Advertisement

European Journal of Law and Economics

, Volume 44, Issue 3, pp 517–552 | Cite as

Public oversight systems for statutory auditors in the European Union

  • Beatriz García Osma
  • Ana Gisbert
  • Elena de las Heras Cristóbal
Article

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.

Keywords

Auditing Directive 2006/43/EU Institutional differences Oversight systems Disciplinary systems Harmonization Accounting 

JEL Classification

G30 G38 K22 M40 M48 

Notes

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.

References

  1. Aharony, J., Barniv, R., & Falk, H. (2010). The impact of mandatory IFRS adoption on equity valuation of accounting numbers for security investors in the EU. European Accounting Review, 19(3), 535–578.CrossRefGoogle Scholar
  2. Ahmed, A. S., Neel, M., & Wang, D. (2013). Does mandatory adoption of IFRS improve accounting quality? Contemporary Accounting Research, 30(4), 1344–1372.CrossRefGoogle Scholar
  3. Arruñada, B. (2004). Audit failure and the crisis of auditing. European Business Organization Law Review, 5(4), 635–643.CrossRefGoogle Scholar
  4. Bagheri, M., & Jahromi, M. (2014). Globalization and extraterritorial application of economic regulation: crisis in international law and balancing interests. European Journal of Law and Economics (forthcoming).Google Scholar
  5. Baker, C. R., Mikol, A., & Quick, R. (2001). Regulation of the statutory auditor in the European Union: A comparative survey of the United Kingdom. France and Germany. European Accounting Review, 10(4), 763–786.CrossRefGoogle Scholar
  6. Ball, R. (2006). International financial reporting standards (IFRS): pros and cons for investors. International Accounting Forum. Accounting and Business Research36(Special Issue), 5–27.Google Scholar
  7. Bebenroth, R., Dietrich, D., & Vollmer, U. (2009). Bank regulation and supervision in bank-dominated financial systems a comparison between Japan and Germany. European Journal of Law and Economics, 27(2), 177–209.CrossRefGoogle Scholar
  8. Bengtsson, E. (2011). Repoliticalization of accounting standard setting—The IASB, the EU and the global financial crisis. Critical Perspectives on Accounting, 22(6), 567–580.CrossRefGoogle Scholar
  9. Blij, I., Hassink, H., Mertens, G., & Quick, R. (1998). Disciplinary practices and auditors in Europe: A comparison between Germany and the Netherlands. European Accounting Review, 7(3), 467–491.CrossRefGoogle Scholar
  10. Boas, T. C. (2007). Conceptualizing continuity and change. Journal of Theoretical Politics, 19(1), 33–54.CrossRefGoogle Scholar
  11. Brown, P. (2011). International financial reporting standards: What are the benefits? Accounting and Business Research, 41(3), 269–285.CrossRefGoogle Scholar
  12. Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business, Finance and Accounting, 41(1–2), 1–52.CrossRefGoogle Scholar
  13. Brown, P., & Tarca, A. (2005). A commentary on issues relating to the enforcement of International Financial Reporting Standards in the EU. European Accounting Review, 14(1), 181–212.CrossRefGoogle Scholar
  14. Burgstahler, D., Hail, L., & Leuz, C. (2006). The importance of reporting incentives: Earnings management in European private and public firms. The Accounting Review, 81(5), 983–1016.CrossRefGoogle Scholar
  15. Bush, P. D. (1987). The theory of institutional change. Journal of Economic Issues, 21(3), 1075–1116.CrossRefGoogle Scholar
  16. Byard, D., Li, Y., & Yu, Y. (2011). The effect of mandatory IFRS adoption on financial analysts’ information environment. Journal of Accounting Research, 49(1), 69–96.CrossRefGoogle Scholar
  17. Coffee, J. (2007). Law and the market: The impact of enforcement. University of Pennsylvania Law Review, 156(2), 229–311.Google Scholar
  18. Crettez, B., Deffains, B., & Musy, O. (2014). Legal convergence and endogenous preferences. International Review of Law and Economics, 39, 20–27.CrossRefGoogle Scholar
