The European Commission today adopted the first decision recognizing the equivalence of the audit oversight systems in 10 third countries[1]. This decision paves the way for reinforced cooperation between Member States and third countries which have been declared equivalent, so that they can mutually rely on each others’ inspections of audit firms. The decision also grants a transitional period to auditors from 20 third countries[2] allowing them to continue their audit activities in the EU while further assessments are carried out.

Internal Market and Services Commissioner Michel Barnier said: “This decision comes at a time when the Commission is considering improvements within the audit market more generally, and so must be seen within this broader context. Today’s decision is an important step towards closer international cooperation on the supervision of auditors and audit firms. International cooperation on auditor oversight is crucial to avoiding the overburdening of audit firms and duplicating supervisory work, and above all, to promoting a high degree of investor protection by ensuring high quality audits”.

Mutual reliance

As the demand for companies to operate globally increases, so too does the need for their auditors to do the same. With auditing now moving beyond national borders, there is a need for effective global auditor oversight, which requires extensive international cooperation. It is for this reason that the Commission supports international mutual reliance on the supervision of auditors that is carried out by their home country audit oversight. Mutual reliance means that Member States and the third countries can rely on each others’ inspections of audit firms allowing for a more effective and efficient oversight of global audit firms.

With the Commission decision now in place, Member States may choose to rely on the supervisory work of one of the 10 third country oversight systems, which have been assessed as equivalent. The extent to which a Member State will rely on and cooperate with one of these third countries is determined by the cooperative arrangements that have been signed by the Member State and the third country.

Transitional phase for 20 countries

The Commission’s assessments show that 20 third countries are in the process of establishing independent public oversight systems for auditors. However, further information about the overall function and rules governing such systems are required before an equivalence decision can be taken. It is for this reason that a transitional period for the activities of auditors from these 20 third countries has been granted. During this period, which lasts until 31 July 2012, auditors are allowed to perform audit activities in the EU without EU oversight and without registering with EU competent authorities. However, this transition will only be granted to third-country audit firms if they comply with minimum information requirements necessary for maintaining investor protection levels in Europe. This could include presenting the result of the last inspection or a description of the internal quality control system of the audit firm.

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1. The countries assessed as equivalent are Australia, Canada, China, Croatia, Japan, Singapore, South Africa, South Korea, Switzerland and the United States of America.

2. The countries in the transitional period are Abu Dhabi, Bermuda, Brazil, the Cayman Islands, The Dubai International Financial Centre, Egypt, Guernsey, Hong Kong, India, Indonesia, the Isle of Man, Israel, Jersey, Malaysia, Mauritius, New Zealand, Russia, Taiwan, Thailand and Turkey.