Federation of European Accountants Fédération des Experts-comptables Européens Newsletter Standing for trust and integrity

September 2011

NEWS IN BRIEF EDITORIAL

Audit policy In recent years, commenting on draft standards, On 29 September, FEE issued an initial reaction to media both in financial reporting and auditing, has reports on possible European Commission proposals on consumed a lot of resources in FEE and its audit policy. It noted that the EC proposals are understood Member Bodies. Much has been achieved with to be complex and wide ranging and, consequently, that FEE the development and introduction of IFRS, and can only make detailed comments on such proposals once a hopefully soon with the adoption of ISAs for all thorough analysis has been undertaken. As a principle, FEE statutory audits in Europe. would support proportionate regulation aimed at enhancing audit quality and audit services supply but warned against It is crucial that global standard setters collect overregulation and unintended consequences. views on how their proposals are perceived in their different constituencies and around The full press release is on the FEE website: http://www. the world. For the profession, it is equally change and indeed, where possible, be at the fee.be/publications/default.asp?library_ref=4&content_ important to understand how our input is forefront in proposing new solutions, or we can ref=1440. received and used. I am pleased to report run for cover with the risk of becoming seen as that the feedback I regularly get is that FEE being on the periphery and not keeping up with Integrated reporting comments are highly appreciated, not only the needs of the various stakeholder groups. The IIRC Consultation Paper “Towards Integrated because of their relevance and quality, but also, Reporting” issued on 12 September, offers initial proposals and perhaps foremost, because they provide a One thing that would help all the profession, for the development of an international integrated reporting true European perspective free from national however, whether representing large, mid- framework and outlines the next steps towards its creation interests. sized or small firms, would for them to be united and adoption. It is available at http://www.theiirc.org/the- and make proposals about the profession’s integrated-reporting-discussion-paper. Developing technical standards cannot be future role. If the profession, itself, makes far done from an ivory tower. We must realise reaching proposals to innovate its offerings FEE Presidents meet in Vienna that today, many see financial statements as and its behaviour, then this stands a far better Presidents of FEE Member Bodies met in Vienna on 22 and more of a compliance exercise than a primary chance of being accepted and will form the 23 September. In this strategic session they discussed the source of information for investment decisions. basis for more palatable and proportionate current challenges of corporate reporting and assurance. An Investors have now more interest in specific regulation. extraordinary General Assembly also brought some changes briefings they receive and in the reporting of to the FEE constitution. KPIs which will include unaudited data. Annual Moreover, current policymakers are not, Reports are growing bigger by the year but necessarily, experts or specialists in our more volume does not necessarily mean that profession and might be eager to duly consider EVENTS they are more relevant, more useful or more any constructive proposals the profession at transparent. large comes up with. This has certainly been FEE Tax Day my experience over the past months and years. The FEE Tax Day 2011 will take place on Tuesday 11 October After focusing – one could say perhaps a little 2011 in Brussels (Royal Museum of Art and History) on too much – on the refinement of technical Against this background, I have put two critical the theme “From Policy to Practice – Highway to hell or standards, it may be time to reassess whether matters on the agenda of our 2011 strategy heaven?” Keynote speeches will be delivered by Algirdas the reporting framework meets its fundamental meeting of the presidents of FEE Member Šemeta, EU Commissioner, and Didier Reynders, Minister objectives and new stakeholders’ needs. Bodies: the future of reporting and the further of Finance of Belgium. Further information including the Integrated Reporting is such an attempt and we evolution of FEE. These issues were debated full programme of the conference is available on the FEE look forward to contributing to its development. on 22-23 September in Vienna thanks to the website www.fee.be. As the International Integrated Reporting kind hospitality of our Austrian Member Bodies Committee (IIRC) said when releasing its first to whom I would like to express my keen Good governance in the Public Sector discussion paper: “the world has changed gratitude. On Wednesday 9 November 2011, FEE will organise a – reporting must too’. In all walks of life, roundtable in Brussels to discuss what good governance innovation is essential: for the profession, it is As Darwin said, evolution is a given, the means and its implications for strong financial management vital to ensure its relevance and in order to fulfil profession must take heed and evolve to ensure in the public sector. Attendance at the Roundtable is by its societal role. that the profession, of which I am proud to be invitation only. Participation requests can be addressed to a member, will continue to exist and flourish in [email protected]. It is clear that, in whatever part of the profession the years ahead. we are positioned, the accountancy profession is at a crossroads. Either we can embrace Philip Johnson, President

