Bolkestein backs “Chinese walls” to avoid Enron chaos

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Series Details Vol.7, No.47, 20.12.01, p17
Publication Date 20/12/2001
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Date: 20/12/01

By Peter Chapman

FINANCIAL services chief Frits Bolkestein is set to unveil new reforms in the way companies are audited in a bid to prevent unexpected collapses in the Union similar to the US Enron debacle.

The new rules on auditor independence would ensure there are "Chinese walls" between the accountants who carry out statutory audits and staff from the same firms who often offer lucrative consulting services to the audit customer.

But unlike in the US - where regulators have thick books detailing rules governing the behaviour of auditors - the EU approach will put most of the responsibility of applying the new system on auditors.

Under the Bolkestein blueprint - drawn up in collaboration with national experts - audit firms would have to consider key ethical "principles" before accepting a job.

The move is expected to eliminate the theoretical risk that firms winning consultancy work worth millions of euro may be willing to overlook anomalies in the companies' audits in order to keep the contract.

At the same time it would force firms to ensure the independence of audit managers who may hold financial interests such as shares in the companies they are checking.

But unlike the US there would be no hard and fast rules stating, for example, that auditors must live more than 500 miles away from managers in the audited company - even if they are members of the same family. Firms would have to consider "the expectations of those directly affected by their work, the public interest, threats to independence that may arise in practice and the safeguards available to eliminate those threats or reduce them to an acceptable level".

This framework would be bolstered by extra requirements providing guidance on the application of these principles in specific cases.

The move follows the launch in 2000 of another rulebook setting minimum quality standards for the three million limited-liability firms that are audited every year. These would ensure that all statutory audits are covered by equivalent standards and that auditors respect ethical rules - including independence.

Commission experts say the auditor independence policy will protect shareholders and workers by making sure firms are not sitting on any nasty secrets affecting their financial well-being.

But they admitted there could be no guarantee that independent auditors would necessarily do better audits than "biased ones".

"What we are trying to do is further improve and harmonise audit quality," said one. "Auditor quality has more to do with our recommendation last year. But independence plays a key role in quality. In public the distinctions are often very blurred."

The role of the auditors in the collapse of US power giant Enron intensified last week when the chief executive of Andersen, the company's long-time auditor, admitted that the firm had erred in its approach to Enron accounts.

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