PDF to HTML - Convert PDF files to HTML files

Erhvervsudvalget 2010-11 (1. samling)
KOM (2010) 0561 Bilag 4
Offentligt

European Commission

DG Internal Market and Services

B-1049 Brussels

[email protected]

MINISTER FOR ECONOMIC

AND BUSINESS AFFAIRS

Green Paper – Audit Policy: Lessons from the Crisis

MINISTRY OF ECONOMIC

AND BUSINESS AFFAIRS

General comments

The Danish government welcomes the initiative by the European Com-

mission to review how the audit function could be enhanced in order to

contribute to increased financial and economic stability.

The Danish government agrees with the importance and societal role of

the audit function and considers, not at least in times of financial instabil-

ity, the audit function crucial. In this regard, the Danish audit legislation

specifies that the statutory auditor shall be the representative of the public

during the performance of the audit.

The Danish government therefore agrees that the audit function plays an

important role to the confidence in financial statements and contributes to

financial and economic stability.

The Directive on Statutory Audit has just recently been implemented in

Member State legislation and the Directive already deals with many of

the issues raised in the Green Paper. The effects of the measures in the

Directive on the audit function have therefore not yet been assessed.

The Danish government has focus on better regulation and administrative

burdens and is concerned whether full impact of the Directive of Statuto-

ry Audit is known.

New administrative burdens on European companies may impede the

growth of the companies and new measures as a result of the green paper

should be carefully considered.

The Danish government therefore agrees with the European Commission

to the need for differentiated and calibrated approach, which is adapted

and proportionate to the size and complexity of the audited company as

well as to the auditor.

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Tel.

Fax

+45 33 92 33 50

+45 33 12 37 78

CVR no. 10 09 24 85

[email protected]

www.oem.dk

PDF to HTML - Convert PDF files to HTML files

2/5

Specific comments

Role of the Auditor

The Danish government welcomes the initiative of the European Com-

mission to review improvements of the auditors’ communication to audit

clients and other stakeholders.

Recognizing the “expectation gab” the Danish government finds that ex-

tension of the audit report should be considered very carefully. It is im-

portant that it cannot be questioned whether an audit report is without

qualifications or it is a qualified audit report.

The Danish government stresses the importance of the division of respon-

sibilities. The responsibility of the auditors is to report on historical fi-

nancial statements, which include going concern considerations in a lim-

ited future period. The responsibility of the management is to prepare the

financial statement, including information about the anticipated future

prospects of the company. An extension of the auditor’s mandate should

not comprise the division of responsibilities between the auditor and the

management of the audited company.

The Danish government supports discussions on how to improve the

communication to management of the audited company. The Danish leg-

islation e.g. requires the auditor to report to the management during the

audit process (Auditors’ records). Amongst other things the auditor must

report on significant issues regarding the audit, including, in particular,

material uncertainties, errors, misstatements or omissions in the compa-

ny’s bookkeeping, accounting or internal control. The auditors’ records

shall also be kept for use by the audit committee and for the use by regu-

latory authorities.

In Denmark generally accepted auditing practices requires the audit to

comply with International Standards on Auditing (ISA). The Danish gov-

ernment finds that ISA promote audit quality and is favourable to the im-

plementation of the ISA into Community Law. However, recognizing the

dogma that “an audit is an audit” other auditor services to the SME seg-

ment should be taken into consideration. Other auditor services that ad-

dresses the less complex structures of SMEs and meet the needs of those

companies would be in line with the desire to reduce the administrative

burdens.

Independence of the auditor is fundamental and the exercise of profes-

sional scepticism is essential to the confidence in statutory audit. The

Danish government will therefore have an open and positive approach to

discussions on initiatives to reinforce the independence of auditors audit-

ing Public Interest Entities.

PDF to HTML - Convert PDF files to HTML files

3/5

The Danish government agrees that the proportion of fees an audit firm

receives from a single audit client compared to the total audit revenues of

the audit firm may compromise the auditors’ independence. According to

the Danish audit legislation an audit firm must therefore not have a share

of more than 20 percent of its turnover with the same customer in each of

five consecutive financial years.

The Danish government is positive as to examine a limitation on the pro-

portion of audit fees from a single audit client.

