Opinion of the European Central Bank of 26 October 2006 at the request of the Cypriot Ministry of Finance on a draft provision amending the draft law amending the Central Bank of Cyprus Laws of 2002 and 2003 (CON/2006/50)

OPINION OF THE EUROPEAN CENTRAL BANK of 26 October 2006 at the request of the Cypriot Ministry of Finance on a draft provision amending the draft law amending the Central Bank of Cyprus Laws of 2002 and 2003 (CON/2006/50) Introduction and legal basis

On 13 October 2006 the European Central Bank (ECB) received a request from the Cypriot Ministry of Finance for an opinion on a draft provision (hereinafter the ‘draft provision’) amending the draft law amending the Central Bank of Cyprus Laws of 2002 and 2003 (hereinafter the ‘CBC Law’) in respect of the appointment of independent external auditors for the Central Bank of Cyprus (CBC). The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty establishing the European Community and the third indent of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft law relates to a national central bank. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1 Subject matter and background

1.1 The subject matter of this opinion is a draft provision amending Section 60 of the CBC Law on the audit of the annual financial statements of the CBC in line with Article 27.1 of the Statute of the European System of Central Banks and of the European Central Bank . The ECB has been consulted in the past on two earlier versions of draft provisions amending Section 60 of the CBC Law and refers to its previous opinions on these provisions .

1.2 In Opinion CON/2006/4, the ECB concluded that, notwithstanding the Auditor General’s 4 5 independence as enshrined in the Cypriot Constitution , the Audit Office (of which the Auditor General is the Head) is not an external auditor within the meaning of Article 27.1 of the Statute and cannot, for that reason, be appointed as the CBC’s independent external auditor . Reaffirming its view on this matter , the ECB also concluded that the appointment of an independent external auditor, in accordance with Article 27.1 of the Statute, to audit the CBC’s annual financial statements once Cyprus has adopted the single currency, ‘will not prevent the Audit Office from continuing to perform a control function, provided that its auditing activities: (i) do not interfere with the review of European System of Central Banks (ESCB) related tasks of the CBC to be undertaken by the CBC’s independent external auditors to be approved by the Council of the European Union in accordance with Article 27 of the Statute; and (ii) do not jeopardise the CBC’s independence’ . 1.3 In Opinion CON/2006/33, the ECB reiterated the conclusions reached in Opinion CON/2006/4, also drawing attention to its May 2006 Convergence Report, according to which the powers of auditors, other than those appointed under Article 27.1 of the Statute, are compatible with central bank independence only when the necessary safeguards are in place .

2 Assessment of the draft provision

2.1 Subsection 1(a) of the draft provision now under consideration provides that the financial statements of the CBC shall be audited in accordance with Article 27 of the Statute and that the CBC shall provide the auditors appointed in accordance with Article 27 with full information, books and other records that are necessary for the exercise of their duties. The ECB welcomes this subsection. 2.2 Subsection 1(b) of the draft provision provides that the Auditor General may carry out financial and management audits of those activities of the CBC that are not related to its ESCB tasks and competences, provided that his reports and audit activities do not impinge on the CBC’s

independence. The ECB also welcomes subsection 1(b) and the draft provision’s definition of management audit, which preclude any interference with the audit to be carried out by the CBC’s independent external auditors. 2.3 The ECB thus considers the draft provision to be consistent with its earlier opinions in this matter and recommends (as an alternative to the initial wording on which the ECB was consulted by the CBC ) its incorporation in the draft law amending the CBC Law as the appropriate means of adapting, in this particular case, national audit arrangements to the requirements of Article 27 of the Statute and, in particular, to the principle of central bank independence.

This opinion will be published on the ECB’s website.

Done at Frankfurt am Main, 26 October 2006.

[signed]

The President of the ECB

Jean-Claude TRICHET