Slide 1 Federation des Experts Comptables Méditerranéens

4th FCM ConferenceCapri, 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

Slide 3

Corporate Governance Helps Enterprises and Auditors

Not just for listed companies

Many other types of “public interest” entities Unlisted banks Savings institutions and funds Co-operative enterprises State-owned entities

Slide 4

Corporate Governance Helps Enterprises and Auditors (2)

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

Slide 5

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 6

EC Action Plan on Corporate Governance

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

Slide 7

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 8

Proposed 8th Directive – Corporate Governance AspectsPublic 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 8th Directive – Corporate Governance AspectsPublic 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)

Slide 10

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 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

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FEE Discussion Paper on Financial Reporting 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

Slide 13Mutual Dependency between Financial Reporting, Corporate Governance and audit

Corporate Governance

FinancialReporting

Audit

Slide 14

FEE Discussion Paper on Financial Reporting 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

Slide 15

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

Does not attempt to address all aspects of corporategovernance

Specifically excludes : work of remuneration and nomination committees detail of the technical audit process

Slide 16

FEE’s Key Messages And Recommendations

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

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FEE’s Key Messages And Recommendations

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

Slide 18

FEE’s Key Messages And Recommendations

External Auditors

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

Slide 19

FEE’s Key Messages And Recommendations

External Auditors (2)

The audit committee’s role in keeping under review: The auditor’s independence The company’s purchasing policy on non-audit

services

Slide 20

FEE’s Key Messages And Recommendations

Disclosure on Corporate Governance

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

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FEE’s Key Messages And Recommendations

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)

Slide 22

FEE’s Key Messages and RecommendationsIndependent Directors

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

Slide 23

FEE’s Key Messages and RecommendationsIndependent 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

Slide 28

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 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

Slide 30 Federation des Experts Comptables Méditerranéens

4th FCM ConferenceCapri, 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)