Slide 1 Federation des Experts Comptables Méditerranéens 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)
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Slide 1 Federation des Experts Comptables Méditerranéens 4 th FCM Conference Capri, 3-4 May 2004 The Globalisation of Small and Medium-sized Enterprises.
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
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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”
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
Slide 12
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
Slide 17
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
Slide 21
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)