Annual Conference of the Lithuanian Chamber of Auditors Palanga, 8 June 2007 Olivier Boutellis-Taft, CEO

About FEE

The European Federation of Accountants Standing for the accountancy profession in Europe Grouping 44 Member Bodies from 32 countries Representing a combined membership of over 500.000 accountants 45% in public practice 55% in industry, commerce, government and education European Federation of Accountants - Fédération des Experts Comptables Européens

FEE: Working for its 44 Members cvc European Federation of Accountants - Fédération des Experts Comptables Européens

FEE Objectives Advancing the interests of the European Profession – recognising the public interest Fostering a harmonised and liberalised regulation and practice of accountancy and audit in Europe Promoting co-operation among Members Identifying public policy developments and influencing outcome Making representation to the EU institutions and to international organisations European Federation of Accountants - Fédération des Experts Comptables Européens

FEE Governance General Assembly All Member Bodies Constitutional matters Council 1 Representative / Country (+ technical advisor) Strategic & political decisions Elects Appoints Executive President + Deputy Vice-Presidents (incl. Treasurer) CEO Implementation of Council’s decisions Prepares positions Appoints Working Parties Reports European Federation of Accountants - Fédération des Experts Comptables Européens

FEE Membership Ordinary Members Take part in the work Participate to meetings and decision making Participate to all Working Parties Agree to abide by the Constitution Fund the Federation Correspondent Members Receive information Attend meetings and are informed of decisions Are invited by Council to certain Working Parties Agree to abide by the Constitution Fund the Federation European Federation of Accountants - Fédération des Experts Comptables Européens

Key Principles of Quality Assurance: the Statutory Audit Directive

Audit Quality? “the accuracy of the information reported on by auditors” (Titman and Trueman, 1986; Beatty, 1989; Davidson and Neu, 1993) “the market-assessed probability that the financial statements contain material errors and that the auditor will both discover and report them” (DeAngelo, 198I) “the probability that an auditor will not issue an unqualified report for statements containing material errors” (Lee et al., 1999) “the degree to which the audit conforms to applicable auditing standards” (Krishnan and Schauer, 2001; Tie, 1999; McConnell and Banks, 1998; Aldhizer et al., 1995; Cook, 1987) European Federation of Accountants - Fédération des Experts Comptables Européens

FEE’s Vision of Audit Quality Audit quality is primarily about delivering an appropriate professional opinion on the financial statements of a company Drivers of audit quality include: Leadership, including tone at the top and audit firm strategy People of competence, quality, objectivity and integrity Working practices and quality control procedures Internal monitoring by audit firms of leadership, people, client relationships and working practices External monitoring under public oversight to encourage and assist audit firms to improve audit quality European Federation of Accountants - Fédération des Experts Comptables Européens

Timeline 90s: Firms’ internal initiatives 28 October 1996: Green Paper on the Role, Position or Responsibilities of Statutory Auditors in the EU 8 May 1998: EU communication ‘Statutory Audit in the European Union – The Way Forward’ – Committee on Auditing 15 November 2000: EU Recommendation ‘Quality Assurance for statutory audit’ 16 May 2002: EU recommendation ‘Statutory Auditors’ Independence in the EU’ 17 May 2006: Statutory Audit Directive – integrates the principles of the 2000 EU Recommendation on Quality Assurance and goes beyond 2007: Possible review of 2000 EU Recommendation on Quality Assurance European Federation of Accountants - Fédération des Experts Comptables Européens

Quality Assurance Systems Must be independent from the reviewed statutory auditors and audit firms Subject to public oversight Have adequate resources Secured funding, free from any undue influence by auditors European Federation of Accountants - Fédération des Experts Comptables Européens

Objectives of QA Reviews Carry out adequate testing of selected audit files to assess: internal quality control of the firm compliance with auditing standards compliance with independence requirements quantity and quality of resources spent audit fees European Federation of Accountants - Fédération des Experts Comptables Européens

Quality Assurance Reviewers Must have appropriate professional education and relevant experience in statutory audit and financial reporting Specific training on quality assurance reviews Selected through an objective procedure No conflicts of interest with the statutory auditor or audit firm under review European Federation of Accountants - Fédération des Experts Comptables Européens

Quality Assurance Reporting Report on QA Reviews QA reviews at least every 6 years – 3 years for PIEs must contain the main conclusions of the review Report on QA Systems Annual Report on the overall results of the QA system Disclosure of findings on individual firms not required European Federation of Accountants - Fédération des Experts Comptables Européens

Follow up of QA Reviews Recommendations of quality reviews shall be followed up by the statutory auditor or audit firm within a reasonable period If not: Investigations Possibility of disciplinary sanctions, including withdrawal of approval European Federation of Accountants - Fédération des Experts Comptables Européens

FEE Report ‘Quality Assurance Arrangements Across Europe’

Quality Assurance Arrangements Across Europe FEE Report studying QA systems and public oversight arrangements of 25 EU Member States plus Bulgaria, Romania, Norway and Switzerland, as of 1 July 2006 Prepared by European experts working in the FEE Subgroup on Quality Assurance Approved by the FEE governing bodies in December 2006 after 14 months of work European Federation of Accountants - Fédération des Experts Comptables Européens

Key Findings 11 out of 25 EU Member States are yet to create a system of public oversight with ultimate responsibility for quality assurance systems Significant number of countries are still considering the impact of the Statutory Audit Directive All countries surveyed except one, have a system of quality assurance covering all audit firms or statutory auditors Quality assurance reviews should cover either audit firms or statutory auditors European Federation of Accountants - Fédération des Experts Comptables Européens

Monitoring / Monitored peer review Both systems are compliant with the Directive despite their differences Monitoring Need to ensure proper experience and competencies of reviewers Monitored peer review Need to ensure independence of reviewers In a number of countries, involvement of practitioners is inevitable: Limited human resources (knowledgeable non-practitioners) Limited financial resources (separate system for PIEs) European Federation of Accountants - Fédération des Experts Comptables Européens

Public Oversight System FEE encourages public oversight systems with the Directive as their basis Different models are possible Wide range of stakeholders involved: Competent and knowledgeable members in auditing business, regulators, investors, government officials, minority of professionals etc… Ultimate responsibility allows for significant delegation to professional European Federation of Accountants - Fédération des Experts Comptables Européens

Cooperation within EU Mutual recognition is required for application of home-country principle in compliance with the Directive: Cooperation and coordination within EU is essential, currently within EGAOB Creation of dedicated legal body to be effective and to build confidence is needed, structured in the public interest and involving all stakeholders Avoid double quality assurance reviews and inspections Stimulate agreement of mutual recognition European Federation of Accountants - Fédération des Experts Comptables Européens

Conclusions Audit regulation should contribute to enhancing audit quality in the public interest, but is not the sole driver The Statutory Audit Directive – once implemented by all Member States – will provide an important improvement of the framework European Federation of Accountants - Fédération des Experts Comptables Européens

Conclusions FEE promotes the development of Audit Quality Assurance Systems in EU Member States FEE supports Public Oversight Bodies at EU Member State level which, while having the ultimate responsibility, allow for significant delegation to the profession FEE contributes to the ongoing debate on quality assurance, the implementation of the Statutory Audit Directive and the sustained efforts of the Profession in this field European Federation of Accountants - Fédération des Experts Comptables Européens

Visit us at FEE Avenue D’Auderghem 22-28 Tel: +32 2 285 40 85 1040 Brussels www.fee.be Fax: +32 2 231 11 12 Belgium Email: secretariat@fee.be European Federation of Accountants - Fédération des Experts Comptables Européens