Corporate & Securities Law

By Jim Hamilton

Against the backdrop of the European Commission?s transitional equivalence arrangements for non-EU audit firms, the UK Professional Practices Board has proposed rules for non-UK audit firms falling within the arrangements. The rules envision informational registration in the UK, with no inspections by UK authorities.

While largely concerned with regulation of EU audit firms, the European Commission?s Audit Directive includes specific provisions for the regulation of third country auditors of non-EU companies who have issued securities admitted to trading on EU markets. The European Commission has now also proposed a draft on the implementation of these requirements, in particular providing for transitional arrangements.

The underlying principle is that all auditors of companies traded on EU markets should be subject to a level of regulation equivalent to the minimum required for auditors under the Directive. While the Commission will not set out specific proposals on the equivalence of third countries? audit regulatory systems until at least the end of 2008, it recently proposed measures allowing Member States for a transitional period to treat the regulatory arrangements in specified countries largely as if they were equivalent, without an assessment of equivalence having been made. US audit firms registered with the PCAOB come within the Commission?s transitional arrangements.

Acting on this permission, the UK regulator proposes registration for third country auditors who audit companies incorporated outside the EU with securities admitted to trading on a UK market. The informational registration would require such items as the audit firm?s name and address and a description of the firm?s legal structure, as well as whether the firm belongs to a network and, if so, a description of the network. The firm would also have to describe its internal quality control systems.

The firm must also give the date of the last external inspection to which it was
subject and provide necessary information about the outcome. As a general rule, the UK regulator would not inspect third country auditors, but it reserves the right to do so. Thus, the UK overseer supports the principle of home country regulation where possible; and would only seek to inspect where the regulatory authority of the third country auditor wished itself to inspect UK audit firms, to meet reciprocity requirements.

The Board is aware that some of the audit firms affected will have to register in a number of European countries; and that this could prove unduly burdensome. While there are no provisions in the Audit Directive for a single registration that is valid across the EU, the Board is working closely with audit regulators in other Member States to minimize the burdens and coordinate decisions. In particular, the Board hopes to develop a common format for applications for registration.

Full post as published by Jim Hamilton's World of Securities Regulation on June 05, 2008 (boomark / email).