The Danish government is, however, very sceptical to a system where the

appointment, remuneration and duration of the engagement are the re-

sponsibility of a third party, e.g. a regulator, rather than the company it-

self. The system violates the shareholders’ right to appoint the auditor

and conflicts with Article 37 of the Directive on Statutory Audit. Second-

ly, a system where a regulator appoints the auditor would clearly com-

promise the independence of that regulator and possibly the independence

of the auditor. And thirdly, such a system will contribute to uncertainty

about the division of liability in case of errors or other irregularities.

The Danish government welcomes a discussion on the market concentra-

tion and the market structure. The Danish government supports that the

European Commission initiate a work with Member States, audit firms,

stakeholders and international fora to discuss a contingency plan in case

of the demise of a so called systemic audit firm. But as stated below the

Danish government does not see joint audits to play a role in this plan.

As regard the market structure it should be noted that a major barrier to

growth of medium sized audit firms is the missing representation on mar-

kets where the audit firm is not represented

The Danish government has concerns in regards to mandatory rotation of

audit firms. An Italian study

of mandatory rotation of audit firms indi-

cates that mandatory rotation does not have any effect but rather increases

the cost of audit and reduces the audit quality. The Danish government

therefore finds the current requirement of mandatory auditor rotation ad-

equate.

Until 2005 listed companies in Denmark was required to appoint two dif-

ferent auditors/audit firms. The Danish experience is that the audit work

was in fact only carried out by one of the auditors although both auditors

Bocconi University, Italy, 2003 (revised 2005) – “Economic consequences of manda-

tory auditor rotation – the impact of mandatory rotation on audit quality and on pricing:

the case of Italy”. Mandatory rotation of audit firms has also been discussed in “Inde-

pendence of Australian Company Auditors” by Ian Ramsay, Harold Ford Professor of

Commercial Law and Director of the Centre for Corporate Law and Securities Regula-

tion, The University of Melbourne, October 2001.

PDF to HTML - Convert PDF files to HTML files

4/5

had the same responsibility for the audit. Neither did the system contrib-

ute to audit quality. The system of joint audits was therefore revoked. The

Danish government is not in favour of reintroducing joint audits and do

not share the Commissions analysis that it has positive effects on the

market structure.

The Danish government finds the idea of the creation “of a European

passport” interesting and supports a further examination of the subject.

An examination should take into account the provision in the Directive on

Statutory Audit, which state that auditors should be approved by the

Member State requiring the statutory audit to secure the proper

knowledge of e.g. tax law, company law, etc., which are not harmonised

on EU level. The examination should take into account the Directive on

recognition of professional qualifications that already allows that service

providers to provide cross-boarder services except statutory audit.

Limitation of the auditor liability has not been specifically addressed in

the green paper. The Danish government, however, finds it appropriate to

comment on this issue. The Danish government does not support a limita-

tion of the auditor’s liability. The Danish law of compensation and in-

demnification contains a reduction provision, which can reduce unrea-

sonable damage claims.

The Danish government therefore holds the position that the profession

has the possibility to establish arrangements where the audit firms, in-

cluding firms participating in a network, do not have joint and several re-

sponsibility to damage claims.

Supervision and international co-operation

The Danish government is positive to awards developing and creating an

efficient and effective structure of the public oversight systems of the

Member States. In this regard, the Danish government has noted that de-

velopments have already taken place within the EGAOB and the sub-

groups of EGAOB and it would be natural to build on these develop-

ments. The financing should be taken into account in the European

Commission’s considerations.

International co-operation on the audit field, including on audit firm over-

sight, is important and the Danish government supports developing the

international co-operation further. This must ensure an efficient and equal

dialogue between competent authorities and should secure the audit firms

from unnecessary burdens when subject to inspections from more than

one oversight authority.

Small and Medium Sized Enterprises and Practitioners

As stated above, the Danish government is favourable to examine auditor

services to SMEs that addresses the less complex structures of SMEs and

meet the needs of those companies.

PDF to HTML - Convert PDF files to HTML files

5/5

In general, the Danish government overall stresses the importance of

fighting “red tape” and its impact on for example SMEs. Before any initi-

atives are taken based on the ideas of the green paper an impact assess-

ment must be carried out to make sure that new administrative burdens do

not impede the growth of the companies. As stated in the general com-

ments any initiative should be proportionate to the size and complexity of

the audited company as well as to the size and complexity of the auditor.

Finally, the Danish government would like to stress concerns if initiatives

are taken before the full impact of the Directive on statutory Audit is

known. New initiatives risk being a burden to the audit firms and the au-

dit clients and without the intended effects on the issues pursued.

Yours sincerely

Brian Mikkelsen