The responsibilities of management and the statutory auditor
on the introduction of the euro


Noël Hepworth



Bankers need to be fully aware of the responsibilities of both the senior management ( directors ) and the auditors of companies so that they can make proper judgements about the preparations being made for the changeover to the euro. The central issue is that of ‘going concern’. If the directors have not made the necessary preparation so that the company can trade in the euro from 1.1.2002 where that company is based in and operates within the eurozone then it will be most unlikely that the company will be able to remain a ‘going concern’ For companies based in countries outside the eurozone the impact of the changeover will not be so severe. Even so, whether a company is based in the eurozone or not the management ought to review the extent to which the change to the euro will impact on the business.

The statutory auditor does not substitute for the judgement of the manager but he has a responsibility to ensure that the accounts of the company give a true and fair view of the state of the company’s affairs. These accounts, unless specifically stated to the contrary, will be based on the assumption that the company will remain a going concern. If the auditor believes that not to be the case he is required to qualify the accounts.

Persons who are interested in the financial statements of a company including shareholders, bankers and analysts, regulators and others defined in national legislation to whom companies are expected to report need to be made aware of the likely impact on the business and the preparations that the management is making for the changeover. The management responsibility for reporting on the company’s viability under the going concern assumption, includes a responsibility for ensuring that the financial statements properly reflect that impact and those preparations. The statutory auditor, in making an independent assessment of the financial statements, therefore needs to be aware of the impact of the euro on the business, as do those responsible for regulating its activities, for lending to or investing in the business as well as those who are entitled to receive information about the business under national legislation.


The responsibility of the senior managers ( the directors ) within a company is to identify the impact of the introduction of the euro on the company and to make adequate preparations for managing the company from the introduction of the euro on 1 January 1999, through the transitional period and conversion to the euro, and beyond. The time-scale for action will vary according to the circumstances of each company.

Examples of some of the risks senior management need to be concerned about with the introduction of the euro are set out below in the form of a checklist :

Adverse Impact on Company Financial Position

Adverse Impact on Liquidity ? Is the company making appropriate arrangements to deal with euro transactions?

? Has the company considered the possible uncertainty over the processing of both inward and outward cash flows in the transitional period?

? Is the company establishing appropriate banking facilities including overdraft facilities for receipts and payments in euro?

? Will the company have the ability to recover cash from debtors in a specified currency?

? Has the company considered whether assets and liabilities denominated in a national currency will retain their value?

? Is the company making appropriate arrangements to handle euro notes and coins from 1 January 2002?

Inadequate Preparation for the Introduction of the euro ? Has the company established appropriate arrangements for identifying and implementing necessary changes?

? Has the company allocated sufficient resources to the planning process?

? Is the planning team drawn from all operating divisions and does it report to the Board of Directors?

? Is the company developing customer educational material including dual pricing of products? ? Will company staff be able to make well informed decisions regarding the euro?

? Has it identified which key customers / suppliers will require transactions in euro and initiated discussions with them over timing and contract revisions?

Inappropriate Systems and Control Processes ? Has the company identified the key operating systems and software which will require adaptation or replacement? ? Has the company identified the resources to make such changes, taking into account the different requirements of bespoke and ‘off the shelf’ packages?

? Are there appropriate controls to prevent fraudulent activities and error?

? Will budgetary and reporting systems include the euro currency at the appropriate time?

? How will the company deal with conversion and rounding issues?

Loss of Market Share and Market Opportunities ? Has the company considered the impact on its existing markets?

? Does it have contingency plans to take into account the possibility of major market changes and downward pressures on prices, for example, through increased price transparency?

? Has the company assessed its long term competitiveness with respect to competitors?

? Does the company have long term relationships with its suppliers and customers?

? Does the company have appropriate processes for identifying new market opportunities?


Inappropriate Capital Financing and Financing Costs ? Is the company aware of possible future euro-based financial instruments?

? Does it understand the impact on access to working capital and capital funding?

? Is there a significant impact on debt repayments and dividend policies?

? Has the company reviewed its treasury management needs and interest rate risk policies?

The process of addressing the issues arising from the introduction of the euro needs to be managed well. There ought to be top level (Board) commitment and adequate resources made available to ensure that the company is making proper plans and preparations for the euro. Management also needs to consider any specific impacts on the financial statements. The review would need to encompass all significant business units, including other group companies, if applicable. (The complexity of plans, the planning process itself and the lead times to make preparations will depend upon the nature and size of the business and the competitive implications of the change to the euro in the markets in which the company is operating.)


