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The role of the Auditors in the UK Corporate Governance

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par N'semy Aubin Mabanza
University of Wales, Cardiff Law School - LLM (Master of laws) in Commercial Law 2004
  

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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

172

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,

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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

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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

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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

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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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