissaires aux<br />
Comptes (CNCC, France) and <strong>the</strong> Royal NIVRA (Ne<strong>the</strong>rlands).<br />
The translati<strong>on</strong>s of <strong>the</strong> extant ISAs are freely<br />
available to <strong>the</strong> public <strong>on</strong> <strong>the</strong> website www.ibr-ire.be/<br />
documentatie/vertaling ISAs (Dutch) or www.ibr-ire.be/<br />
documentati<strong>on</strong>/traducti<strong>on</strong> des normes ISA (French).<br />
The most important c<strong>on</strong>tributi<strong>on</strong> of <strong>the</strong>se projects is to<br />
create a comm<strong>on</strong> vocabulary per language for use <strong>within</strong><br />
74. Comment <strong>on</strong> Exposure Drafts “Improving <strong>the</strong> Clarity of IAASB <str<strong>on</strong>g>Standards</str<strong>on</strong>g>”, October 2005, http://ec.europa.eu:internal_market/auditing/committee/<br />
index_en.htm.<br />
75. Art. 26 (3) of <strong>the</strong> Audit Directive.<br />
76. Rules 81 (4a) of procedures revised <strong>on</strong> 14 December 2006.<br />
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<strong>the</strong> EU, in order for professi<strong>on</strong>als from different countries<br />
sharing <strong>the</strong> same official language (e.g. French for<br />
France, Belgium and Luxembourg; Dutch for <strong>the</strong> Ne<strong>the</strong>rlands<br />
and Belgium) to understand and correctly apply<br />
<strong>the</strong> ISAs.<br />
C<strong>on</strong>clusi<strong>on</strong><br />
The <strong>European</strong> Commissi<strong>on</strong> (EC) pointed out <strong>the</strong> need for<br />
high quality in all statutory audits required by Community<br />
law in order to c<strong>on</strong>tribute to <strong>the</strong> preventi<strong>on</strong> of corporate<br />
and financial malpractice. For that purpose, <strong>the</strong> Audit<br />
Directive approved by <strong>the</strong> EP and <strong>the</strong> Council in 2006<br />
states clearly that all statutory audits be carried out <strong>on</strong><br />
basis of internati<strong>on</strong>al standards <strong>on</strong> auditing.<br />
The Audit Directive reflects a principles-based approach<br />
<strong>on</strong> auditing matters and aims at reinforcing and harm<strong>on</strong>ising<br />
<strong>the</strong> statutory audit functi<strong>on</strong> throughout <strong>the</strong> EU,<br />
<strong>the</strong>reby reinforcing <strong>the</strong> c<strong>on</strong>fidence in <strong>the</strong> functi<strong>on</strong>ing of<br />
<strong>the</strong> <strong>European</strong> capital markets. To that extent, <strong>the</strong> Directive<br />
enforces <strong>the</strong> use of ISAs for all statutory audits to be<br />
c<strong>on</strong>ducted in <strong>the</strong> EU. For <strong>the</strong> ISAs to become part of a<br />
legal system, <strong>the</strong> EC has to apply <strong>the</strong> new “Comitology<br />
procedure”. This procedure sets out <strong>the</strong> authority of <strong>the</strong><br />
EC, <strong>the</strong> <strong>European</strong> Parliament and <strong>the</strong> Council for taking<br />
<strong>the</strong> necessary implementati<strong>on</strong> measures in order to adopt<br />
<strong>the</strong> ISAs for all statutory audits to be performed <strong>within</strong><br />
<strong>the</strong> <strong>European</strong> Uni<strong>on</strong> (EU).<br />
On 17 th July 2006, a new procedure was created, named<br />
“Regulatory procedure of scrutiny”. When <strong>the</strong> new<br />
Comitology Procedure will be in place, <strong>European</strong> Parliament<br />
will dispose of a so-called “scrutiny” right, whereby<br />
it will be possible to intervene when <strong>the</strong> EC makes use of<br />
its implementing powers c<strong>on</strong>ferred by <strong>the</strong> Audit Directive.<br />
This article clarifies in what part of <strong>the</strong> Comitology procedure<br />
such a “scrutiny” right will be important.<br />
ISAs are subject to a “clarificati<strong>on</strong>” project of <strong>the</strong> <str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g><br />
<strong>Auditing</strong> and Assurance <str<strong>on</strong>g>Standards</str<strong>on</strong>g> Board (IAASB),<br />
which is <strong>on</strong>e of <strong>the</strong> most important committees of <strong>the</strong><br />
<str<strong>on</strong>g>Internati<strong>on</strong>al</str<strong>on</strong>g> Federati<strong>on</strong> of Accountants, as well as a<br />
private body setting internati<strong>on</strong>al standards. The socalled<br />
“clarity project” is an ambitious program designed<br />
by <strong>the</strong> IAASB in order to clarify what exactly is required<br />
by <strong>the</strong> ISAs, which purposes are being envisaged <strong>within</strong><br />
<strong>the</strong> ISAs and how <strong>the</strong> required audit procedures could be<br />
applied in different circumstances of <strong>the</strong> audit engagement.<br />
The authors of this article deem it of paramount importance<br />
for <strong>the</strong> EC to finally adopt <strong>the</strong> whole set of clarified<br />
ISAs for use <strong>within</strong> <strong>the</strong> <strong>European</strong> uni<strong>on</strong>, in order to<br />
achieve a maximum degree of harm<strong>on</strong>izati<strong>on</strong> as envisaged<br />
by <strong>the</strong> Audit Directive.<br />
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