Management will also need to assess the increased risk of error and opportunities for fraud that could arise when a company has to make major adaptations to its systems where one currency is being substituted for another with inevitable rounding differences. The extent of change and urgency may cause a relaxation of formal testing and program change control procedures. Manual intervention may occur as problems arise or are identified, particularly where rounding differences emerge. Because of the urgency of the issue and consequent demands on manpower, proper supervision and control may not be given during the process. Businesses may use subcontractors to search their programmes and alter them. Controls over these sub-contractors may not be stringent, nor may the entity have the necessary knowledge to supervise them properly. Managers and/or staff may take advantage of system errors and failures. Therefore in making plans for the changeover to the euro managers should recognise these possibilities of increased fraud and error and to minimise them should strengthen internal control and audit procedures.


The European Commission document "Accounting for the Introduction of Euro" concluded that the existing European accountancy framework can deal with the accounting issues arising from the introduction of the euro, and therefore there is no change in directors’ legal responsibility to prepare "true and fair" annual financial statements.

Underpinning the preparation of the annual financial statements is the assessment by management of the company’s going concern status. International Accounting Standard 1 (revised in 1997), "Presentation of Financial Statements" sets out management’s responsibility for assessing going concern status as follows:

"When preparing financial statements, management should make an assessment of an enterprise’s ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions which may cast significant doubt upon the enterprise’s ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the enterprise is not considered to be a going concern.

In assessing whether the going concern assumption is appropriate, management takes into account all available information for the foreseeable future, which should be at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts in each case. When an enterprise has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors surrounding current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate".

Consideration of going concern involves analysis of corporate profitability, cash flows, operational activities and availability of financial resources. The introduction of the euro is likely to have a profound effect on business within Europe and may, in due course depending upon the circumstances of the company, impact on all of these factors. This is, in itself, a strong argument for management that consideration of their plans and preparations for the euro should be an integral part of their assessment of the company’s going concern status.

However, a stronger reason for considering their preparations is that the introduction of the euro on 1 January 1999 is clearly within the foreseeable future - as defined in International Accounting Standard 1 above - for a company whose financial statements have a balance sheet date on or after 31 December 1997. Therefore directors ought now to consider euro-related issues in their assessment of going concern .

At a balance sheet date on or after 31 December 1997 there will still be considerable uncertainty about the impact of the euro on a company’s business and the different companies will require different responses, over different time-scales. However management ought to be considering the plans and preparations they have made or are making when assessing the company’s going concern basis Over time the emphasis will change, as will reporting considerations, to consider what detailed actions have been taken and whether these are sufficient to enable the company to continue trading after 31 December 2001 when national currency units are no longer sub-divisions of the euro.

When the annual financial statements are prepared and presented to the shareholders at the Annual General Meeting, they are usually accompanied by a director’s report and the directors should ideally use their annual report to inform shareholders and others of their view of the impact of the introduction of the euro on the business and what steps they have taken or are taking to respond to it.


Whilst the issue of preparing for the euro should be an integral part of management’s assessment of the going concern status of the company, similarly the statutory auditor ought to consider the management’s preparations for the euro in connection with his assessment of the going concern basis of the company. He should enquire whether the management have developed reasonable plans to address the issues, reasonable processes to secure that plans are implemented and that there is no indication that these plans are ineffective.

Circumstances may arise where the directors’ analysis of the impact of the euro causes the going concern assumption of the company to be called into question, unless management can take effective action to address the impacts identified in the analysis. Where the statutory auditor is unable to obtain sufficient comfort from his enquiries as to the preventive action being taken by management he will consider whether additional disclosures are required in the financial statements or whether the audit opinion may require qualification.

The International Standard of Auditing "Knowledge of the Business" - ISA 310 - requires the statutory auditor, in performing an audit of financial statements, to have or obtain a knowledge of the business sufficient to enable him to identify and understand the events, transactions and practices that, in his judgement, may have a significant impact on the financial statements or on the examination or audit report. The euro will have an effect on the business of all companies within the eurozone (and for some companies outside of but trading within the eurozone) and the statutory auditor may consider that the introduction of the euro could have a significant impact on the company’s financial statements. The statutory auditor will therefore need to have an adequate understanding of the issues arising for the audited business. This will enable the statutory auditor to plan and perform those audit procedures appropriate in the circumstances, and as the date for the withdrawal of national currency units approaches, to consider whether the company will be able to remain a going concern after the end of the transitional period.

