4

th

FCM Conference Capri, 3-4 May 2004

The Globalisation of Small and Medium-sized Enterprises and the Role of the Accountancy Profession

The Financial Reporting and Auditing Aspects of Corporate Governance

David Devlin – FEE President (Fédération des Experts Comptables Européens - European Federation of Accountants)

Slide 2

Topics



Corporate Governance Helps Enterprises & Auditors

 Recent EC Developments  Proposed New 8th Directive  FEE Discussion Paper “Financial Reporting and Auditing Aspects of Corporate Governance”  FEE Paper “A Conceptual Approach to Safeguarding Integrity, Objectivity and Independence throughout the Financial Reporting Chain”  Concluding remarks

Corporate Governance Helps Enterprises and Auditors

Slide 3  Not just for listed companies  Many other types of “public interest” entities    Unlisted banks Savings institutions and funds Co-operative enterprises  State-owned entities

Corporate Governance Helps Enterprises and Auditors (2)

Slide 4  Several important initiatives  OECD “New Principles of Corporate Governance”  IFAC – Credibility Task Force Report  EU – Action Plan

Recent EC Developments

 Jaap Winter Expert Group Report (2002)  EC Communication on Company Law and Corporate Governance (2003)  EC Communication on the Statutory Auditor (2003)  Proposed New EC 8th Directive (March 2004) Slide 5

EC Action Plan on Corporate Governance

Slide 6 Consultation on:  Collective responsibility of the board for financial statements  Intra-group transparency  Related party transactions  Disclosures on corporate governance EC Statement on Corporate Governance  Listed Companies  Expected later in 2004

Outline

 FEE  Recent EC Developments 

Proposed New 8th Directive

 FEE Discussion Paper “Financial Reporting and Auditing Aspects of Corporate Governance”  FEE Paper “A Conceptual Approach to Safeguarding Integrity, Objectivity and Independence throughout the Financial Reporting Chain”  Concluding remarks Slide 7

Slide 8

Proposed 8th Directive – Corporate Governance Aspects Public Interest Entities

 Audit committee (non executive)  At least one independent member with competence in accounting and/or auditing  Effective Communication with auditors, to be properly recorded

Slide 9

Proposed 8 th Directive – Corporate Governance Aspects Public Interest Entities

 Audit committee tasks   Monitor financial reporting process Monitor effectiveness of company’s internal control, internal audit and risk management systems   Oversee the statutory audit Monitor independence statutory auditors – in particular additional services  Select auditors (approved by AGM)

Outline

 FEE  Recent EC Developments  Proposed New Eighth Directive 

FEE Discussion Paper “Financial Reporting and Auditing Aspects of Corporate Governance”

 FEE Paper “A Conceptual Approach to Safeguarding Integrity, Objectivity and Independence throughout the Financial Reporting Chain”  Concluding remarks Slide 10

Slide 11

FEE Discussion Paper on the Financial Reporting and Auditing Aspects of Corporate Governance

 Common Views of EU Profession  Providing input to developments at EU level  Highly relevant in light of recent scandals  Aimed at publicly listed companies but also relevant to other entities

FEE Discussion Paper on Financial Reporting

Slide 12

and Auditing Aspects of Corporate Governance

 Main focus of the paper is on the role of audit committees, external auditors and internal auditors  Key elements of corporate governance framework (including non-executive directors)  Mutual dependency between corporate governance, financial reporting and audit

Mutual Dependency between Financial Reporting, Corporate Governance and audit

Slide 13 Corporate Governance Audit Financial Reporting

FEE Discussion Paper on Financial Reporting

Slide 14

and Auditing Aspects of Corporate Governance

Highlights the importance for companies of:  structures, independent directors and ethics  proper balance of power at board level  good risk management and internal control systems  an effective and well resourced internal audit function  good corporate governance disclosures

FEE Discussion Paper on Financial Reporting

Slide 15

and Auditing Aspects of Corporate Governance

 Does not attempt to address all aspects of corporate governance  Specifically excludes :   work of remuneration and nomination committees detail of the technical audit process

FEE’s Key Messages And Recommendations

Slide 16

Broad Approach

 No need for a European Corporate Governance Code  Convergence around common principles and benchmarks  “Comply or explain” approach supported  Unitary boards:  separation of the roles of Chairman and CEO  need for strong, independent non-executives  Two tier boards:  the management board should at least have two members in addition to the chief executive