FEE • Av. d’Auderghem 22-28, 1040 Bruxelles • tel: +32 (0) 2 285 40 85 • fax: +32 (0) 2 231 11 12 • email: [email protected] Newsletter

FEE Conference on Audit Policy More than 300 participants attended the Keynote speeches were delivered successively FEE Conference, organised in Brussels on by Stephen Haddrill, Chief Executive Officer, Thursday 30 June 2011, to address key UK Financial Reporting Council (FRC), issues in audit policy in the EU. Opening Wouter Bos, Partner KPMG and Former the conference, André Kilesse, FEE Deputy Finance Minister of the Netherlands, Michel President, emphasised the willingness of the Barnier, European Commissioner responsible accountancy profession to conduct a fruitful for Internal Market and Services, Brendan dialogue with stakeholders and to proactively Nelson, Chairman of the Audit Committee contribute to developing an audit policy that Commissioner Michel Barnier of Royal Bank and of BP plc, and James is fit for purpose. Doty, Chairman, Public Company Accounting “We have a common objective which is to redefine and enhance the auditor’s role. I Oversight Board (PCAOB), USA. confirm my commitment to reforming this role towards more responsibility, considering the legitimate concerns of accountants and investors.”

Wouter Bos Brendan Nelson “Transparency is an essential asset of our modern-day culture. Accountants are in a “Although the role of the audit committee unique position to assist other organisations in was not addressed in the green papers achieving transparency by providing access to on corporate governance or audit policy, I relevant and reliable information. Accountants believe it is critical that the Commission will personally also have to show what they more clearly articulate the responsibility of the independent audit committee to select, do, how they do it, what dilemmas they Chairman James R. Doty encounter and how they contribute towards remunerate and assess the performance of our shared goal: transparent, efficient and “Given the effort involved in an audit of a the external auditor, beyond what is outlined reliable markets.” large company, and the complexity of many in the 8th Company Law Directive.” financial statements, investors want deeper insight from the auditor. The PCAOB concept release explores several ways that audit reports could better serve investors.”

Fernando Restoy, Member of the Management Board of ESMA introduced a panel debate on Developing the Role and Value of Audit. Antonio Masip Hidalgo, Rapporteur on the EC Fernando Restoy Andrew Brown, Nathalie de Basaldua, Giacomo Bugna, MEP Masip Hidalgo Green Paper on Audit Policy in the European “We, in ESMA, have expressed an opinion Parliament, introduced the debate on Building “The final report of the European Parliament, in favour of formally adopting ISAs in the EU a European Audit Market. Texts of the main although not supporting all European Commission’s through an endorsement system akin to the speeches and the video recorded statements proposals, constitutes a solid basis for a reform of one in place for IFRS. This system incorporates by panel members are available on the FEE the audit market that discards the status quo a good balance between ultimate regulatory and that promotes a greater independence of website: http://www.fee.be/news/default. sovereignty and a sort of delegation on an the auditors when declaring the reliability of the independent international technical board.” asp?library_ref=2&content_ref=1363. financial statements of the companies.” (MEP Antonio Masip Hidalgo)

www.fee.be Newsletter

EC Green Paper on Corporate Governance FEE commends the European Commission for its as well as in the application of already existing as to how the principle is applied in practice, commitment to improve corporate governance in requirements and guidelines to enhance the quality especially with regard to the quality and content Europe for the benefit of all stakeholders. Good of the cooperation between the two parties. of the explanations are needed. This could be corporate governance highlights the importance done by setting clearer criteria in a proportionate of the involvement of non-executive directors and The main FEE comments on the proposals in the reporting framework; their structures and relationships with the board(s), European Commission’s Green Paper cover the - Sound and sustainable corporate governance is including any board committees that the board may following aspects: important for any company. With this in mind, have established, such as the audit committee. It - Boards should collectively have the competences corporate governance measures should be also focuses on internal controls, internal audit, needed to discharge their duties which can be proportionate to the nature, size and complexity external audit and disclosures about corporate ensured by an appropriate composition that has of the entity and its business. Any policy actions governance, and in particular, the fundamental sufficient diversity among the members. The envisaged in this area should therefore equally relationships and obligations between boards, composition of boards should be based on the be proportionate with regard to size, complexity auditors and shareholders. principle of “the best person for the job” which and number of shareholders of the entity. The is not compatible with any kind of quotas which main difference between listed and unlisted Although not addressed in the Green Paper, the role would therefore not be appropriate; companies is the need for transparency to the of the audit committee could be further analysed, - FEE fully supports the aim of engaging public and towards its shareholders. as there seems to be room for improvement of shareholders to a greater extent than is currently this particular part of the corporate governance of the case and believes which can be approached The full FEE comments are available on the FEE public interest entities including listed companies. appropriately by recognising that shareholders website: http://www.fee.be/publications/default. Especially the relationship between the audit are not a homogenous group; asp?library_ref=4&content_ref=1419. committee and the auditor is of key importance and - FEE continues to support strongly the “comply or improvements could be made at regulatory level explain” principle. However, some improvements

