Financial industry must self-regulate for risk

A high-level conference in Brussels on 25 October discussed the issue of how investors and industry could best be protected from any future accounting debacles.

Commission proposals

Director –General of DG Internal Market, Alexander Schaub, outlined the proposals put forward by the Commission in 2004 as part of its company law action plan. These proposals, which would amend the 4th and 7th company law directives, have three strands:

  • to promote greater transparency concerning off-balance sheet transactions and related party transactions;
  • all EU listed companies to produce a corporate governance statement explaining their internal checks and
  • board members to have collective duty to prepare and publish financial statements.

The Commission was also looking at proposals to lessen the regulatory burden on SMEs by widening their exemptions from accounting rules.

Who sets the standards

A panel discussion agreed with Mr Schaub that it was the job of the market to set standards and not the regulators. It was agreed that over-regulation could inhibit companies from taking risks. The key to investor protection was not to compel directors to make statements on compliance but to provide investors with the information to make their own decisions.

For Alexander Schaub, "The overriding principle is that good financial reporting and good corporate governance go hand in hand". The Commission had no intention, he said, of setting-up an EU-wide corporate governance code, rather internal mechanisms of governance should be flexible and investor-driven.

Rüdger von Rosen of the Deutsches AktienInstitut, stressed that regulation should not set impossible standards. There would always be criminals who broke rules and the majority should not be penalised for the actions of a tiny minority.

Andrew Bailey of the SEC echoed this point in his outline of the US Sarbanes-Oxley Act, passed in the wake of the Enron scandal. He agreed that over-regulation was a danger. However, the very high costs of compliance which have brought much criticism for the Act, would in his view recede once procedures were set in place.

In the past few years the financial sector has seen a number of spectacular instances of fraud and malpractice. Major companies - Enron, Parmalat – have collapsed on the discovery of great holes in their accounts. On both sides of the Atlantic, the industry has been forced to ask how this was allowed to happen and what can be done to stop it in the future.

The 25 October conference, run by the European Federation of Accountants (FEE) looked at these issues.

  • Commission proposals on amending 4th and 7th Company Law directives awaiting Parliament decision at first reading
  • Agreement to be reached by the end of 2005.

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