We welcome the opportunity to speak on the proposals contained in the revised EU directive on the statutory audit of annual accounts and consolidated accounts, known as the eighth directive. The directive of 10 April 1984 dealt primarily with the approval of statutory auditors in member states. Although the directive contains some requirements on registration and professional integrity, it does not include requirements on how a statutory audit should be conducted, nor does it deal with the degree of public oversight or external quality assurance needed to ensure high audit quality.
Since 1996 the Commission has been examining the effectiveness of the existing directive in light of developments within the profession. The result of these reviews is the new proposed directive. The timing of this revision is, from an Irish perspective, most opportune. New legislation, the Companies (Auditing and Accounting) Act 2003, has been introduced, bringing into law the recommendations of the review group on auditing. The review group, of which I was privileged to be a member, considered national and international developments and developed a regulatory regime to meet the needs of Irish investors, taking into account existing corporate structure and culture. As a result of our early initiative, Ireland is already largely compliant with the proposed eighth directive.
In revising the directive the aim of the Commission was to reinforce the statutory audit function in the EU to recognise that it is one of the crucial elements for underpinning investor trust in the European capital markets; to harmonise the statutory audit function in Europe and internationally; and to provide a basis for effective international regulatory co-operation with third country oversight bodies such as the US Public Company Audit Oversight Board, PCAOB.
With regard to the particular provisions of the directive, we strongly support the aim of international harmonisation of the statutory audit function; the aim of improvement in audit quality within the audit firms through the requirement for auditors to be subject to a system of quality assurance and for the professional bodies to be subject to an independent oversight function; and the aim to improve transparency by requiring member states to maintain and hold specified information on a publicly available register of auditors.
In Ireland all of the above have already been put in place, either in whole or in part. However, we have a number of concerns on specific matters in the directive and the impact these will have on business, particularly small and medium enterprises, SMEs, in Ireland.
Once the directive is approved by the European Parliament, all member states will be required to transpose the directive into national law. Unfortunately, the language in the directive is at times unintelligible. The original text has been subject to at least nine revisions with different countries responsible for the amendments. It is important that the directive at a high level sets out future requirements in a clear, unambiguous fashion which is not open to a variety of interpretations by different countries.
It is important for Ireland that the directive is clear and unambiguous, not only for its future transposition into Irish law but to add to our credibility when discussing future regulatory co-operation with US regulators. We know that foreign direct investment is very important for Ireland. American companies seeking to invest in Ireland will be concerned that they are not overly burdened by overlapping regulation from both US and Irish regulators, so the directive needs to be clear and concise on future co-operative arrangements.
The directive deals with all companies requiring an audit. In most of Europe, including our near neighbours in Great Britain and Northern Ireland where the audit threshold is high, this generally applies only to companies with a turnover in excess of €7.5 million. In Ireland the audit threshold for turnover is only €1.5 million. Legislation developed with the capital markets in mind will therefore apply also to many very small companies in Ireland. We are concerned that the Government's stated intention to reduce the regulatory burden on small entities in an attempt to increase their competitiveness and encourage entrepreneurship will be undermined when the directive is transposed into Irish law, unless we move into line with Europe in relation to audit exemption thresholds.
Increasingly, audit rules and regulations are being developed for public companies and now being applied to SMEs without any regard for their relevance to that sector. The increasing weight of regulation will make the limited liability company a less attractive medium through which to do business, thus stifling enterprise, which will impact on the growth of Irish business and overall economic development.
The time is right for a fuller debate on the appropriate nature of an audit for the SME sector. It may be possible to develop a model which, while providing reassurance on the financial statements of the company, adds value to the company itself and hence encourages growth rather than stifles it. We would be happy to work with Government on this in the future. We strongly support the move to require the adoption of international standards on auditing as set out in the directive. However, the wording of the directive allows members states to carve out sections of the standards they do not like and add other sections which they prefer. This does not equate to international or even European harmonisation. We would strongly recommend that the Commission adopt the full suite of international standards as they exist at present and contribute actively to the development of new standards to ensure peculiar European issues are properly considered and reflected. We urge that only as a short-term measure. Where national law requires, a limited number of additional requirements could be included by individual member states.
The directive will rightly bring into law the requirement for auditors to consider any threats to their independence and where necessary introduce appropriate safeguards. We support the principle of auditor independence but believe the directive should contain high level principles with member states developing and/or approving codes on independence.
During the deliberations of the review group on auditing, the valuable role the auditor played in providing advice and support to the audit client was recognised, and as a result the RGA decided that it would not move to the introduction of wide prohibitions in relation to other services. The RGA determined that based on the public interest nature of the audit client, disclosure to and discussion with the audit committee was necessary before agreements to contract non-audit services from the auditor where entered into. Under the direction of the Irish Presidency, the text of the directive at that stage very much followed this approach, but things appear to have changed in more recent drafts.
If the directive results, as it could, in total prohibition of non-audit services, this would have a seriously detrimental effect on Irish companies, particularly SMEs, resulting in their needing two advisers with a consequent increase in costs. It would also undermine the local general accountancy practice with which members of the committee are no doubt familiar. We therefore support the text reverting to that developed during the Irish Presidency, dealing with auditor independence issues.
The new directive will require each member state to recognise non-resident EU recognised auditors as being eligible to audit Irish companies. The competent authority in a member state must recognise the auditor regardless of the legal structure through which the audit functions operate. In Europe, including Northern Ireland and Great Britain, it is possible and currently highly popular to establish the audit firm as a body corporate, either a limited liability company or a limited liability partnership, an LLP. The Companies Act 1990, however, prohibits the appointment of a body corporate as auditor. Unless the Companies Act is amended the result will be that Irish resident firms will not be able to avail of the body corporate option but non-Irish resident firms will, even in Ireland. This will place Irish firms at a considerable disadvantage to their European counterparts.
In conclusion I would like to touch on an area outside the subject matter of the directive, which we discussed with the committee when we appeared here last to discuss what is now the Companies Act 2003, namely the regulation of the term "accountant". When we last discussed the issue, some members of the committee were good enough to support our position. Indeed, in the Dáil the Minister of State at the Department of Enterprise, Trade and Employment was supportive in principle of Opposition amendments during that debate. This revised directive imposes further regulation on our sector and IAASA itself will undoubtedly be placed on a statutory basis very soon next year. It is unfair that our members who are subject to this consumer protection regulation are not distinguished as accountants from those without qualifications or supervision who practice as such.