FEE Stimulates Debate on Integrated Reporting Integrated Reporting aims at making clear the IIRC Working Group and Chair of FEE Sustainability link between financial and non-financial value Group, moderated the discussion in which key and addresses the wider as well as longer-term representatives of the EU Institutions, business consequences of decisions and actions. The organisations and stakeholders associations International Integrated Reporting Committee (IIRC) engaged actively. arranged a series of roundtables around the world to discuss the idea. The conference material is available on the FEE website: http://www.fee.be/news/default. FEE hosted a roundtable in Brussels on 17 June asp?library_ref=2&content_ref=1397. to stimulate a wide debate amongst all European stakeholders. Jim Singh, Nestlé CFO, briefed the participants. Paul Druckman, Co-Chairman of the Jean-Charles de Lasteyrie, Paul Druckman and Jim Singh

Draft standards on compilation and review engagements Not all engagements performed by accountants are audit The change in the regulatory environment is a significant assurance can probably best be conveyed through a engagements. Other frequently performed engagements driver for the demand for services other than the negative opinion as this makes the review opinion include for instance reviews of financial statements, financial statement audit to enhance the credibility of different from an audit opinion in its appearance. compilations of financial or other information, the SME financial statements on a cost-effective basis. However, improvements were suggested to the proposed preparation of tax returns or consulting engagements. Reviews are such alternatives. In these limited assurance wording of the report. engagement, the objective is to conclude whether Compilation means applying accounting and financial anything has come to the accountant’s attention that A meeting was also organised on 4 July, in the FEE reporting expertise to assist management in preparing causes him/her to believe that the financial statements offices, between the IAASB Task Force in charge of and presenting financial information in accordance are not prepared, in all material respects, in accordance the development of international standards for with an applicable financial reporting framework. with an applicable financial reporting framework. compilation engagements and review engagements, The difference between this engagement and other and representatives of the European profession, mainly bookkeeping services is that the accountant has to FEE fully supports revising the standard on review from smaller firms. The purpose of the meeting was to provide a report on his compilation work. engagements. The overarching aim is to make review review some pending issues concerning performance and engagements understandable, meaningful and clearly reporting. The extent to which ISCQC 1 should apply was In its response FEE was generally supportive as the distinguishable from audit engagements. The general also discussed. After this useful meeting the chairman of amendments substantially improve the current standard. concept of a negative opinion may be difficult to the Task Force, Phil Cowperthwaite, was confident that However clarification was suggested on some definitions, understand in practice and may not contribute, in the ISRS 4410 and ISRE 2400 could be revised in due course. the non applicability of independence rules, and the interest of the users, to close the expectation gap http://www.fee.be/publications/default.asp?library_ scope of the reporting requirements. that already exists. However, FEE believes that limited ref=4&content_ref=1367

www.fee.be Newsletter

Council of the EU agrees on financial reporting by micro entities

In February 2009, the European Commission in first reading on 10 March 2010. The Parliament of annual accounts. The thresholds for defining proposed a directive amending the 4th Company noted however that “micro-entities must still be micro-entities have also been reduced. Law Directive to simplify the business environment subject to the obligation to keep records showing and particularly the financial reporting requirements the company’s business transactions and financial FEE convinced the Council and the Parliament of for micro-entities. The proposal was to remove the situation as a minimum standard to which Member the pitfalls of cash accounting for micros and of the micro-entities from the scope of the 4th Company States remain free to add further obligations”. necessity to maintain accrual accounting. Law Directive, thereby relieving them from the requirement to draw up annual accounts. On 30 May, after long debates, the Council of the EU The text approved by Council is now on the agenda eventually found an agreement, allowing Member of the European Parliament for second reading in The European Parliament approved the proposal States to exempt micro-entities from the publication January 2012.

