Europe will dominate audit in 2013

Andrew Leck
Involvement with the EU on legislation and regulation is crucial

THE Mayans’ reputation as expert astrologers and doomsday forecasters recently took a knock when 21 December 2012 came – and safely went. You could argue that we shouldn’t have paid so much attention to this forecast, given that the Mayans spectacularly failed to predict there wouldn’t be any Mayans around to produce a new calendar, or to explain why the “end of days” hadn’t delivered on its promise.

But, even so, it is critical to look ahead and get a sense of the issues likely to arise that will have an impact on the business world this year.

As the debate around the UK’s continued involvement in the EU continues, far-reaching legislation – which will have a significant impact on how businesses operate and report on their operations – is going to be negotiated in Brussels in the next year. So continuing engagement by Britain and British business in the process of law-making in Brussels is essential.

The first major announcement of the year – from the UK’s Competition Commission later this month – shows how interconnected business legislation and regulation has now become, and why the UK needs an effective voice in Brussels.

The Commission has been looking at the question of whether the dominance of the big four accounting firms is restricting competition in the UK audit market for listed companies. It has also looked at how the country’s top 350 listed companies buy audit services.

Its preliminary findings will be welcomed in Brussels, where the European Commission (EC) has been working to clarify the role of auditors and to introduce more stringent rules for the audit sector – aimed particularly at strengthening their independence and bringing greater diversity to what it sees as a highly-concentrated market. Given the importance attributed to London as a financial centre, the findings will be influential.

The EC also wants to create a single market for statutory audit services. It would allow auditors to exercise their profession freely and easily across Europe, once licensed in one member state. The EC has also debated proposals for a strengthened and more coordinated approach to the supervision of auditors in the EU. Taken together, the EC claims the “measures should enhance the quality of statutory audits in the EU and restore confidence in audited financial statements, in particular those of banks, insurers and large listed companies”.

ACCA has been working hard to ensure that the UK voice is heard in the European debate. We have been engaging with the EU institutions and stakeholders to inform the legislative process on behalf of our pan-European network of accountants and finance experts. The single market offers huge benefits to business operating across Europe.

In September, in partnership with the European Confederation of Directors’ Associations, we organised a roundtable in Brussels hosted by Sajjad Karim MEP, who is a member of the European Parliament Committee on Legal Affairs. It looked at two related draft reports: one on Statutory Audits of Annual Accounts and Consolidated Accounts, the other on Statutory Audit of Public-Interest Entities: Specific Requirements. The various proposals linked to audit quality and transparency, and those targeting independence and market structure were discussed.

The event concluded that any reform needs to improve transparency and audit quality, and to join the gap between what auditors are asked to do and what stakeholders and citizens understand by “audit process”.

Additionally, the International Auditing and Assurance Standards Board will be issuing its proposals to improve how and what auditors report. Its aim is to make audit reports easier to understand, and to meet calls from stakeholders for more information to underpin the “pass or fail” opinion from the auditors. The proposals should encourage greater dialogue between auditors and preparers.

In terms of legislation that will affect how business is done in the City, the action also takes place in Brussels.

The first quarter of 2013 should see the adoption by the European Council and European Parliament of the review of the fourth and seventh Accounting Directives, which outline how a parent company must draw up consolidated accounts for all its subsidiaries. This should improve the amount of information that stakeholders will have.

In the coming year, the EU will also be working on a number of proposals on company law and corporate governance, as part of an action plan published in December. The plan intends to increase the level of transparency between companies and shareholders. This will include proposals to increase companies’ transparency on board diversity and risk management policies; plans to improve corporate governance reporting; better identification of shareholders by issuers; and strengthening transparency rules for institutional investors on their voting and engagement policies.

There are also a range of initiatives aimed at encouraging and facilitating long-term shareholder engagement. These include more transparency on remuneration policies and individual remuneration of directors; a shareholders’ right to vote on remuneration policy and the remuneration report; and better shareholder oversight on dealings between the company and its directors or controlling shareholders.

There are proposals to create appropriate operational rules for proxy advisers, especially on transparency and conflicts of interest. There is also a move to clarify the “acting in concert” concept, to make shareholder cooperation on corporate governance issues easier. And the Commission will be investigating whether employee share ownership can be encouraged.

ACCA is supportive of initiatives aimed at increasing transparency. EU laws, especially those that facilitate the better operation of the single market, can affect the UK and produce significant benefits for British business, so government and business need to remain intimately involved in the EU law-making process. We will continue to make our views known in Brussels, and will continue to ensure the needs of businesses and their stakeholders are met.

Andrew Leck is head of ACCA UK.