Abstract
We provide a comparative overview of the process of implementation, harmonization and stabilization of public oversight systems for statutory auditors across the European Union (EU) after Directive 2006/43/EC. We build on institutional change theory to identify potential determinants as to why some countries still lag in this harmonization process. Oversight systems are a key institutional factor to guarantee the quality of financial information, essential to maintain investors’ confidence and deep and stable capital markets. Thus, the harmonization of these systems has long been an objective of the EU. Our analyses serve to identify, analyse and compare how EU countries have incorporated European-wide requirements into their national legal systems. Particularly, we study: (1) basic characteristics of the system and bodies for public oversight, (2) organizational structure, (3) financing (4) transparency, (5) supervisory, and (6) disciplinary mechanisms. We show that significant diversity still exists across systems and that both the incentives for institutional change and the distance between pre-existing systems and the Directive are important explanatory factors of the achieved level of harmonization.
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Notes
The Regulation states its aim as follows: “(The Regulation) aims at contributing to the efficient and cost-effective functioning of the capital market. The protection of investors and the maintenance of confidence in the financial markets is also an important aspect of the completion of the internal market in this area.”
Canada set up the Canadian Public Accountability Board in 2003; and Japan set up the Certified Public Accountants and Auditing Oversight Board in 2004. The same year, the competences of the Australian Securities and Investments Commission were extended to cover the public oversight for the auditing profession.
Particularly, the public oversight system has the responsibility to oversight: (a) the approval and registration of statutory auditors and audit firms; (b) the adoption of standards of professional ethics and internal quality controls for auditors and audit firms; and, (c) continuing education, quality assurance and the investigative and disciplinary systems. In addition, the POBSAs are required to cooperate in the oversight activities at the European and international levels. All these POBSAs belong to the European Group of Auditors’ Oversight Bodies and are members of the International Forum of Independent Audit Regulators.
The level of audit quality is proxied by the country negative value of the aggregate earning management measure for the period 1996-2005 provided by Leuz (2010). As a proxy for the level of audit quality in the market of a country we also use the aggregate earning management proxies provided from Leuz et al. (2003) and Burgstahler et al. (2006). The graphical representation of the distances between countries indicates the same groups and draw to the same conclusions.
This helps to identify the first instance when the POBSA was de facto functioning. The cut off point to identify early and late adopters is 2002, because it is the year when the self-regulation of the audit profession starts to be questioned and therefore, when public oversight system are proposed and encouraged.
Even though Panel A identifies Belgium as an early adopter, we might consider it a late adopter. The Conseil Supérieur des Professions Economiques (CSPE), the main body, was set up in 1985. However, the responsibilities for public oversight are delegated to several bodies created in 2007, year when the audit regulatory system is deeply restructured.
Following Article 32 of the Directive, we identify as regulatory functions those (a) related to the approval and registration of statutory auditors and audit firms; (b) the adoption of standards on professional ethics and internal quality controls of audit firms and auditing; and finally, (c) the establishment of continuing education mechanisms. The supervisory functions include: (a) the control and programming of the quality assurance system; and (b) the investigation procedures. Finally, the disciplining functions relate to the competencies to impose sanctions, ranging from censure or fines to the revocation of registration.
The Directive allows a minority of auditors (practitioners) to be designated as Board Members, as long as they are selected in accordance with a transparent and independent procedure (Art. 32.3).
Investigation procedures are carried as a result of several triggers: (a) as a result of the deficiencies identified through quality controls; (b) as a results of a direct request from other public supervisory body (e.g., stock market regulators, fiscal controls, national central banks etc.) and (c) a third party direct claim (e.g. professional organizations) to the POBSA.
Finland was an exception, enacting the Auditing Act (459/2007) in 2007. Austria, Belgium, Ireland, Luxemburg, the Netherlands or Portugal complete to group of “late-adopters”, embracing the content of the Directive in the period 2006-2010.
Additional details on financing sources can be provided by the authors under request.
Additional details on quality controls developed in Germany, Finland and the UK can be provided by the authors under request.
Written reprimands are used by the CONSOB to request for clarifications and additional information to auditors. Information on written reprimands is firstly published in the CONSOB annual report in 1986.
In constructing Harm_POBSA we allocate the same weight to each of the 15 items and thus assume that they all have equally importance. This assumption is common in previous studies on enforcement (e.g., La Porta et al. 2006; Brown et al. 2014) because of the difficulty involved in defining a specific weight for each item.
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Acknowledgments
We gratefully acknowledge helpful comments and suggestions from the editor and an anonymous reviewer. Also, from Leandro Cañibano, Cristina de Fuentes, Laura Gil, Jose A. Gonzalo, Begoña Navallas, Domi Romero, Jose Luis Ucieda, Risto Ruuska and seminar participants at 9th EUFIN workshop and the X Workshop on Empirical Research in Financial Accounting. We acknowledge financial contribution from the AECA Carlos Cubillo Chair in Accounting and Auditing (Capítulo Español), the Spanish Ministry of Science and Innovation (ECO2010-19314 and ECO2013-48328), the ICAC (Instituto de Contabilidad y Auditoría de Cuentas) and ASEPUC, through the XVIII Fernandez Pirla Research Funding.
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García Osma, B., Gisbert, A. & de las Heras Cristóbal, E. Public oversight systems for statutory auditors in the European Union. Eur J Law Econ 44, 517–552 (2017). https://doi.org/10.1007/s10657-014-9460-1
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DOI: https://doi.org/10.1007/s10657-014-9460-1
Keywords
- Auditing
- Directive 2006/43/EU
- Institutional differences
- Oversight systems
- Disciplinary systems
- Harmonization
- Accounting