EU director: Commission remains vigilant on content, timing of audit reforms

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This article is part of our special report European Corporate Reporting.

The Commission sees the creation of a 'black list' of prohibited non-audit services and the rotation of audit firms as essential to restore investor trust and is pushing for these rules – and changes to EU auditing standards oversight – to be agreed before the end of the European Parliament's term next spring, says Ugo Bassi.

Ugo Bassi is the director of capital and companies within the EU executive's directorate-general responsible for the internal market. The interview was conducted by EURACTIV's Jeremy Fleming.

>> Read: Commission to overhaul reporting standards body by end of year

On the Commission’s proposals to amendment to existing accounting legislation in order to improve the transparency of certain large companies on social and environmental matters. What is the state of play? Is it likely the amendments will go through before the end of this Parliament? The Commission adopted on 16 April a proposal for a directive amending the existing legislation as regards disclosure of non-financial and diversity information by certain large companies and groups.

Under the proposal, large companies with more than 500 employees would be required to disclose in their annual reports relevant and material information on policies, results and risks concerning environmental aspects, social and employee-related matters, respect for human rights, anti-corruption and bribery issues, and diversity on the board of directors. Small and medium-sized companies would not be subject to any new requirement.

Currently, around 2,500 large EU companies disclose environmental and social information regularly.  It is estimated that around 18,000 large companies would come within the scope of application of the proposal.

The lead in the European Parliament is with the Legal Affairs Committee. Mr Raffaele Baldassarre is the rapporteur (EPP, IT). The rapporteur is targeting a timetable consistent with adopting the proposal by the end of the legislature.

In the Council the dossier is followed by the Competitiveness Council. The proposal has been discussed in a number of expert Council Working Group meetings. Views are overall favorable to enhanced transparency, although some aspects such as scope, country by country reporting, or the nature of the reporting requirement are still being debated.

Transparency should contribute to better long-term performance, sustainable economic growth and employment. The Commission's proposal allows for significant flexibility and avoids undue administrative burden. We aim at adopting this legislation by the end of this legislature.

Do you envisage more scope for so-called integrated reporting, rather than merely ‘comply or explain’ for the larger companies? If so what areas of corporate social responsibility might be included as a priority? Different stakeholders have different views on how “comply or explain” legislation should look like. Jurisdictions claiming that they have a “comply or explain” approach to transparency often have very different legislation.

To be clear, this proposal sets out a requirement. But companies are left with significant flexibility. Companies will not be required to disclose information that is not relevant or not necessary for an understanding of a company’s development, performance or position. This is no box-checking exercise.

As regards key areas, the Commission proposes that large companies with more than 500 employees should disclose relevant information relating to environmental aspects, social and employee-related matters, respect for human rights, anti-corruption and bribery issues, and diversity on the board of directors.

The proposal focuses on disclosure of certain non-financial information. Integrated reporting is a step ahead. This directive does not require companies to comply with integrated reporting. The Commission is monitoring with great interest the evolution of the integrated reporting concept, and, in particular, the work of the International Integrated Reporting Council.

Is there a danger that no common position can be reached on the audit reform proposals before the Parliament runs out of time in Spring next year? The Lithuanian Presidency and the European Parliament are engaged in negotiations to come to an agreement on this ambitious reform, and the European Commission is an active participant in these discussions. Negotiations are progressing well, in a constructive spirit. Difficult discussions cannot be excluded as talks develop, but we are hopeful that a positive political agreement can be reached before the end of the current mandate.     

How are the compromise positions looking, in terms especially of the rotation time periods for auditors and the so-called ‘grey list’ of non-audit services? The main objective of the reform is that auditors truly perform their societal role, restoring investor trust and serving the real economy. To fulfil such a mission, auditors have to enjoy the highest conditions of independence, particularly when auditing entities that present a risk for financial stability. With this in mind, a strict 'black list' of prohibited non-audit services and rotation of audit firms are essential. These key measures have been endorsed by both the Council and the Parliament, although through different approaches. The Commission remains vigilant that any compromise will strengthen the independence of auditors.  

The Maystadt proposals issued last week touch on several IFRS related issues. What types of new rules might be required to implement these? In essence, the report looks at how best to strengthen the EU`s voice in the IFRS setting process as well as the system of endorsement of standards in the EU. The objective, when drafting the report, was to put forward recommendations which could be implemented quickly, and if possible without legislative proposals by the Commission, given the time pressure (major IFRS to be endorsed in the coming months, elections in the EP in 2014 and the future change of Commission). The report presents, on purpose, recommendations that are quite high-level.

The report focuses on the recommendation of transforming EFRAG. It will be the responsibility of EFRAG management to work out the operational details regarding their practical implementation.

Is ESMA the right body to take control of this process, would it not need new EFRAG-trained staff to deal with the issues? The report looks at the possibility of transferring the responsibilities of EFRAG to ESMA. It would rationalise the resources, integrate the endorsement and enforcement processes, endow the EU with a structure more similar to the SEC and gather functions of representation of the EU in the field of international accounting standards in a public entity. However this option encountered a massive opposition from stakeholders for a number of reasons, as detailed in the report. The option recommended in the report is the transformation of EFRAG with the aim to reinforce its structure and to maintain its mixed composition covering both public and private interests at the European level.

Maystadt refers to the creation of a new EU agency, why might this be necessary and what form could it take? Again, the creation of a new EU agency is another option considered in the report. This new EU agency would be an independent legal entity separate from the institutions of the EU and set-up on a similar basis of the existing EU agencies. This option would ensure full control of the process by public authorities and reinforce communication and cooperation between Member States, European Union and European stakeholders. However, given the current budgetary context and the legal and practical implementation formalities, the option was deemed possible only in the longer term.

Will the flexibility inherent in Maystadt’s proposal answer criticisms that the EU, despite complying with the IFRS, seems to do so more than the US and other global players, despite the composition of the IFRS standards setters emanating from these countries? It was not the objective of the report to answer that alleged criticism. The report focuses on enhancing EU`s role in developing high quality international standards.

However, we clearly hope that the work of Mr Maystadt will allow the EU to better organise itself to ensure that the needs of its markets are fully taken into account in the international accounting debate, very much focussed these last few years on the objective of convergence with the US accounting standards (the US GAAP).

Generally is there a danger that in reforming reporting standards the EU may be conforming woth standards that – whilst they are ahead of the pack – put EU companies at a competitive disadvantage in global markets? The report is very cautious about the possibility of introducing more flexibility in the endorsement of standards in the EU as this would risk giving a negative signal to the rest of the world and hindering actions that are underway for achieving the objective of using global standards ensuring the comparability of financial statements.

In his report, Mr Maystadt insists on the need to better assess, over the endorsement process, whether the new standards or amendments do not "hinder the economic development of the Union". This aspect should be better taken in account in the future work of EFRAG.

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