  19. Daske, H., Hail, L., Leuz, C., & Verdi, R. S. (2008). Mandatory IFRS reporting around the world: early evidence on the economic consequences. Journal of Accounting Research, 46(5), 1085–1142.Google Scholar
  20. De las Heras, E. (2009). Sistemas de refuerzo y control en la UE: Un estudio comparativo del sistema de enforcement de España y el Reino Unido. Revista de Contabilidad y Tributación, 320, 77–120.Google Scholar
  21. DeFond, M., Hu, X., Hung, M., & Li, S. (2011). The impact of IFRS adoption on foreign mutual fund ownership: The role of comparability. Journal of Accounting and Economics, 51(3), 240–258.CrossRefGoogle Scholar
  22. Florou, A., & Pope, P. (2012). Mandatory IFRS adoption and institutional investment decisions. The Accounting Review, 87(6), 1993–2025.CrossRefGoogle Scholar
  23. Francis, J. R., & Wang, D. (2008). The joint effect of investor protection and Big 4 Audits on earnings quality around the world. Contemporary Accounting Research, 25(1), 157–191.CrossRefGoogle Scholar
  24. Gebhardt, G., & Novotny-Farkas, Z. (2011). Mandatory IFRS adoption and accounting quality of European banks. Journal of Business Finance & Accounting, 38(3–4), 289–333.CrossRefGoogle Scholar
  25. Glaum, M., Schmidt, P., Street, D. L., & Vogel, S. (2013). Compliance with disclosures required by IFRSs across 17 European countries: Company-level and country-level determinants. Accounting and Business Research, 43(3), 163–204.CrossRefGoogle Scholar
  26. Houqe, M. N., Zijl, T., Dunstan, K., & Karim, W. (2012). The effect of IFRS adoption and investor protection on earnings quality around the world. The International Journal of Accounting, 47(3), 333–355.CrossRefGoogle Scholar
  27. Isidro, H., & Raonic, I. (2012). Firm incentives, institutional complexity and the quality of “harmonized” accounting numbers. The International Journal of Accounting, 47(4), 407–436.CrossRefGoogle Scholar
  28. Jeong-Bon, K., & Haina, S. (2012). IFRS reporting, firm-specific information flows, and institutional environments: International evidence. Review of Accounting Studies, 17(3), 474–517.CrossRefGoogle Scholar
  29. Judge, W., Li, S., & Pinsker, R. (2010). National adoption of international accounting standards: An institutional perspective. Corporate Governance: An International Review, 8(3), 161–174.CrossRefGoogle Scholar
  30. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2007). Governance matters VI: Aggregate and individual governance indicators 1996–2006. Washington, DC: The World Bank.Google Scholar
  31. Kingston, C., & Caballero, G. (2009). Comparing theories of institutional change. Journal of Institutional Economics, 5(2), 151–180.CrossRefGoogle Scholar
  32. Klumpes, P. J. M. (2013). Audit fee pricing and internationally-credible GAAP: A property rights analysis. European Journal of Law and Economics, 35(1), 21–39.CrossRefGoogle Scholar
  33. Kolmar, M. (2003). An analysis of institutional change in the European Union. European Journal of Law and Economics, 16(3), 303–326.CrossRefGoogle Scholar
  34. Kvaal, E., & Nobes, C. (2010). International differences in IFRS policy choice. Accounting and Business Research, 40(2), 173–187.CrossRefGoogle Scholar
  35. Kvaal, E., & Nobes, C. (2012). IFRS policy changes and the continuation of national patterns of IFRS practice. European Accounting Review, 21(2), 343–371.CrossRefGoogle Scholar
  36. La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What works in securities laws? Journal of Finance, 61(1), 1–32.CrossRefGoogle Scholar
  37. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131–1150.CrossRefGoogle Scholar
  38. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106(6), 1113–1155.CrossRefGoogle Scholar
  39. Landsman, W. R., Maydew, E. L., & Thornock, J. R. (2012). The information content of annual earnings announcements and mandatory adoption of IFRS. Journal of Accounting and Economics, 53(1–2), 34–54.CrossRefGoogle Scholar
