European Business Law, the fourth volume in our series, shows how the European authorities simultaneously abolish all restrictions on access to and exercise of economic activities and support the growth of domestic markets, through the harmonization the internal legislation or the enactment of genuinely unified regulations.

European Business Law

The accounting system set up by the Fourth  and Seventh  directives - now replaced by Directive No 2013/34  - has been supplemented by the Eighth Directive , now superseded by Directive No 2006/43 . The Eighth Directive merely fixed the conditions of approval of persons responsible for carrying out the statutory audit of accounts provided for by the accounting directives. Directive No 2006/43 goes further and is aimed at further harmonization of the quality of the statutory audit of accounts in the EU and at reinforcing confidence in audits, in particular by applying a unique system of international accounting standards, the updating of requirements regarding training, the definition of ethics and the practical implementation of cooperation between the Member States' competent authorities and between these authorities and those of non-member countries. Directive No 2006/43 was amended by Directive No 2014/56  in order to take account of the public interest . The provisions concerning public-interest entities were further developed in a specific regulation  and those provided for in the directive will apply to statutory auditors and audit firms only insofar as they carry out statutory audits of such entities.

According to Article 3 of Directive No 2006/43, a statutory audit of the accounts can be carried out only by statutory auditors or audit firms that are approved by the Member State requiring the audit. Each Member State designates the competent authority to be responsible for approving statutory auditors and audit firms. The approved auditors must be of good repute (Article 4), must have the educational qualifications defined in Article 6 and must have passed an examination of professional competence, covering the subjects listed in Article 8, supplemented by practical training of at least three years (Article 10). Under Article 3(a), an audit firm which is approved in a Member State is entitled to perform statutory audits in another Member State provided that the key audit partner who carries out the statutory audit on behalf of the audit firm fulfills those conditions and is registered with the competent authority in the host Member State which checks that the firm is in fact registered in its home Member State. Pursuant to Article 14, the Member States must establish procedures for the approval of statutory auditors who have been approved in other Member States, which cannot go beyond a requirement to pass an aptitude test or to complete an adaptation period which covers only the adequate knowledge of the laws and regulations of the Member State concerned insofar as the knowledge is relevant to statutory audits. For reasons of protection of third parties, all approved statutory auditors and audit firms must be entered in a public register accessible to the public and containing essential information on the statutory auditors and audit firms (Articles 15 to 20) . They are subject to principles of professional ethics, covering at least their public-interest function, their integrity and objectivity and their professional competence and due care (Article 21), as well as strict rules of confidentiality and professional secrecy (Article 23) . Directive No 2014/56 has added to the principle of professional ethics, the maintaining of professional scepticism . The statutory auditor or the audit firm must, when carrying out the statutory audit, maintain professional scepticism throughout the audit, recognizing the possibility of a material misstatement due to facts or behavior indicating irregularities, including fraud or error, notwithstanding the statutory auditor's or the audit firm's past experience of the honesty and integrity of the audited entity's management. The statutory auditor or the audit firm must maintain professional scepticism when reviewing management estimates relating to fair values, the impairment of assets, provisions, and future cash flow. In all events, statutory auditors and audit firms must be strongly independent of an audited entity and must not be involved in the decision-making process of that entity (Article 22 and 22(b)) . Article 22(a) furthermore strictly controls the recruitment by audited entities to key management or administration positions of former statutory auditors or of employees of statutory auditors or audit firms of audited entities. Such employment is only possible after at least one year has elapsed since the person was directly involved in the statutory audit engagement . 

Article 24(a) added by Directive No 2014/56 regulates the internal organization of statutory auditors and audit firms, which must comply with certain organizational requirements. The audit firm must establish appropriate policies and procedures to ensure that its owners or shareholders, as well as the members of the administrative, management and supervisory bodies of the firm, or of an affiliate firm, do not intervene in the carrying-out of a statutory audit in any way which jeopardizes the independence and objectivity of the statutory auditor who carries out the statutory audit on behalf of the audit firm. Sound administrative and accounting procedures, internal quality control mechanisms, effective procedures for risk assessment, and effective control and safeguard arrangements for information processing systems must be put in place. The organizational requirements also concern, inter alia, the appropriate knowledge and experience for the duties assigned to employees as well as the coaching, supervising and reviewing of their activities, the outsourcing of audit functions, the prevention of any threats to the independence of firms and the establishment of internal quality control systems. Such policies and procedures must be documented and communicated to the employees of the statutory auditor or the audit firm. Article 24(b) deals with the organization of the work and  provides that, when the statutory audit is carried out by an audit firm, that firm must designate at least one key audit partner to whom it grants sufficient resources to carry out his/her duties appropriately.  When carrying out the statutory audit, the statutory auditor must also devote sufficient time to the engagement and assign sufficient resources to enable him or her to carry out his or her duties appropriately. The statutory auditor or audit firm must maintain a client account record which includes the data set out in the directive  and an audit file for each statutory audit.

