Public oversight systems for statutory auditors in the European Union

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.

External investigations and disciplinary sanctions against auditors: the impact on audit quality

“…The self-regulation framework was replaced in the USA by the independent PCAOB, created under Section 104 of SOX, which conducts inspections of registered public accounting firms that provide audits for publicly traded companies. García-Osma et al (2014) have classified the quality assurance systems of the Member States into three categories: a professionally self-regulated system with peerreview (France, Ireland, and the UK), a governmental public oversight system (Finland and Sweden), and a mixed system (Belgium, Germany, and Spain). Consistent with the international trend of harmonizing the audit legislation, the Directive 2006/43/EC also backed a more independent supervisory framework.…”

“…All in all, the European legislation requires that all statutory auditors and auditing firms should be submitted to regular inspections conducted by independent bodies and that Member States should implement effective investigation and disciplinary systems that would help to detect and prevent audit malpractice. Despite this regulatory endeavor to harmonize supervisory regimes, the implementation of the public oversight boards across European countries is not homogeneous, and significant differences persist (García-Osma et al 2014).…”

“…7 Nevertheless, it is remarkable that Spain exhibits a mixed supervisory system (García-Osma et al 2014), because the ICAC has both the ultimate responsibility for the quality assurance of the statutory audits and for the provision of effective investigation and disciplinary systems (art. Regarding the sanctioning scheme, the Financial Act 44/2002 11 and the Audit Act 1/2011 broadened the original two categories of infractions (minor and serious) to include a third-very serious infractions-complemented by the severest penalties.…”

“…In Europe, the quality assurance systems differed among the Member States (García-Osma et al 2014). With the aim of harmonizing statutory audit requirements, and in the same vein as SOX 2002, Directive 2006/43/EC compelled all Member States to implement a public independent board entrusted with ultimate responsibility for overseeing statutory audits (art.…”

Foreign ownership and financial reporting quality in private subsidiaries

“…Additionally, despite being a developed country, Spain has relatively low quality institutions (e.g. : Christensen, Hail, & Leuz, 2013;García-Osma, Gisbert, & de las Heras, 2016;La Porta, López-de-Silanes, Shleifer, & Vishny, 2000); and earnings management practices are more prevalent than in other developed countries (e.g. : Leuz, Nanda, & Wysocki, 2003).…”