In view of recent developments (globalization, financial scandals, etc.), the European Commission considered it opportune to modernize the Eighth Directive, and to make a more concise and broader European legal framework with clear principles on statutory audits of accounts, professional ethics, independence and objectivity, auditing standards and reporting, quality assurance, investigations and sanctions, etc.

The most important items in the new Eighth Directive, as approved by the European Parliament 11 October 2005, are:

• Statutory audits must be carried out in accordance with international auditing standards.

• The group auditor bears full responsibility.

• Special provisions for the statutory audit of public interest entities:

• Audit Committee requirement:
The requirement to set up an audit committee (Article 39) will strengthen the monitoring of the financial reporting process and the statutory audit, and help to prevent any possible undue influence of the executive management on the financial reporting of the audited entity. To enhance the quality of financial reporting, the statutory auditor or audit firm must communicate to the audit committee on key matters of governance arising from the audit, in particular on any material weaknesses observed in internal controls relating to the financial reporting process.

• Annual transparency report:
Statutory auditors or audit firms that carry out statutory audits of public interest entities must publish on their Web sites, within three months of each financial year, an annual transparency report that includes, among other information, a description of the governance structure of the audit firm, a description of its internal quality control system, and a statement by its administrative or management body on the effectiveness of its functioning (Art. 38).

• Mandatory audit partner rotation (Note: not audit firm rotation):
The key audit partner is to rotate within a maximum period of seven years after the date of appointment. The audit partner can be allowed to participate in the audit of the audited entity again after a minimum period of two years.

• A cooling-off period of two years:
The statutory auditor or the key audit partner who carries out the statutory audit on behalf of an audit firm is not allowed to take up a key management position in the audited entity before two years have elapsed from their resignation.

The full text of the Eight Directive can be found at the Web site of the European Union (http://www.europa.eu.int/comm) under the “Internal Markets” caption by selecting “Financial Reporting” followed by “Auditing” and “Directives and other official Documents”.