PracticeAuditFinding a way out of Europe’s growing legislative maze

Finding a way out of Europe's growing legislative maze

Sorry, but here comes the 'e' word again. No, not the euro - that particular ball looks like being tossed out of court with the prospect of a return as distant as that of a British Wimbledon champion. But this does not mean we will hear any less about the other, larger 'e' word - Europe.

Whatever the outcome of the slimmed down 11+ on the single currency, Europe is here to stay and accountancy is at the very heart of the European project – probably more so than any other profession or indeed industry sector and interest group.

The relationship between the industry and Europe still has the feel of a very recent encounter of two different worlds always destined to collide.

One might speak of fate, but it’s not really the stuff of star-crossed lovers. In fact, the relationship has grown out of dire necessity – evident both from the role of accounting within the management of the European institutions and the centrality of accountancy’s activities to the development of the European single market.

Where the European Commission is concerned, inadequate financial management and poor accountability had by the early 1990s become a time-bomb. Still anchored to its founding legal and ambassadorial moorings, the commission continued to allocate low priority to these apparently mundane matters.

While teeming with lawyers and diplomats, the commission continued to employ just a relative handful of accountants while holding the purse strings of a euro 60bn (£43.1bn) budget. Since its implosion in 1998, the commission has embarked on the most profound cultural and managerial readjustment in its history.

In the midst of this, just as accounting and auditing were becoming part of everyday Brussels parlance, came Enron, WorldCom and all the rest.

The European Union has always been influenced by external events: after all, competition with the US (particularly driven by France) and the iron curtain were two of the three founding pillars. But no-one could have predicted how major US corporate collapses could have impacted on the EU political mainstream – specifically by catapulting accounting on to the agenda.

Today, after 10 years of the single market programme, there is a universal recognition within the Brussels corridors of power that there can be no such thing as a European single market without addressing the quality and standards of accounting and auditing.

Where policy towards the accountancy industry is concerned, financial reporting has until now been the commission’s principal focus, mainly in the form of the international accounting standards regulation.

In addition to the European endorsement and effective enforcement of IAS, the commission is also seeking to introduce compulsory quarterly reporting. The commission’s proposed transparency directive has only just reached the European parliament, but it is doubtful whether there will be a repeat performance to match the record 15 months it took to secure approval of the IAS regulation.

It is precisely because of the long drawn-out and uncertain nature of the decision-making processes in the single market and other critical spheres that the EU is seeking to rewrite all the ground rules. It has no choice but to do so given the imminent accession of 10 new EU member states.

This unprecedented enlargement clearly presents significant and very diverse issues: in fact everything from finding office space to finding institutional space. Currently, specially appointed observers from the accession countries are crammed into packed offices at the European parliament while they seek to familiarise themselves with its often unintelligible procedures. The evident problems over room availability might prove to be a most appropriate introduction.

Meanwhile, the European Convention, chaired by former French prime minister Valery Giscard d’Estaing, is seeking to cram together hugely divergent views into a new institutional architecture for the European Union.

The steady stream of reports on the European convention regularly sets Eurosceptic and Euroenthusiast pulses racing alike. Of the two, the former are naturally the more strained – and particularly so as news reports multiply of an unstoppable march towards an all-enveloping European constitution.

But if there is such a march at all, it will necessarily be a slow one.

While the European convention has only a month to conclude its work, we will still be far from the finishing line. The convention’s remit is merely to provide a preparatory document to submit to a six-month intergovernmental negotiation of EU member states, which will only begin in October. Here the marching, in whichever direction, will get bogged down.

The only certainty at this stage is that life in Brussels next year will be very different to today. It seems very likely that the EU will experience an interregnum as both the European parliament and European Commission are ‘renewed’ in mid-2004.

Where the parliament is concerned, there will not only be re-elected and new members, but also an expansion in their overall numbers from 626 to 700. There might be an argument for lengthening the legislature to enable MEPs to at least recognise one another before going to the polls again.

As regards the commission, it is still unclear how the organisation will be structured to ensure that all member states have a direct hand on the levers of the EU’s ideological engine room – presuming that the commission retains this role.

Recently, Frits Bolkestein, the internal market commissioner, described himself at a Brussels briefing as the ‘commissioner for financial services’, which may be an indication of how his present and extremely broad portfolio could be split in part. Currently the portfolio is enormous, involving the supervision of two commission directorate-generals – internal market and tax and customs union – as well as responsibility for overseeing the commission’s response to some 1,500 cases pending at the European Court of Justice on the non-implementation or infringement of EU law.

But the EU’s main concern in the coming months will be to ensure it still has the capacity to make EU law. There is a growing recognition within the various institutions that legislative measures not approved before next spring could be placed on the backburner as all the new parties at the EU table find their place. The EU urgently needs to act to ensure that the backburner does not become permanent.

Now for some time, the commission has made clear that 2003 will see the second installment of its policy towards the accountancy profession. Following on from the initiatives regarding financial reporting, the EU policy spotlight is now set to focus on audit and more specifically the role of the auditor in the overall corporate governance construct.

This week should see the publication of the commission’s priorities.

How quickly these are implemented will depend on the industry’s engagement with the European institutions, but evidently, a lot more besides.

  • By Martin Manuzi, director of the ICAEW’s European Office.

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