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transcript
Standing for trust and integrity
NASBA International Forum
Professional Accounting Challenges in the EU
Philip Johnson, FEE President Orlando, Florida
October 31 ‒ November 1, 2012
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Federating the European Profession
Ø 45 professional institutes of accountants
Ø 33 European countries, including all 27 European Union (EU) Member States
Ø 700,000 professionals incl. all sections of the profession: large, medium, small practices, business, public sector
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Active FEE Working Groups
Ethics
Direct Tax
Indirect Tax
Qualification and Market
Access
SMP Forum Corporate Reporting
Policy Group Auditing
IAASB EDs Subgroup
Company Law and Corporate Governance
Anti-Money Laundering
Insurance
Accounting
Capital Markets
Banks
Public Sector Committee
Sustainability
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EU main Institutions Council of the European Union Represents Member States
Main attributions Ø Legislates Ø Coordinates economic policies
European Parliament Represents EU citizens
Main attributions Ø Legislates Ø Supervises EU institutions
European Commission Is the EU Executive body Ø Proposes new legislation Ø Manages and implements EU policies Ø Enforces European law (with the Court) Ø Represents the EU
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The EU legislative process
European Commission
Council of the European Union European Parliament
Proposes Legislation
Co-Decide
Rapporteurs Accounting K.H. Lehne
(JURI Committee) Auditing
Sajjad Karim
(JURI Committee)
Kay Swinburne
(ECON Committee)
Final Legislation
Presidencies Denmark - 2012 Cyprus - 2012 Ireland - 2013 [Lithuania] - 2013 [Greece] – 2014 [Italy] - 2014
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The EP Ways of Working Commission proposal
Discussion
& preparation
Ø Committees Ø Political groups
Practical importance of Committee Chairs and
Rapporteur
Rapporteurs’ Report
Vote in Plenary Session
Ø Report Ø Legislative resolution
ü Approval ü Rejection ü Proposal to amend
Ø Amendments
Council (Member States)
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EC Accounting Reform Proposals of 25 October 2011
Combining and amending the existing 4th and 7th Accounting Directives
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EC Proposals (1/4) Ø “Think small first approach”
Ä New size category: “micro” entities (Member State option to exempt)
Ä Bottom up approach for reporting and disclosures (small, medium, large companies and Public Interest Entities (PIEs))
Ä Limited disclosure requirements for “small” companies Ø Fully harmonised EU size criteria for financial reporting (27
countries) Ø Size criteria for audit requirement
Ä Mandatory audit at EU level for medium and large companies and PIEs
Ä No EU level audit requirement for small companies Ä BUT Member State option to require audit of some or all small
companies allowed (“opt-in” option)
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Proposed accounting and auditing threshold criteria* (2/4)
* Entity or Group, if not exceeding 2 of the 3 criteria
In millions EUR Micro Small Medium Large
Agreed Current Proposed Current Proposed Current Proposed
Balance Sheet <0.35 <4.4 <5 <17.5 <20 >17.5 >20
Net Turnover <0.7 <8.8 <10 <35 <40 >35 >40 Average # of employees <10 <50 <50 <250 <250 >250 >250
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EC Proposals (3/4)
Ø IAS 2005 Regulation requiring use of IFRS (EU) for listed entities remains in place (all listed entities to adopt IFRS)
Ø Full adoption of IFRS for SMEs is not pursued
Ø Relatively minor accounting obstacles
Ä Presentation of unpaid subscribed share capital (Directive: recognised as asset vs. IFRS for SMEs: not recognised)
Ä Amortisation periods for goodwill where expected useful life cannot be reliably estimated (Directive: 5 years vs. IFRS for SMEs:10 years)
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EC Proposals (4/4) Ø Country by Country Reporting (CbyC) on payments made
to governments by the extractive industries and forestry companies
Ø Comparable to the US Dodd-Frank Act (July 2010) requiring SEC registered extractive industry companies to report on payments to governments
Ø To improve accountability in resource - rich emerging economies
Ø No specific threshold proposed for reporting
Ø Difficulty getting agreement by Member States
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Draft European Parliament (EP) & Council Positions (1/2)
Ø Accounting and auditing thresholds for small undertakings Ä EP and Council
q Member State option for the thresholds ranging from § Balance sheet total: EUR 4 million to EUR 6 million § Net turnover: EUR 8 million to EUR 12 million
q Average number of employees: 50
Ø Limited disclosure requirements for small companies Ä EP
q Further limitation to disclosure requirements by removing § off-balance sheet transactions § post balance sheet items § related party transactions
Ä Council q Member State option to require the above three disclosure
requirements
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Draft EP & Council Positions (2/2) Ø Audit requirement for small companies
Ä Council • Explicitly stating: Member States are not prevented from imposing an
audit on small companies Ø The use IFRS for SMEs
Ä EP and Council • The restriction to write off goodwill removed by a Member State
option to determine write off period between 5 - 10 years • Other obstacle retained
Ø Country By Country reporting Ä EP
• Threshold for disclosure per total payment of EUR 80,000 • The scope extension to large companies and PIEs active in banking,
construction or telecommunication industries Ä Council
• Threshold for disclosure per total payment of EUR 500,000 • No scope extension proposed to other industries
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FEE’s Positions
Ø Limited disclosure requirements for small companies Ä MS option to add disclosures that they deem needed
(subsidiarity principle)
Ø Audit requirement for small companies Ä Member State option to exempt some or all small
