Chapter 3 Harmonisation of the European Company
Law.
Under the European Commission, there are several ways of
in reforming company
laws. As far as the Member States of the EU
are concerned, accounting
harmonisation is an integral part of the development of
the Union into a single
«Economic Space». Traditionally, the fundamental EU
Directive relating to financial
reporting is the Fourth Company Law Directive of July
25,1978. This relates to the
accounts of limited companies. It was followed by the
Seventh Company Law
Directive of June 13,1983, which extends the principles of
the Fourth Directive to
the preparation of consolidated ( group ) accounts.
The fourth Directive seeks to provide a minimum of
coordination of national
provisions for the content and presentation of
annual financial accounts and
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reports, of the valuation methods used within them, and of
the rules for publication.
In addition, the Seventh Directive applied and broadly
extended the provisions of
the Fourth Directive to the preparation and
publication of consolidated accounts
(Article 1 of Table 6). On the other hand , the
harmonisation of the fundamental
rules governing accounting and financial
information shows that the EU
has made no further progress. The above Directives
have brought about a real
173
improvement in the quality of financial information.
172 . Boyle & Birds 's company law'.
173 . http://europa.eu.int/scadplus/leg/en/lvb/126020.htm
However, large European companies wishing to raise
capital on international
markets are obliged to prepare a second set of accounts,
which is a lengthy and
174
costly procedure and may give rise to confusion. In the
last few decades, a number
of company law directives have been brought into force
by the decision of the
Council of Ministers and were subsequently implement by
the UK government;
for example, the Seventh and the Eighth Directives
deal respectively with
consolidated accounts prepared and published by companies
with subsidiaries and
175
with the independence and professional
qualification and control of auditors.
The Eighth EU Council Directive addresses the
harmonisation of the conditions
for the approval of auditors: professional
qualifications, personal integrity and
176
independence. The lack of precision of the
Directive, particularly where the
independence is concerned, has led to inevitable
differences in national legislation
177
and, in some cases, to an absence of legislation backing.
The issues are important in
178
so far as they affect the smooth operation of the
single market:
* audited financial statements of a company established in
one Member State are
used by third parties in other Members States;
* significant differences in national legislation prevent
the establishment of
a genuine European market in auditing services.
However, the absence of a common definition of the
statutory audit in the EU
179
creates a damaging expectation gap. Moreover, numerous
studies have shown that
there are considerable differences between what the public
expects from an audit and
what the auditing profession believes that the auditor should
do; a common approach
174. http :// europa.eu.int /scadplus/leg/en/lvb/126020.htm
175. L .Evans and C . Nobes , 'Harmonisation relating to
Auditor Independence : the Eight Directive , The UK and Germany».
176.Green Paper on the statutory auditor.
177.ibid
178.ibid
179 . ibid
to the statutory audit, taking account of the latest
developments at international level,
seems desirable: if the audit is to add confidence to
published financial statements,
180
users need to know what the audit certificate means
in terms of guarantees.
Traditionally in the UK before the Directive s.389 of CA1985
excluded a person from
being an auditor if he was an «officer or
servant of the company», or a partner or
employee of an officer or servant of the company, or a
corporate entity. Moreover,
this prohibition is extended to the company's
subsidiaries, holding company and
fellow subsidiaries.
The UK implemented the Eighth Directive through Part
II of the Companies
Act 1989; this resulted in few practical changes, and its
main impact appears to have
been that more rules were laid down in legislation, instead
of, as previously, being
181
left to the profession to regulate. The 1989 Act (section 27)
specifies cases in which
a person would be ineligible to act as auditor, thus
implementing Article 24 of the
182
Directive, which gives scope to define lack of
independence to the Member States.
Included here is ineligibility if the auditor was also
ineligible to audit an associated
undertaking; further, the Act requires auditors to be
»fit and proper persons». This
relates to Article 3 of the Directive, which requires
auditors to be «persons of good
183
repute...» As we can see, the EU legislation
on company accounting was
adopted in the 1970s and needs to be updated if is to meet
the needs of today's
investors.
180.L. Evans and C. Nobes ,'Harmonisation relating to auditor
Independence : the Eighth Directive , the UK and Germany `.
181.ibid
182.ibid
183.ibid
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