  40. Legrand, P. (1996). European legal systems are not converging. The International and Comparative Law Quarterly, 45(1), 52–81.CrossRefGoogle Scholar
  41. Leuz, C. (2010). Different approaches to corporate reporting regulation: How jurisdictions differ and why? Accounting and Business Research International Accounting Policy Forum, 40(3), 229–256.CrossRefGoogle Scholar
  42. Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505–527.CrossRefGoogle Scholar
  43. Li, S. (2010). Does mandatory adoption of international financial reporting standards in the European Union reduce the cost of equity capital? The Accounting Review, 85(2), 607–636.CrossRefGoogle Scholar
  44. Maijoor, S. J., & Vanstraelen, A. (2006). Earnings management within Europe: The effects of member state audit environment, audit firm quality and international capital markets. Accounting & Business Research, 36(1), 33–52.CrossRefGoogle Scholar
  45. Maijoor, S. J., & Vanstraelen, A. (2012). Research opportunities in auditing in the EU. Revisited. Auditing: A Journal of Practice and Theory, 31(1), 115–126.CrossRefGoogle Scholar
  46. Naor, N. (2006). Reporting on financial derivatives—a law and economics perspective. European Journal of Law and Economics, 21(3), 285–314.CrossRefGoogle Scholar
  47. Nobes, C. (2011). IFRS practices and the persistence of accounting system classification. Abacus, 47(3), 267–283.CrossRefGoogle Scholar
  48. North, D. (1990). Institutions, institutional change, and economic performance. New York: Cambridge University Press.CrossRefGoogle Scholar
  49. Pope, P. F., & McLeay, S. J. (2011). The European IFRS experiment: Objectives, research challenges and some early evidence. Accounting and Business Research, 41(3), 233–266.CrossRefGoogle Scholar
  50. Quick, R., & Warming-Rasmussen, B. (2002). Disciplinary observance and sanctions on German and Danish auditors. International Journal of Auditing, 6(2), 133–153.CrossRefGoogle Scholar
  51. Schmid, A. (1994). Institutional law and economics. European Journal of Law and Economics, 1(1), 33–51.CrossRefGoogle Scholar
  52. Stevenson, J. E. (2002). Auditor independence: A comparative descriptive study of the UK, France and Italy. International Journal of Auditing, 6(2), 155–182.CrossRefGoogle Scholar
  53. Suchman, M. (1995). Managing legitimacy: Strategic and institutional approaches. The Academy of Management Review, 20(3), 571–610.Google Scholar
  54. Van Tenderloo, B., & Vanstraelen, A. (2008). Earnings management and audit quality in Europe: Evidence from the private client segment market. European Accounting Review, 17(3), 447–469.CrossRefGoogle Scholar
  55. Velte, P., & Freidank, C. C. (2014). The link between in- and external rotation of the auditor and the quality of financial accounting and external audit. European Journal of Law and Economics (forthcoming).Google Scholar
  56. Viitanen, J. (2000). Auditors’ professional ethics and factors associated with disciplinary cases against auditors. PhD thesis, Swedish School of Economics and Business Administration, Finland.Google Scholar
  57. Wagner, H. (2012). Is harmonization of legal rules an appropriate target? Lessons from the global financial crisis. European Journal of Law and Economics, 33(3), 541–564.CrossRefGoogle Scholar
  58. Weyland, K. (2008). Toward a new theory of institutional change. World Politics, 60(2), 281–314.CrossRefGoogle Scholar
  59. Wysocki, P. (2011). New institutional accounting and IFRS. Accounting and Business Research, 41(3), 309–328.CrossRefGoogle Scholar
  60. Yip, R., & Young, D. (2012). Does mandatory IFRS adoption improve information comparability? The Accounting Review, 87(5), 1767–1789.CrossRefGoogle Scholar
  61. Zeff, S. (2007). Some obstacles to global financial reporting comparability and convergence at a high level of quality. The British Accounting Review, 39(4), 290–302.CrossRefGoogle Scholar

