European Commission accounting reform proposals provoke institute debate
INSTITUTES HAVE SCRAMBLED to respond as the European Commission gave its two-pence worth on accounting practices, focusing on SMEs, social enterprise and responsible business.
The ICAEW was first off the mark with a relatively supportive statement, calling the 4th and 7th Accounting Directives “ancient pieces of legislation long in need of an overhaul”.
It welcomed the Commission’s ‘think small first’ basis for proposed reforms, which could see SME financial reporting requirements simplified and an end to quarterly updates.
The country-by-country reporting proposal, which would see extractive and logging industries forced to disclose payments to governments, also found favour with the English institute.
“ICAEW strongly supports efforts to improve domestic accountability and governance in resource-rich countries. In principle, we believe that much value can be achieved through country-by-country reporting, particularly in areas of the world where greater transparency is required,” it said.
However, the body warned “general-purpose financial reports prepared primarily to meet the information needs of investors” could actually reduce transparency and “would not be appropriate”.
Then it beat a retreat to consider the EC’s other proposals, which include a package of support measures for companies with a positive social impact and new rules to prevent investors secretly amassing controlling stakes in listed entities.
“The EC is to be congratulated on the comprehensive nature of its review and for its open, inclusive approach to consultation during this lengthy and important debate. We will need time to consider the detail of these new proposals, not least to ensure that accountability to shareholders and protection of creditors will not be compromised,” it concluded.
ACCA was more detailed and critical in its appraisal. It stressed the “wider social value of effective accounting and auditing”, saying there is “a balance to be struck” with the drive for deregulation.
It nevertheless “shares the EC’s concerns” regarding cutting red tape for SMEs and called the ‘think small first’ approach “an important and positive step for the future development of EU legislation”.
Support in principle is, for the most part, all ACCA is prepared to offer. It gave the same reception to the proposed transparency measures, but warned removing the requirement for SMEs to publish their management report “is less welcome”.
“This suggests a lack of confidence in the content of the management report, which – given the active international interest in developing narrative reporting – is disappointing.”
ACCA welcomed the emphasis on corporate social responsibility in the EC directive – which calls for better disclosure on payments to governments in resource-rich countries – but questioned the individual proposals.
It warned against overly prescriptive and compliance-driven rules, saying: “CSR should ideally be about encouraging companies to adopt business strategies that are driven by socially responsible values and which incorporate an holistic approach to the management of risk.”
ICAS was also open to country-by-country reporting, but warned disclosures of this nature could be “voluminous”.
Executive director of technical policy and services David Wood said: “We are very sympathetic to their aims, but there are better ways to go about it,” suggesting a concise, web-based report on companies’ impact in each country would be preferable.
Wood said the institute would be “supportive in principle” of the deregulatory proposals for SME financial reporting.
However, ICAS fears cutting disclosure requirements could spark a “lack of financial discipline” that would inhibit SME growth, as they would no longer have essential information upon which business decisions are made.
“We would be nervous about suspending financial reporting at that level,” said Wood.
It is clear the institutes will have much to say on the proposed accounting shake-up, especially when it comes to SME regulation.