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Corporate Sector Accounting and Auditing within the Acquis Communautaire

Corporate Sector Accounting and Auditing within the Acquis Communautaire. Mr. Frederic Gielen Senior Financial Management Specialist Europe and Central Asia Region The World Bank. What is the acquis communautaire?.

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Corporate Sector Accounting and Auditing within the Acquis Communautaire

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  1. Corporate Sector Accounting and Auditing within the Acquis Communautaire Mr. Frederic Gielen Senior Financial Management Specialist Europe and Central Asia Region The World Bank

  2. What is the acquis communautaire? • The entire body of EU laws is known, collectively, as the acquis communautaire. • For enlargement negotiations, the acquis has been divided into 31 chapters. Chapter 5 (Company Law) is most relevant to corporate sector accounting and auditing • All EU Member States must abide by the acquis communautaire.

  3. What comprises the acquis? • Primary legislation (treaties) • Secondary legislation (Regulations, Directives, Decisions, etc.) • Case law (judgments from the European Court of Justice and European Court of First Instance)

  4. The acquis is in constant evolution…

  5. The Accounting Acquis: Key Components • The Fourth EU Company Law Directive (78/660/EEC) • Sets forth accounting, reporting and publication requirements for companies • Imposes audit requirement • SMEs may be exempted from financial reporting and audit requirements • Recognition that for most small and medium companies, the cost of compliance outweighs the benefits • Listed companies may not be exempted, irrespective of size

  6. The Accounting Acquis: Key Components (2) • Seventh EU Company Law Directive (83/349/EEC) • Requires consolidated accounts for groups which comprise at least one limited liability company • Allows for exemptions for SMEs in some cases • Insurance Directive (91/674/EEC) • Rules on annual and consolidated accounts of insurance companies • Banking Directive (86/635/EEC) • Rules on annual and consolidated accounts of financial institutions

  7. The Adoption of International Standards (IFRS) • Despite Accounting Directives, recognition of need for greater harmonization of financial reporting rules in order to make EU companies more attractive  harmonization =  comparability =  understandability =  investment

  8. The Adoption of International Standards (IFRS) – continued • Regulation 1606/2002 of the Parliament and Council • Requires listed (publicly-traded) companies, including banks and insurance companies, to prepare their consolidated accounts in accordance with endorsed International Financial Reporting Standards as of 2005. • IFRS must be endorsed individually by the European Commission

  9. The Accounting Acquis – The Bottom Line • Based on true and fair view principle • NAS apply to non-listed companies and to solo accounts of both listed and non-listed companies • IFRS apply to the consolidated accounts of listed companies • Member states may require IFRS for solo accounts / non-listed companies • Exemptions for SMEs

  10. The Auditing Acquis: Key Components • Eighth EU Company Law Directive (84/253/EEC) • Sets out minimum requirements for statutory auditors

  11. But then… Parmalat Tyco Ahold Worldcom Enron

  12. The A&A Acquis: The Way Forward • Corporate scandals reinforced the need for more sophisticated regulation and better oversight, and required effective action to boost confidence in markets

  13. The A&A Acquis: The Way Forward (2) • Accounting: proposed amendments to the 4th and 7th Directives: • Collective responsibility of board members for financial statements and key non-financial information • Better disclosure of related-party transactions • Disclosure of off-balance sheet arrangements for all companies • Listed companies must issue corporate governance statements

  14. The A&A Acquis: The Way Forward (3) • Auditing: proposal for a new 8th Directive: • Clarifies duties of statutory auditors • Sets out ethical principles to ensure objectivity and independence • Requires public oversight of the audit profession • Use of International Standards on Auditing for statutory audits • Better international cooperation with third-country regulators

  15. The A&A Acquis – Challenges Ahead • Heterogeneity in Member States with regard to auditors’ and accountants’ capacity – are all professionals capacitated to comply with all aspects of existing and forthcoming acquis? • Enforcement • Endorsement

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