General comments

The Danish government welcomes the initiative by the European Com-mission to review how the audit function could be enhanced in order tocontribute to increased financial and economic stability.The Danish government agrees with the importance and societal role ofthe audit function and considers, not at least in times of financial instabil-ity, the audit function crucial. In this regard, the Danish audit legislationspecifies that the statutory auditor shall be the representative of the publicduring the performance of the audit.The Danish government therefore agrees that the audit function plays animportant role to the confidence in financial statements and contributes tofinancial and economic stability.The Directive on Statutory Audit has just recently been implemented inMember State legislation and the Directive already deals with many ofthe issues raised in the Green Paper. The effects of the measures in theDirective on the audit function have therefore not yet been assessed.The Danish government has focus on better regulation and administrativeburdens and is concerned whether full impact of the Directive of Statu-tory Audit is known.New administrative burdens on European companies may impede thegrowth of the companies and new measures as a result of the green papershould be carefully considered.The Danish government therefore agrees with the European Commissionto the need for differentiated and calibrated approach, which is adaptedand proportionate to the size and complexity of the audited company aswell as to the auditor.

Specific comments

Role of the AuditorThe Danish government welcomes the initiative of the European Com-mission to review improvements of the auditors’ communication to auditclients and other stakeholders.Recognizing the “expectation gab” the Danish government finds that ex-tension of the audit report should be considered very carefully. It is im-portant that it cannot be questioned whether an audit report is withoutqualifications or it is a qualified audit report.The Danish government stresses the importance of the division of respon-sibilities. The responsibility of the auditors is to report on historical fi-nancial statements, which include going concern considerations in a lim-ited future period. The responsibility of the management is to prepare thefinancial statement, including information about the anticipated futureprospects of the company. An extension of the auditor’s mandate shouldnot comprise the division of responsibilities between the auditor and themanagement of the audited company.The Danish government supports discussions on how to improve thecommunication to management of the audited company. The Danish leg-islation e.g. requires the auditor to report to the management during theaudit process (Auditors’ records). Amongst other things the auditor mustreport on significant issues regarding the audit, including, in particular,material uncertainties, errors, misstatements or omissions in the com-pany’s bookkeeping, accounting or internal control. The auditors’ recordsshall also be kept for use by the audit committee and for the use by regu-latory authorities.In Denmark generally accepted auditing practices requires the audit tocomply with International Standards on Auditing (ISA). The Danish gov-ernment finds that ISA promote audit quality and is favourable to the im-plementation of the ISA into Community Law. However, recognizing thedogma that “an audit is an audit” other auditor services to the SME seg-ment should be taken into consideration. Other auditor services that ad-dresses the less complex structures of SMEs and meet the needs of thosecompanies would be in line with the desire to reduce the administrativeburdens.Independence of the auditor is fundamental and the exercise of profes-sional scepticism is essential to the confidence in statutory audit. TheDanish government will therefore have an open and positive approach todiscussions on initiatives to reinforce the independence of auditors audit-ing Public Interest Entities.

The Danish government agrees that the proportion of fees an audit firmreceives from a single audit client compared to the total audit revenues ofthe audit firm may compromise the auditors’ independence. According tothe Danish audit legislation an audit firm must therefore not have a shareof more than 20 percent of its turnover with the same customer in each offive consecutive financial years.The Danish government is positive as to examine a limitation on the pro-portion of audit fees from a single audit client.The Danish government is, however, very sceptical to a system where theappointment, remuneration and duration of the engagement are the re-sponsibility of a third party, e.g. a regulator, rather than the company it-self. The system violates the shareholders’ right to appoint the auditorand conflicts with Article 37 of the Directive on Statutory Audit. Sec-ondly, a system where a regulator appoints the auditor would clearlycompromise the independence of that regulator and possibly the inde-pendence of the auditor. And thirdly, such a system will contribute to un-certainty about the division of liability in case of errors or other irregu-larities.The Danish government welcomes a discussion on the market concentra-tion and the market structure. The Danish government supports that theEuropean Commission initiate a work with Member States, audit firms,stakeholders and international fora to discuss a contingency plan in caseof the demise of a so called systemic audit firm. But as stated below theDanish government does not see joint audits to play a role in this plan.As regard the market structure it should be noted that a major barrier togrowth of medium sized audit firms is the missing representation on mar-kets where the audit firm is not representedThe Danish government has concerns in regards to mandatory rotation ofaudit firms. An Italian study1of mandatory rotation of audit firms indi-cates that mandatory rotation does not have any effect but rather increasesthe cost of audit and reduces the audit quality. The Danish governmenttherefore finds the current requirement of mandatory auditor rotationadequate.Until 2005 listed companies in Denmark was required to appoint two dif-ferent auditors/audit firms. The Danish experience is that the audit work

was in fact only carried out by one of the auditors although both auditorshad the same responsibility for the audit. Neither did the system contrib-ute to audit quality. The system of joint audits was therefore revoked. TheDanish government is not in favour of reintroducing joint audits and donot share the Commissions analysis that it has positive effects on themarket structure.The Danish government finds the idea of the creation “of a Europeanpassport” interesting and supports a further examination of the subject.An examination should take into account the provision in the Directive onStatutory Audit, which state that auditors should be approved by theMember State requiring the statutory audit to secure the proper knowl-edge of e.g. tax law, company law, etc., which are not harmonised on EUlevel. The examination should take into account the Directive on recogni-tion of professional qualifications that already allows that service provid-ers to provide cross-boarder services except statutory audit.Limitation of the auditor liability has not been specifically addressed inthe green paper. The Danish government, however, finds it appropriate tocomment on this issue. The Danish government does not support a limita-tion of the auditor’s liability. The Danish law of compensation and in-demnification contains a reduction provision, which can reduce unrea-sonable damage claims.The Danish government therefore holds the position that the professionhas the possibility to establish arrangements where the audit firms, in-cluding firms participating in a network, do not have joint and several re-sponsibility to damage claims.Supervision and international co-operationThe Danish government is positive to awards developing and creating anefficient and effective structure of the public oversight systems of theMember States. In this regard, the Danish government has noted that de-velopments have already taken place within the EGAOB and the sub-groups of EGAOB and it would be natural to build on these develop-ments. The financing should be taken into account in the EuropeanCommission’s considerations.International co-operation on the audit field, including on audit firm over-sight, is important and the Danish government supports developing theinternational co-operation further. This must ensure an efficient and equaldialogue between competent authorities and should secure the audit firmsfrom unnecessary burdens when subject to inspections from more thanone oversight authority.Small and Medium Sized Enterprises and Practitioners

As stated above, the Danish government is favourable to examine auditorservices to SMEs that addresses the less complex structures of SMEs andmeet the needs of those companies.In general, the Danish government overall stresses the importance offighting “red tape” and its impact on for example SMEs. Before any ini-tiatives are taken based on the ideas of the green paper an impact assess-ment must be carried out to make sure that new administrative burdens donot impede the growth of the companies. As stated in the general com-ments any initiative should be proportionate to the size and complexity ofthe audited company as well as to the size and complexity of the auditor.Finally, the Danish government would like to stress concerns if initiativesare taken before the full impact of the Directive on statutory Audit isknown. New initiatives risk being a burden to the audit firms and the au-dit clients and without the intended effects on the issues pursued.

Green Paper – Audit Policy: Lessons from the Crisis

General comments

Specific comments