The EU and the US have agreed to co-operate in the regulation of audit firms and have overcome apparent difficulties in the US Sarbanes-Oxley Act, the two sides said yesterday.

The head of the US Public Company Accounting Oversight Board, Mr William McDonough, said yesterday maximum co-operation was possible between Europe and the US following proposals to govern European auditing.

His remarks appear to lift the threat of regulatory rivalry between the EU and US which has been hanging over EU companies and audit firms since the Sarbanes-Oxley Act was passed in 2002.

After a meeting in Brussels with the European Internal Market Commissioner, Mr Frits Bolkestein, Mr McDonough welcomed the Commission's proposals on statutory auditing, published last week.

Mr Bolkestein said that, while the EU could have opposed Sarbanes-Oxley tooth and claw, it had found a constructive co-operative way forward. He said the principle of "home-country control" had been established and fears of extra-territorial regulation by the US were now "no longer real".

Sarbanes-Oxley, passed after the Enron and WorldCom scandals, required that any firm auditing a US-listed firm would be subject to US regulation.

The Commission has been trying to persuade the US to accept European regulation of European audit firms.

The rules proposed by Mr Bolkestein for the EU last week threatened non-EU firms with heavy registration and policing requirements if they audit firms listed in the EU, but the demands are reduced if their home country is deemed to offer mutual regulatory recognition to EU auditors.

Mr McDonough said: "If we require registration in the US, I cannot see in the name of reciprocity why we would object to registering over here."

He said there would be no formal agreement but said the US could co-operate easily and fully with the proposed European system.

And he hoped to publish the board's rules on foreign audit firms by early May and added that accountancy firms wishing to audit a US-listed company would have to register with the board by early June.

He characterised the application process as "just a way of establishing a two-way postal relationship".

But he indicated there would be no precipitate rush by the US authorities to set up inspections of foreign firms that registered.