FEE’s Key Messages And Recommendations

Slide 17

Audit Committees

 All listed companies should have an audit committee where, at a minimum, the majority of the committee’s members are independent  Audit committee’s core responsibilities should include:  reviewing financial reporting arrangements  internal control related to reporting  monitoring the relationship with the external auditor  monitoring the work and resources of the internal audit function

FEE’s Key Messages And Recommendations External Auditors

Slide 18  Active dialogue with audit committees and boards:  external auditors aware of all relevant information  audit committees understanding of auditors work  on significant accounting policies and practices  on principal accounting estimates and judgements

FEE’s Key Messages And Recommendations External Auditors (2)

Slide 19  The audit committee’s role in keeping under review:  The auditor’s independence  The company’s purchasing policy on non-audit services

FEE’s Key Messages And Recommendations Disclosure on Corporate Governance

Slide 20  Disclosures are a powerful tool  Corporate governance statement in the annual report from the board (EC Communication)  Not yet an agreed framework for corporate governance reporting, setting out common principles on their form and contents  Implications of where the corporate governance statement is located in the annual report

FEE’s Key Messages And Recommendations

Slide 21

Disclosure on Corporate Governance (2)

 Protection of minority shareholders: all disclosures available to all shareholders at the same time  Information about the processes that boards use to manage risk and assess internal control  Information on the audit committee’s responsibilities and activities (help reduce possible expectation gap)

FEE’s Key Messages and Recommendations Independent Directors

Slide 22  Two main roles for non-executive directors:   strategy Monitoring  To act effectively they must:   be, and be seen to be, independent act independently from management   be involved be competent

FEE’s Key Messages and Recommendations

Slide 23

Independent Directors (2)

 On an individual basis - independent directors may need to limit the number of their directorships in order to fulfil their responsibilities  To be transparent, annual reports should disclose:  which directors are deemed to be independent  for each director, the names of the other companies and organisations of which they are directors (or equivalent positions)  the particular expertise or experience that each director brings to the board

Slide 24

Outline

 FEE  Recent EC Developments  Proposed New Eighth Directive  FEE Discussion Paper “Financial Reporting and Auditing Aspects of Corporate Governance” 

FEE Paper “A Conceptual Approach to Safeguarding Integrity, Objectivity and Independence throughout the Financial Reporting Chain”

 Concluding remarks

Slide 25

FEE Paper “A Conceptual Approach to Safeguarding Integrity, Objectivity and Independence Throughout the Financial Reporting Chain”

 Published in November 2003  Applying the profession’s Framework Approach of threats and safeguards to other parts of the financial reporting chain

Slide 26

FEE’s Key Messages

 Availability of reliable and credible information is vital to ensure economic progress; people should act ethically throughout the financial reporting chain.

 Financial reporting activities other than audit are not exclusively provided by accountants and the accountancy profession cannot rebuild public confidence alone.

 Relevant bodies, whether individual businesses, regulators or professional associations need to have in place codes of ethics.

Slide 27

FEE’s Key Messages (2)

 Ethics Codes should:  Establish fundamental principles which must always be adhered to  Require analysis (and where relevant demonstration) of threats and safeguards  Highlight types of threats that might be encountered and general safeguards that may be applied  Give examples of typical situations  Be subject to oversight of compliance

Outline

 FEE  Recent EC Developments  Proposed New Eighth Directive  FEE Discussion Paper “Financial Reporting and Auditing Aspects of Corporate Governance”  FEE Paper “A Conceptual Approach to Safeguarding Integrity, Objectivity and Independence throughout the Financial Reporting Chain” 

Concluding remarks

Slide 28

Slide 29

Concluding Remarks

 Corporate Governance is a key factor in high quality financial reporting  Supporting auditors to provide high quality audits  FEE welcomes the corporate governance initiatives of the EC  All parties in the Financial Reporting Supply Chain have to assume their proper responsibilities and demonstrate ethical behaviour  Restoring confidence in capital markets should be the aim of all parties involved

4

th

FCM Conference Capri, 3-4 May 2004

The Globalisation of Small and Medium-sized Enterprises and the Role of the Accountancy Profession

The Financial Reporting and Auditing Aspects of Corporate Governance

David Devlin – FEE President (Fédération des Experts Comptables Européens - European Federation of Accountants)