Faceless bureaucrats interfering in matters they don’t understand, or an umbrella organisation trying to build a single market to rival the US? Whatever your views on Europe, unless you deal with international issues, it’s likely your experience of the European Commission is limited to the recent press coverage of the mismanagement of huge amounts of money, which led to the entire Commission resigning in March.
But as the Commission and, more specifically, Directorate General XV, which deals with the Internal Market and Financial Services, probes further into accountancy and company law, all those with an interest in the sector will need at least an elementary grasp of the workings of Europe.
On 12 May, single market commissioner Mario Monti unveiled an action plan for a single capital market in Europe to the Corporation of London, forcing the issues of international accounting standards and harmonisation of corporate governance and taxation to the forefront of the European Commission’s agenda.
The report’s main points centre around allowing companies the option of publishing financial statements using IAS and establishing a screening mechanism to ensure that IAS output conforms with EU rules.
Other proposals include the modernisation of the accounting provisions of the EU financial reporting directives to take account of IAS and fair value accounting, as well as changes to ‘counter harmful tax competition’, which could affect the location of businesses in the EU.
The ‘mission’ of DGXV is to ‘co-ordinate the Commission’s overall policy to ensure that the European single market functions effectively and to execute Commission policy in key areas of the single market’.
At the time of going to press commissioner Monti, although officially resigned from his post, still presides over DGXV until a new set of commissioners are voted in and take up their posts in September.
But for the more specific areas of financial information and company law, Karel Van Hulle is probably the most important contact for the accountancy profession, as he heads the unit within DGXV (Directorate C) which examines these issues. He will remain in his post, despite changes to the commissioners.
But, despite what some might see as Europe often running roughshod over the wishes of the member states, Van Hulle takes advice from several committees that have been set up to examine specific issues, the most important of which are the Contact Committee on Accounting Directives and the Committee on Auditing.
Any European enthusiast will be aware that Monti’s action plan, completed with the assistance of the Financial Services Policy Group, was the firmest signal yet that the EC is committed to creating an environment that allows comparable, transparent and reliable financial information.
A commission spokesman puts the report into context: ‘The single currency is causing many changes in business, such as a rise in mergers and acquisitions, cross-border investment and the need for comparable financial reporting. In the Eurozone, people are reporting in the same currency, but this highlights the differences in the way accounts are prepared.’
The topic dominating the current discussions in both the main committees is therefore the introduction of international standards for both accountants and auditors.
Deloitte & Touche technical partner Ken Wild explains that, as Europe moves towards the UK in terms of raising finance from sources other than banks, this convergence is changing the nature of the financial information required and opening the way for an internationally acceptable system.
But there are problems with this approach. ACCA technical officer Richard Martin says: ‘We are supportive of this, but this is all about listed companies. Should others be allowed to follow IAS?’
But Glaxo Wellcome finance director John Coombe says the issue could be more serious than a matter of who is allowed to use IAS. He contends that, in many ways, the requirements of the UK accounting system are more rigorous than other member states and compliance could be detrimental to financial reporting.
‘The IASC would be trying to cope with a lot of territories, many of which have less developed standards. We would like a single statement of worldwide accounting standards but we would not want to see less rigorous UK standards.’
Although the IASC has produced a core package of standards, these have been sent to the International Organisation of Securities Commissions, which has agreed to assess them for cross-border listing purposes. According to the EU, there is no conclusion expected until the first half of next year.
The need for common standards is similarly being debated among auditors, alongside issues such as quality assurance – the quality control of statutory audit work – and auditor independence.
FEE, the representative body for the accounting profession in Europe, as well as the European Confederation of the Institutes of Internal Audit, are both lobbying to enhance the role of the auditor as part of the Committee on Auditing.
FEE has close links with all the main EU bodies, including the Commission and Court of Auditors, as well as Brussels-based think tanks and academic communities. It produces regular research used as the basis for discussion in the Committee.
