The Commission's consultative paper, Statutory Auditors' Independence in the EU: a Set of Fundamental Principles, argues that "statutory auditors" independence is fundamental to the reliability of audit reports, adds credibility to published financial information, and enhances the protection of European and non-European investors, creditors and other stakeholders in EU companies'.

It adds that independence is the profession's best way of showing that audit firms carry out audits at a level that meets ethical principles such as objectivity and integrity; independence is also of "considerable interest" to stock market, banking and insurance regulators and supervisors.

The Commission proposes a framework that would require auditors to take into account the expectations of those directly affected by their work, the public interest, potential threats to independence and safeguards available to reduce those risks to an acceptable level. The framework would be fleshed out by specific requirements that would provide guidance on the application of the general principles to specific situations, "including prohibitions where no other safeguard would be acceptable."

For example, in relation to non-audit services, it says that preparing accounting records and financial statements involves a "self-review threat." However, the significance of the threat depends on "the spectrum of these persons' involvement in the preparation process and on the level of public interest." So, for example, any help whatsoever in preparing the accounts of a public interest client -- such as a listed company, a pension fund or a credit institution -- would "cause an unacceptably high level of independence risk, and should therefore be prohibited." Similarly, the Commission proposes to limit the provision of services by auditors involving the design and implementation of financial information systems, valuations, internal audit and acting as an expert witness on behalf of an audit client in litigation.

The consultation period runs until March 2, 2001. The Commission says that it will take comments received into account in drafting a Recommendation on statutory auditors' independence, due to be adopted in mid-2001, which is intended to "further improve the provision of reliable and comparable financial information by companies that is vital to the efficient functioning of EU capital markets."

Copies of the consultation paper can be downloaded from the Commission's Web site at europa.eu.int/comm/internal_market/en/company/index.htm.

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