EU plans tougher auditing rules

The Parmalat scandal has raised concerns over corporate governance

The European Commission is planning the introduction of tougher new auditing laws to tackle corporate fraud.

Following the Parmalat scandal in Italy, and Enron and Worldcom in the US, the Commission has proposed the end of self regulation for auditors.

Instead independent oversight bodies will be set up to police accountancy firms in each EU member state.

The proposals, which mirror those put in place in the US, will also insist overseas firms with EU bases comply.

In addition to the new oversite bodies, the Commission plans to increase co-operation among EU supervisors, introduce compulsory rotation of auditors, and create audit committees for all stock market-listed firms.

'Ethical dose'

"Auditors are our major line of defence against crooks who want to cook the books," said Frits Bolkestein, European Internal Market Commissioner.

"No-one is naive enough to think any directive will stop accounting fraud at a stroke - you cannot abolish crime - but what we are proposing would inject more rigour and a stronger dose of ethics into the audit process."

The proposal needs the backing of EU states and the European Parliament to become law, and this is expected by mid-2005.

However, critics say the planned reform does not go far enough.

They point to the fact that Italy, home to Parmalat, already has most of the proposed measures in place.

Others say the call for auditor rotation is also unlikely to break the dominance of the major four accountancy firms.

This is because EU states will have the option of insisting that companies simply switch to another auditor from the same accountants every five years, rather than a more radical transfer to another accountancy business.