John Hegarty, the secretary general, says: ‘We are working from the EC’s view of the profession, which supports monitored self-regulation. I think we are going to see something on auditing standards and quality assurance within the next year.’
ECIIA director general Neil Cowan says that recent discussions have examined the reliance of the external auditor on internal audit, while the Commission is also seeking views on a paper regarding fraud and irregularities.
But discussions about the role of the auditor cannot take place in isolation, and the action plan has paved the way for the EC to open up the sensitive debate on corporate governance and company law.
Industry insiders agree that Europe has fought shy of opening what one described as a ‘Pandora’s box’ because of the cultural differences between the member states which has resulted in some countries rejecting plans to look at the issue at all.
Roger Davis, PricewaterhouseCoopers head of professional affairs, warns: ‘One of the great assets of a global economy is that there are different ways of doing things. This needs to be looked at, but we should not try to clone national cultures in terms of company structure.’
Others, such as ACCA senior technical officer Mary-Lou Wedderburn and the English ICA Centre for Business Performance director Anthony Carey, agree that it is a tricky exercise, and Wedderburn comments that there has been little tangible output from the Commission on this issue, with agendas based on the work of FEE.
But there are definite signs that this will soon be addressed, despite even DGXV’s admission that company structures are linked to national identities.
To this end, there has been great interest in the UK’s recent Turnbull Report on directors’ responsibilities for listed companies and the government-backed company law review.
FEE’s Hegarty predicts the EC will watch the response to the Review as a means to ‘test the water’ before opening its own debate, but it will have to tread carefully because its own suggested European Company Statute, which has been on the table for decades, has never been passed because of the absence of a private sector push.
The Commission says: ‘We are committed to producing a new strategy on accounting and auditing by the end of the year and allied to this we will consider these questions.’
The lack of a formal statute calls into question any future harmonisation in terms of tax. Although not dealt with under DGXV (it was moved to DGXXI), tax was an inflammatory issue under German chancellor Lafontaine’s era, but has since died down. He campaigned for tax rates to be harmonised throughout Europe, but the more conciliatory mood now centres on the possibility for the more burdensome taxes to be scrapped. Again, the action plan mentioned tax, but there is nothing concrete as yet.
As the action plan awaits its passage it will be up to accountants to make certain their views are made clear or you could miss this opportunity to shape the future of European regulation of the sector.
DGXV is able to draw on the views of leading accounting practitioners, bodies and governments of the member states regarding accounting standards, tax, corporate governance and company law through two committees – the Contact Committee on Accounting Directives and the Committee on Auditing – both of which are chaired by Karel Van Hulle, head of the financial information and company law unit.
Contact: set up as part of the 4th Directive on accounting, it was introduced in 1978. The main advisory body to the Commission, it represents the member states in the application of EU accounting directives (notably, the 4th and 7th company law directives on annual and consolidated accounts), while also advising on accounting policy and potential amendments.
Much of its work has dealt with consolidated accounts so as to make it possible to introduce changes via recommendations rather than new legislation.
Committee on Auditing: set up following a 1996 Green Paper and subsequent communication, which indicated a consensus among member states, the European auditing profession and users of audit reports are in favour of action at community level.
The Committee debates some important issues, such as international standards on auditing, audit quality monitoring systems and the professional liability of auditors.Its remit could be extended to examine the role of the auditor within corporate governance.
Accounting Advisory Forum: set up in 1991, it comprises representatives of the main professions using and preparing accounts, as well as of national accounting standard setters. The forum is associated with the technical work of Contact.
Financial Services Policy Group: Set up for a specified length of time only. FSPG, comprising finance ministers of the member states, first met at the beginning of this year to identify priorities to establish a single market, including accounting, auditing and corporate governance. It has made its proposals public as part of an action plan, ‘Implementing the Framework for Financial Markets’, which will go to the Commission for consideration.
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