The statutory auditor should consider the company’s plans and preparations for the introduction of the euro, and what audit-related business risks could arise from the introduction of the euro, when defining the scope of his audit, bearing in mind that the issue for the statutory auditor is the impact on the continuing applicability of the going concern concept underlying the financial statements of the company.

In countries where audit engagement letters or similar documents are used, auditors usually agree or confirm in writing the scope of their work as statutory auditors. The statutory auditor may wish to make specific reference to the issue of the introduction of the euro in defining the scope of the audit in the audit engagement letter or other form of agreement. This would clearly state the different responsibilities of management and that of the statutory auditor and the extent of the statutory auditor’s work in relation to the introduction of the euro. In particular, the professional duties of the statutory auditor do not include an assessment of the entity’s exposure to the possible adverse consequences of the introduction of the euro.

The International Standard of Auditing 500 "Audit Evidence" requires that the statutory auditor obtains sufficient appropriate audit evidence on which to base his audit opinion on the financial statements. The adequacy of evidence is a matter of professional judgement, and in circumstances where the client has analysed the impact or has plans to address the associated risk with the change to the euro, the statutory auditor will need to assess the analysis or plans as to their reliability as audit evidence in relation to the risk of material misstatement.

There are two ways for the statutory auditor to communicate the findings of the audit to the company’s management and shareholders (and where applicable other interested parties):

During the audit examination, the statutory auditor may identify matters relating to the introduction of the euro which he considers should be formally communicated because they may represent material weaknesses in internal control.

The purpose of the management letter or long-form report is to report the findings of the audit to the senior management of the company. This could be the company’s directors, a non-executive Audit Committee or Supervisory Board depending upon the audit and corporate governance requirements in the company’s Member State. The contents of the management letter or long-form report would normally identify any significant weaknesses in accounting and internal control systems identified during the collection of audit evidence.

In making any such reports, a statutory auditor needs to ensure management understands the limits of the work on which the comments are based (which would only be that necessary to fulfill general audit responsibilities), and that consequently failure to report does not mean that there are no deficiencies. Equally where the statutory auditor wants to report issues to an Audit Committee, (where one exists), he needs to be careful to clarify the limited basis of the comments to ensure that the Audit Committee is not misled by implying that the audit responsibilities have involved extensive work in relation to the introduction of the euro, unless a wider degree of work has been agreed as part of the letter of engagement or its equivalent. Comments should therefore normally be made in the context of the statutory auditor’s responsibility for giving an opinion on the financial statements.

The statutory auditor has a statutory requirement to report to the shareholders of a company on the financial statements, specifically to give an opinion as to whether the annual accounts give a true and fair view of the profit and loss account for the period and the financial state of affairs of the company at the year end.

If the statutory auditor considers that the company has not made adequate preparations for the introduction of the euro and this, in the statutory auditor’s opinion, casts serious doubts over the company’s ability to remain a going concern which is not addressed adequately in the financial statements, then the statutory auditor’s report will need to reflect the adequacy of any such disclosure. Therefore the statutory auditor has to consider whether the financial statements and the annual report give sufficient and appropriate information about the company’s likely future development. The principle of ‘no compulsion, no prohibition’ applies during the transitional period, i.e. between 1 January 1999 and 31 December 2001, when a company could trade in national currency units with the banking sector facilitating the conversion to and from euro when required. Therefore it is unlikely that statutory auditors will find it necessary to modify their audit opinion on a set of company financial statements until the year 2000 or 2001 i.e. much closer to the end of the transitional period.

In a number of European countries, the statutory auditor has a duty to report on audit findings to a regulatory body if the company undertakes business in a regulated sector, for example, in financial services. International Auditing Standards require that the statutory auditor of such a company should bring information of which they may have become aware, in the ordinary course of performing work undertaken to fulfill the audit responsibilities, to the attention of the appropriate regulator when they conclude that it is relevant to the regulator’s functions, having regard to such matters as may be specified in statute or any related regulations, and when in their opinion, there is reasonable cause to believe it is or may be of material significance to the regulator.

If the statutory auditor’s evaluation of the actions -or lack of them- taken by company management to prepare for the euro is such that this may lead to an adverse audit opinion, then this should be reported to the regulatory body since it is likely that this would be of material significance to the regulator.


The introduction of the euro does not change the responsibilities of either the management or the statutory auditor. However this event could have a profound effect upon the operational capacity of the business and may even endanger the ‘going concern’ status of the company. Both managers and the statutory auditors need to be aware of this and to reflect that in carrying out their responsibilities.

In turn bankers should also be aware of the distribution of these responsibilities so that they know what they can expect from the management and the statutory auditors.