Skip to main content
Log in

Public oversight systems for statutory auditors in the European Union

  • Published:
European Journal of Law and Economics Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. 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.”

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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).

  9. 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.

  10. 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.

  11. Additional details on financing sources can be provided by the authors under request.

  12. Additional details on quality controls developed in Germany, Finland and the UK can be provided by the authors under request.

  13. 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.

  14. 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.

References

  • 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.

    Article  Google Scholar 

  • Ahmed, A. S., Neel, M., & Wang, D. (2013). Does mandatory adoption of IFRS improve accounting quality? Contemporary Accounting Research, 30(4), 1344–1372.

    Article  Google Scholar 

  • Arruñada, B. (2004). Audit failure and the crisis of auditing. European Business Organization Law Review, 5(4), 635–643.

    Article  Google Scholar 

  • 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).

  • 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.

    Article  Google Scholar 

  • Ball, R. (2006). International financial reporting standards (IFRS): pros and cons for investors. International Accounting Forum. Accounting and Business Research36(Special Issue), 5–27.

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Boas, T. C. (2007). Conceptualizing continuity and change. Journal of Theoretical Politics, 19(1), 33–54.

    Article  Google Scholar 

  • Brown, P. (2011). International financial reporting standards: What are the benefits? Accounting and Business Research, 41(3), 269–285.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Bush, P. D. (1987). The theory of institutional change. Journal of Economic Issues, 21(3), 1075–1116.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Coffee, J. (2007). Law and the market: The impact of enforcement. University of Pennsylvania Law Review, 156(2), 229–311.

    Google Scholar 

  • Crettez, B., Deffains, B., & Musy, O. (2014). Legal convergence and endogenous preferences. International Review of Law and Economics, 39, 20–27.

    Article  Google Scholar 

  • 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 

  • 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 

  • 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.

    Article  Google Scholar 

  • Florou, A., & Pope, P. (2012). Mandatory IFRS adoption and institutional investment decisions. The Accounting Review, 87(6), 1993–2025.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Kaufmann, D., Kraay, A., & Mastruzzi, M. (2007). Governance matters VI: Aggregate and individual governance indicators 1996–2006. Washington, DC: The World Bank.

    Google Scholar 

  • Kingston, C., & Caballero, G. (2009). Comparing theories of institutional change. Journal of Institutional Economics, 5(2), 151–180.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Kolmar, M. (2003). An analysis of institutional change in the European Union. European Journal of Law and Economics, 16(3), 303–326.

    Article  Google Scholar 

  • Kvaal, E., & Nobes, C. (2010). International differences in IFRS policy choice. Accounting and Business Research, 40(2), 173–187.

    Article  Google Scholar 

  • Kvaal, E., & Nobes, C. (2012). IFRS policy changes and the continuation of national patterns of IFRS practice. European Accounting Review, 21(2), 343–371.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What works in securities laws? Journal of Finance, 61(1), 1–32.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131–1150.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106(6), 1113–1155.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Legrand, P. (1996). European legal systems are not converging. The International and Comparative Law Quarterly, 45(1), 52–81.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505–527.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Naor, N. (2006). Reporting on financial derivatives—a law and economics perspective. European Journal of Law and Economics, 21(3), 285–314.

    Article  Google Scholar 

  • Nobes, C. (2011). IFRS practices and the persistence of accounting system classification. Abacus, 47(3), 267–283.

    Article  Google Scholar 

  • North, D. (1990). Institutions, institutional change, and economic performance. New York: Cambridge University Press.

    Book  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Quick, R., & Warming-Rasmussen, B. (2002). Disciplinary observance and sanctions on German and Danish auditors. International Journal of Auditing, 6(2), 133–153.

    Article  Google Scholar 

  • Schmid, A. (1994). Institutional law and economics. European Journal of Law and Economics, 1(1), 33–51.

    Article  Google Scholar 

  • Stevenson, J. E. (2002). Auditor independence: A comparative descriptive study of the UK, France and Italy. International Journal of Auditing, 6(2), 155–182.

    Article  Google Scholar 

  • Suchman, M. (1995). Managing legitimacy: Strategic and institutional approaches. The Academy of Management Review, 20(3), 571–610.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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).

  • Viitanen, J. (2000). Auditors’ professional ethics and factors associated with disciplinary cases against auditors. PhD thesis, Swedish School of Economics and Business Administration, Finland.

  • 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.

    Article  Google Scholar 

  • Weyland, K. (2008). Toward a new theory of institutional change. World Politics, 60(2), 281–314.

    Article  Google Scholar 

  • Wysocki, P. (2011). New institutional accounting and IFRS. Accounting and Business Research, 41(3), 309–328.

    Article  Google Scholar 

  • Yip, R., & Young, D. (2012). Does mandatory IFRS adoption improve information comparability? The Accounting Review, 87(5), 1767–1789.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

European Union Documents:

  • Commission Communication: Statutory audit in the European Union, the way forward. COM (1998) 1112. Brussels: Commission of the European Communities.

  • Commission Communication: Reinforcing the Statutory audit in the European Union. COM (2003) 286. Brussels: Commission of the European Communities.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

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

Download references

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.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Elena de las Heras Cristóbal.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

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

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10657-014-9460-1

Keywords

JEL Classification

Navigation