The European Commission yesterday published proposals for a Europe-wide law governing the audit of company accounts, drawn up following corporate scandals at Parmalat and Ahold.
The law would govern all statutory audits carried out in the EU.
Mr Frits Bolkestein, the EU Commissioner for the Single Market, said: "No one is naive enough to think any directive will stop accounting fraud at a stroke but what we are proposing would inject more rigour and a stronger dose of ethics into the audit process."
The Commission is also attempting to force the US authorities to back down from what are seen as excessive demands in the Sarbanes-Oxley Act for oversight of European companies by threatening retaliation on US firms.
The proposal would impose an obligation on all statutory audits to use International Standards on Auditing.
Companies would have to disclose the audit fee and other fees for non-audit work carried out by the auditor.
Audit firms would be forbidden to provide "any additional service that would compromise their independence".
An extra layer of obligations would apply to listed companies, banks and insurance companies, which are deemed to be "public interest companies". They would have to rotate auditors, although national governments can choose between either a change of audit firm every seven years or, if the same firm keeps the work, a change of key audit partner every five years.
The Commission would also make it obligatory, in a group audit, for a lead firm to take responsibility for the whole audit, even if some of the work is sub-contracted to other auditors.
In many respects, the Commission's proposal imposes on the whole of the EU obligations that, for Ireland, are contained in the Companies (Auditing and Accounting) Act passed last December.
Other EU governments will probably have still greater difficulties with some of the Commission's proposals. The directive would no longer allow an EU state to impose nationality restrictions on the ownership or control of audit firms, as happens in France and Germany.
Mr David Devlin, of PricewaterhouseCoopers in Dublin, who is president of the European accountants body FEE, said he welcomed the measures on audit committees and international standards.
But he said FEE was against mandatory rotation of audit firms and feared that the Commission would interfere in the endorsement of auditing standards.
The Institute of Chartered Accountants in Ireland (ICAI) gave the proposals a generally positive response. It was especially pleased with the adoption of the International Standards on Auditing and also with the proposed co-ordination between national regulatory authorities and oversight bodies.
However, it also expressed concern about the issues of firm rotation and auditor liability as dealt with in the directive.
Privately, EU officials admit that the proposal aims to strengthen the EU's hand in its negotiations with the US over the implementation of the Sarbanes-Oxley Act, the post-Enron legislation, which threatens to impose US regulation on any European company listed in the US.
The Commission's proposal has imposed on non-EU auditors a requirement to register with any EU state in which a company they are auditing is listed. That obligation would apply even if the audit is being carried out in the US.
But the obligation could be waived if the US offered reciprocal arrangements for European auditors, leaving EU firms to be regulated by EU authorities.
