EU proposes crackdown on auditors

In the wake of corporate scandals involving European firms Parmalat and Royal Ahold, the European Union's head office Tuesday proposed stricter standards for auditing firms similar to those enacted in the United States.

Among the requirements are "more robust" oversight boards in each EU country along the lines of criteria set up for auditors under the 2002 U.S. law, the European Commission said.

Auditing firms from outside countries, including the United States, will have to register in each EU country where they conduct certain business — just as European firms will soon have to do in the United States.

The directive also would lay out a clear chain of responsibility for cases like Parmalat, the scandal-plagued Italian food giant, where different firms were auditing subsidiaries in different countries.

While the new U.S. law requires a firm's chief executive to certify financial statements, the EU directive proposes making the group auditor take full responsibility for the consolidated accounts, meaning it would need to review the work of the other auditors.

Like the U.S. rules, the EU also would require companies to set up an independent audit committee to select its auditor and oversee the process. That was upgraded from a recommendation in the wake of the Parmalat scandal, said Commission spokesman Jonathan Todd.

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Initial proposals to bar auditing firms from offering other services, such as consulting, to avoid conflicts of interest were dropped in favor of rules preventing "low-balling," where a firm offers auditing services below cost in the hope of making up the fees on other services.

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"Auditors are our major line of defense against crooks who want to cook the books," said EU Internal Market Commissioner Frits Bolkestein. "Parmalat was a reminder of what happens when that defense fails."

While "no one is naive enough to think any directive will stop accounting fraud at a stroke," Bolkestein said the rules would "inject more rigor and a stronger dose of ethics into the audit process."

The commission said the proposal would likely not be adopted by the European Parliament and national governments before mid 2005, although some countries are already making changes on their own.