European Union Documents:

  1. Commission Communication: Statutory audit in the European Union, the way forward. COM (1998) 1112. Brussels: Commission of the European Communities. Google Scholar
  2. Commission Communication: Reinforcing the Statutory audit in the European Union. COM (2003) 286. Brussels: Commission of the European Communities. Google Scholar
  3. Commission Recommendation 2001/256/EC of 15 November 2000 on quality assurance for the statutory audit in the European Union: minimum requirements. Brussels: Official Journal of the European Communities L091. Google Scholar
  4. Committee of European Securities Regulators (CESR) (2003). Standard No. 1 on Financial Information: Enforcement of Standards on Financial Information in Europe, CESR/03–073. Available at http://www.europefesco.org/v2/default.asp.
  5. Directive 84/253/EEC of 10 April 1984 based on Article 54 (3) (g) of the Treaty on the approval of persons responsible for carrying out the statutory audits of accounting documents. Brussels: Official Journal of the European Communities L126. Google Scholar
  6. Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC. Brussels: Official Journal of the European Union L157/87.Google Scholar
  7. Fédération dés Experts Comptables Européens (FEE) (2001). Enforcement mechanism in Europe - a preliminary investigation of oversight systems. Available at www.fee.be/publications/main.htm.
  8. Fédération dés Experts Comptables Européens (FEE) (2002). The role of accounting and auditing in Europe. Available at http://www.fee.be/publications/main.htm. Accessed 08 march 2013.
  9. Fédération dés Experts Comptables Européens (FEE) (2003). Discussion Paper European Co-ordination of Public Oversight. Available at http://www.fee.be/publications/main.htm. Accessed 08 march 2013.
  10. Regulation (EC) No 1606/2002/EC of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards. Brussels: Official Journal of the European Communities L243/241. Google Scholar

Country-specific documents (All accessed march-may 2013 unless otherwise indicated):

  1. TILA (1927). Minutes of the meeting of the Auditing Board of the Central Chamber of Commerce (A3BC) held on 20/10/1927.Google Scholar
  2. TILA (2012). Auditing Board of the Central Chamber of Commerce Annual Report. Available at: http://tilintarkastuslautakunta.fi/files/2012/08/Toimintakertomus_2011_koko-6.pdf.
  3. French Financial Securities Act 2003-706. Available at: http://www.amf-france.org/affiche.asp?id=4746.
  4. H3C (2004). Annual Report. Available at: http://www.h3c.org/rapport_annuels.htm.
  5. H3C (2009). Décision relative aux modalités de la délégation de l’exercice des contrôles périodiques auxquels sont soumis les commissaires aux comptes. Available at: http://www.h3c.org/fiches/avis040809.htm.
  6. H3C (2011). Annual Report. Available at: http://www.h3c.org/rapport_annuels.htm.
  7. APAK (2010). Report of the Auditor Oversight Commission on the results of the inspections according t 62b WPO for the years 2007–2010. Available at: http://www.apak-aoc.de/english/pdf/APAK-AOC–News_Report_Inspections_2007-2010.pdf.
  8. German Act on the Advancement of Professional Oversight of Auditors of Financial Statements in the Public Accountant Act (Auditor Oversight Act - APAG) (WPO) 2004 (FLJ I p. 3846). Available at: http://www.wpk.de/pdf/WPO_English.pdf.
  9. ICAC (1993). Boletín Oficial del Instituto de Contabilidad y Auditoria de Cuentas 10.Google Scholar
  10. ICAC (2011). Activity Report. Madrid. Available at: http://www.icac.meh.es/Temp/20130520154037.PDF.
  11. Auditing Act 19/1988 of 12 July. Available at: http://www.boe.es/boe/dias/1988/07/15/pdfs/A21874-21879.pdf.
  12. British Companies Act 2004 (Audit, Investigations and Community Enterprise). Available at: http://www.legislation.gov.uk/ukpga/2004/27/contents.
  13. Financial Reporting Council (FRC) (2012). Annual Report. Available at: http://www.frc.org.uk/About-the-FRC/Plans-and-budget/Annual-Reports-and-Plans.aspx.

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Beatriz García Osma
    • 1
  • Ana Gisbert
    • 1
    • 2
  • Elena de las Heras Cristóbal
    • 1
  1. 1.Departamento de ContabilidadUniversidad Autónoma de MadridMadridSpain
  2. 2.Departamento de Contabilidade e AtuáriaUniversidade de São PauloSão PauloBrazil

Personalised recommendations