Article 25(a) fixes the scope of the statutory audit which may not include assurance on the future viability of the audited entity or on the efficiency or effectiveness with which the management or administrative body has conducted or will conduct the affairs of the entity.To guarantee the permanent and high quality of all statutory audits of accounts required by EU law, they must be in compliance with international auditing standards the definition of which is delegated to the Commission (Article 26). Article 29 also imposes on Member States to set up a system of quality assurance so that each individual auditor is subject to review at least every six years. Lastly, the Member States must organize an effective system of public oversight for the activity of statutory auditors and audit firms based on the principle of oversight by the initial Member State and governed by non-practitioners who are knowledgeable in the areas relevant to the statutory audit (Article 32).

Directive No 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, OJ L 222 of 14.8.1978, 11.

Directive No 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts, OJ L 193 of 18.7.1983, 1.

Professional skepticism is defined in Article 21(2) as an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Independence is required at least during both the period covered by the financial statements to be audited and the period during which the statutory audit is carried out. The statutory auditor or the audit firm must not carry out a statutory audit if there is any threat of self-review, self-interest, advocacy, familiarity or intimidation created by financial, personal, business, employment or other relationships; Case C-950/19 Patentti-Ja Rekisterihallituksen Tilintarkastuslautakunta, Judgment of  24 March 2021, LawLex202100004276JBJ, stating that the requirement of independence of the statutory auditors in the performance of their tasks not only aims at ensuring that the audited entity can rely on the audit carried out but also at preserving the confidence of third parties, such as creditors and investors, in the reliability of the audit.

Case C-950/19 Patentti-Ja Rekisterihallituksen Tilintarkastuslautakunta, Judgment of 24 March 2021, LawLex202100004276JBJ, holding that a statutory auditor, such as a key audit partner, appointed by an audit firm in the context of a statutory audit  engagement, must be regarded as holding a key management position in an audited entity, within the meaning of Article 22a(1)(a) of Directive No 2006/43, as soon as he or she concludes an employment contract with the latter relating to that post, even if he or she has not yet begun to actually perform his or her duties in that post.

i.e. the name, the address and the place of business; in the case of an audit firm, the name(s) of the key audit partner(s); the fees charged for the statutory audit and the fees charged for other services in any financial year.

Directive No 2013/34 of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertaking, OJ L 182 of 26 June 2013.

Directive No 84/253/EEC of 10 April 1984 on the approval of persons responsible for carrying out the statutory audits of accounting documents, OJ L 126 of 12.5.1984, 20.

Directive No 2006/43/EC of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives Nos 78/660/EEC and 83/349/EEC and repealing Council Directive No 84/253/EEC, OJ L 157 of 9.6.2006, 87.

Directive No 2014/56/EU of 16 April 2014, OJ L 158 of 27 May 2014, 196.

Defined in point 13 of Article 2 as entities governed by the law of a Member State whose transferable securities are admitted to trading on a regulated market of any Member State; credit institutions as defined in point 1 of Article 3(1) of Directive No 2013/36/EU other than those referred to in Article 2 of that directive; insurance undertakings within the meaning of Article 2(1) of Directive No 91/674/EEC or, entities designated by Member States as public-interest entities, for instance undertakings that are of significant public relevance because of the nature of their business, their size or the number of their employees.

Regulation No 537/2014 of 16 April 2014, OJ L 158, 77.

In exceptional circumstances, Member States may disapply these requirements but only to the extent necessary to mitigate an imminent and significant threat to the personal security of any person.

Where a statutory auditor or an audit firm carries out a statutory audit of an undertaking which is part of a group whose parent undertaking is situated in a third country, the confidentiality and professional secrecy rules shall not impede the transfer by the statutory auditor or the audit firm of relevant documentation concerning the audit work performed to the group auditor situated in a third country if such documentation is necessary for the performance of the audit of consolidated financial statements of the parent undertaking.

199. Statutory audit of accounts