Changes at the helm of IASB ... and ICAS On 1st July 2011, the chairmanship of the International We would also like to express our keen Accounting Standards Board (IASB) moved from appreciation for Sir David’s immense contribution Sir David Tweedie CA to Mr Hans Hoogervorst. to the development of a global financial reporting FEE is particularly grateful to Mr Hoogervorst who framework over his 20 years as IASB Chair. FEE is addressed its General Assembly in December 2010. pleased that Sir David was recently appointed Vice- We look forward to a continued engagement with President of the Institute of Chartered Accountants the IASB Chair and Vice-Chair, Mr Ian Mackintosh, of Scotland with a view to his becoming President who spoke at the 2011 Meeting of Presidents of FEE in 2012. We look forward to continuing promoting Member Bodies. the development of high quality principles based standards together. Sir David Tweedie CA

FEE Publications

6 Briefing Papers on audit issues European passport for auditors and for audit firms are advantages in requiring auditors to provide In the context of the FEE Conference on Audit Policy to be attractive. Its effectiveness will largely assurance on public components of solvency reports. on 30 June 2011, FEE has prepared five Briefing depend on the further harmonisation and the Papers on a number of topics directly relevant to adoption of ISAs. Environmental, Social and Governance (ESG) audit policy. These Briefing Papers are not meant - Future Supervision of the Audit Profession: indicators in annual reports - An introduction to be detailed technical papers, they are meant to This FEE Paper encourages further integration to current frameworks be brief and to inform policy makers, legislators, and cooperation of audit firm supervision at The debate around the broader disclosure of ESG regulators, politicians, preparers and other European level. issues is important. FEE believes it can make a stakeholders as well as the profession about how - Proportionality and International Standards difference to the most necessary transition toward these subject matters could be further developed. on Auditing: The Paper develops questions and a sustainable economy. This paper aims at providing http://www.fee.be/publications/default. answers showing that ISAs can be applied in information on documents prepared by various bodies asp?library_ref=4&category_ref=235&private=False a proportionate way by SMPs and in an SME and most commonly referred to when considering environment. the identification and use of ESG indicators (also - Developing the Role of the Auditor and Key Performance Indicators (KPIs) and reporting Auditor’s Communication: In this Paper, FEE Enhancing the Quality of Solvency II Public principles). http://www.fee.be/publications/default. outlines its willingness to proactively contribute Reporting - Benefits of Harmonising Auditor asp?library_ref=4&content_ref=1392 to developing, in dialogue with all stakeholders, Reporting for the Users the future role of the auditor as well as auditor’s Revised regulatory requirements on the solvency Sovereign Debt Exposures - Key Issues for communication. of insurance companies introduces a revised consideration in the half-year financial - Appointment of the Auditor: This Paper comprehensive framework to define required capital reporting highlights some key aspects regarding the levels and to implement procedures to identify, As widely reported, several EU countries process of how the auditor is selected, how measure, and manage risk levels in insurance are presently facing increased bond yields and many auditors a company selects and how often undertakings and to report on financial condition in significant credit rating downgrades. The availability the company would appoint and/or reappoint its the context of these issues. It is expected to be fully of fair and transparent information about exposures auditor. effective and binding for insurance undertakings of individual institutions is of key importance to - Provision of Non-Audit Services to Audit from 1 January 2014. mitigate uncertainties and help prevent market Clients: There are different categories of non- mistrust. The purpose of this FEE Alert is to highlight audit services. They should not be treated as a The new rules include two kinds of reporting key issues faced by those involved with preparing monolithic bloc which endanger the auditor’s requirements (solvency reports): public reports half-year financial reports and auditors involved in independence. (Solvency and Financial Condition Report) and reviewing them. http://www.fee.be/publications/ - European Passport for Auditors and Audit private reports (Regular Supervisory Report) to default.asp?library_ref=4&content_ref=1418 Firms: In this Paper, FEE considers the idea of a supervisory authority. This paper explains why there

FEE • Av. d’Auderghem 22-28, 1040 Bruxelles • tel: +32 (0) 2 285 40 85 • fax: +32 (0) 2 231 11 12 • email: [email protected]