companies from EU audit requirement (“Opt-out” option rather than “Opt-in”)
Ø The use of IFRS for SMEs Ä Explicit MS option to use IFRS for SMEs
Ø Country By Country reporting Ä Reporting is required in a separate document, outside of
the annual report
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Future steps and Timeline
EU Body Timeline
Council Next meeting December 2012
EP Plenary Vote January 2013
Ø Likely to change
Ø Work still in progress
Ø Not a lot of optimism that a compromise will be reached at first reading due to contradictory amendments between EP and Council (CbyC and Fair Value accounting)
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Ø EC Green Paper Consultation, Oct. 2010 Ä Role of the Auditor Ä Communication by auditors to stakeholders Ä International Standards on Auditing (ISAs) Ä Governance and Independence of Audit Firms Ä Supervision (public oversight) Ä Market structure and concentration Ä Creation of a European internal market for
auditing Ä Simplification: SMEs & SMPs Ä International cooperation
« No subject should be taboo »
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EC Audit Reform Proposals of 30 November 2011
Amending current 2006 Statutory Audit Directive for all statutory audits
Proposing new Regulation for audits of Public Interest Entities (PIEs)
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EC Proposed Directive Ø Qualification
Ä Mutual recognition of professional qualifications
Ä Further harmonisation of aptitude test
Ø Auditing standards Ä ISA adoption by Member
States (MS) for all audits Ä MS to determine auditing
standards and quality assurance reviews for SMEs proportionally
Ø Supervision Ä Publication individual audit firm inspection reports Ä No practitioners in governance public oversight system
Ø Role professional bodies Ä Limited to possible delegation of registration and approval of auditors
Ø Public Interest Entities Ä Extended definition PIEs
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EC Proposed Regulation Ø Auditor’s Report
Ä Significant additions to ISA 700 for PIEs audit
q Going concern assessment q Internal Control assessment q Methodology, materiality, ...
Ø Firm Rotation Ä Initial appointment > 2
years, renewable once Ä Total duration ≤ 6 years,
longer if joint-audit Ä Cooling-off 4 years
Ø “Audit-only” Firms Ä Restrictions on audit firms
q with > 1/3 of annual audit revenues from large PIEs, and q belonging to a network with total annual audit revenues > 1.5 billion € (EU)
Ä Shall not provide NAS to any PIE
Ø Non-audit services Ä Long list of prohibited services without materiality thresholds Ä Some subject to prior approval of Audit Committee / competent authority Ä Allowed “related financial services” to max. 10% audit fees
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European Parliament Draft Opinions (1/3)
Ø Expected key battle grounds to arrive to a compromise
Ä Mandatory audit firm rotation Ä Joint-audit Ä Provision of non-audit services Ä Legal instrument: Regulation or Directive?
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European Parliament Draft Opinions (2/3) JURI (Legal Affairs): Main Committee
Ø Does not want to regulate the market Ø Supports
Ä Mandatory audit firm rotation of 25 years (“back stop” position)
Ä ISA adoption Ä Alignment of non-audit services with IESBA Code (no cap 10% audit fees)
Ä Strengthening of Audit Committees Ä Alignment of auditor reporting requirements with IAASB project
Ä More limited role of EU Oversight Body (ESMA)
Ø Does not support Ä Limitation of delegation to professional bodies
Ä Audit-only firms Ä Joint-audit
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European Parliament Draft Opinions (3/3)
ECON (Economic & Monetary affairs): Secondary Committee
Ø Supports Ä Limitation of delegation to professional bodies Ä Alignment of non audit services with IESBA Code with 10% audit
fee cap Ä Tendering for non audit services Ä Strengthening of Audit Committees Ä Mandatory tendering for audit every 7 years
Ø Does not support Ä Audit-only firms
Ä Mandatory audit firm rotation Ä Joint-audit
Ä EU oversight role for ESMA
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Draft Council Opinions
Ø Different views being expressed by Member States, which want to stay much closer to 2006 Statutory Audit Directive
Ø Appropriateness of legal instrument Ä Audit report: better to wait for IAASB proposals? Ä Non-audit services: safeguards vs clear list of
prohibitions Ä Opposition to 10% cap on fees of financial audit services Ä Concerns about pure-audit firm proposal Ä No consensus on mandatory audit firm rotation Ä Questions on role of ESMA
Ø Compromise text being drafted by Cypriot Presidency
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Positions of the Accountancy Profession in Europe & FEE
Ø Delegation to professional bodies should be possible Ø PIE definition: no EU extension Ø ISA Adoption Ø Auditor reporting in line with IAASB proposals Ø Provision of non-audit services in line with IESBA Code Ø No cap (10%) of audit fees for provision of other services Ø No pure-audit firms Ø Strengthening role of Audit Committees Ø Audit market structure? Mandatory rotation of firms Ø Strengthening EU audit oversight
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Future steps and timeline
EU Body Timeline
EP Committees Vote Early 2013
EP Plenary Vote Spring 2013
Council Vote Under Irish Presidency H1 2013
Ø Likely to change
Ø Work still in progress
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FEE activities re. Audit Policy debate
Ø Continued dialogue with stakeholders in EC, EP & Council Ø Heavily involved with the offices of the various rapporteurs Ø Engagement with IAASB and PCAOB Ø Continued work on role of Audit Committees – surveys/round tables Ø Publication of 4 Briefing Papers in July 2012
Ä « Improved auditor reporting » Ä « The Provision of non-audit services to PIEs audit clients » Ä « Adoption of ISAs in the EU » Ä « Public Oversight of statutory auditors and audit firms »
Ø Close contact with FEE Member Bodies Ø Currently working on paper relating to « The Future of Audit »