3 Financial services and accounting and
audit standards
| (30397) 5783/09 + ADD 1 COM(09) 14
| Draft Decision establishing a Community programme to support specific activities in the field of financial services, financial reporting and auditing
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| Legal base | Article 95 EC; co-decision; QMV
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| Document originated | 23 January 2009
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| Deposited in Parliament | 3 February 2009
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| Department | Business, Enterprise and Regulatory Reform
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| Basis of consideration | EM of 20 February 2009
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
3.1 Any company with its securities listed on a regulated market
in the Community must publish its consolidated financial accounts
in accordance with International Financial Reporting Standards
issued by the International Accounting Standards Board and with
related interpretations by the International Financial Reporting
Interpretations Committee. These are two bodies of the International
Accounting Standards Committee Foundation, which is a not-for-profit
corporation incorporated in Delaware, USA.[15]
3.2 The European Financial Reporting Advisory Group
was set up in 2001 by organisations representing issuers of securities,
investors and the accountancy profession involved in the financial
reporting process. It assists the Commission in the endorsement
of international accounting standards by providing advice on the
technical quality of these standards and is used by stakeholders
to provide technical input to the development of draft international
accounting standards.[16]
3.3 The Public Interest Oversight Board[17]
was created in 2005 to increase the confidence of investors and
others that the public interest activities, including the setting
of standards by independent boards operating under its auspices,
of the International Federation of Accountants, a global private
body representing the accounting profession,[18]
are properly responsive to the public interest. A key role of
the Board is to ensure that International Standards on Auditing
are developed and adopted by the International Auditing and Assurance
Standards Board,[19]
a board of the International Federation of Accountants, with due
process, public oversight and transparency.
3.4 The Lamfalussy Level 3 committees[20]
are the Committee of European Securities Regulators,[21]
the Committee of European Banking Supervisors[22]
and the Committee of European Insurance and Occupational Pensions
Supervisors.[23] They
were set up by the Commission between 2001 and 2004 in order to
provide for stronger cooperation between national supervisory
authorities and the convergence of supervisory practices. They
are made up of representatives from national supervisory authorities
competent in the fields of securities, banking and insurance in
each Member State. The committees do not receive any funding from
the Community budget — they are funded by annual contributions
from their members, based on the number of votes held in the Council
by the Member State concerned.
The document
3.5 With this draft Decision and the annexed staff
working document the Commission proposes a programme of Community
budget funding over four years, totalling €36.20 million
(£32.50 million); for the International Accounting Standards
Committee Foundation (€15.00 million (£13.47 million)),
the European Financial Reporting Advisory Group (€12.00 million
(£10.77 million)) the Public Interest Oversight Board (€1.20
million (£1.08 million)) and the three Lamfalussy Level 3
committees (€8.00 million (£7.18 million)). Additionally
the Commission proposes that €7.13 million (£6.40 million)
over four years will be needed to provide extra staff for its
Internal Markets and Services Directorate to manage the proposed
funding.
3.6 In support of funding for the International Accounting
Standards Committee Foundation the Commission says that:
- ECOFIN Council conclusions
in each of the last three years have highlighted the need to secure
appropriate funding for the Foundation;
- its current budget of target contributions is
£16 million for 2008;
- it is dependent on the voluntary contributions
of four major international accountancy and audit firms, the "big
four",[24] for about
22% of its funding;
- around 26% of the funding comes from countries
within the Community, currently arranged at Member State level,
and funds raised in the USA and Japan account for 26% and 10%
respectively;
- national funding schemes have been established
in only eight Member States, either through privately arranged
voluntary funding schemes or via statutory levies on companies
with listed securities;
- the Commission assesses that no significant progress
can be expected towards establishing national funding schemes
in all Member States in the foreseeable future;
- the Commission is concerned that the standard
setting process needs to be independent of undue influence from
parties, such as auditors and listed companies, with a stake in
its outcome, that the continuity of the International Accounting
Standards Board's operations is threatened by the existing voluntary
nature of so much of its funding and about the lack of fairness
in only eight Member States contributing;
- its legal service has concluded that there is
no basis in Community law to require Member States to fund the
Foundation or to impose a mandatory levy on Community listed companies;
- even if a legal basis for such a levy could be
found on the basis of Article 308 EC, adoption of such legislation
would require unanimity in the Council and political reasons make
this unlikely to be achieved; and
- the Commission, therefore, proposes that the
Community contributes to the funding of the International Accounting
Standards Committee Foundation.
3.7 In relation to the European Financial Reporting
Advisory Group the Commission says that:
- the Group's role of providing
technical input to the development of draft international accounting
standards is constrained by lack of resources;
- in 2007 its budget was €3.25 million (£2.8
million);
- around half the budget is in cash and the other
half represents a contribution "in kind" by the provision
of technical experts from national standard setters, the accounting
and audit profession, users, and academic institutions;
- the Group is currently funded by its member organisations
and interested parties (such as auditors);
- this makes its funding non-diversified, precarious
and voluntary;
- the additional financing proposed would be partly
used to put some current experts on the Group's payroll and partly
to increase the number of staff;
- as with the International Accounting Standards
Committee Foundation, there is no legal basis for a requirement
to set up national funding schemes; and
- no material increase in funding can be expected
from existing funders.
3.8 On the Public Interest Oversight Board the Commission
says that:
- the Community has a direct
interest in the development process of international accounting
standards as the 2006 Statutory Audit Directive provides for them
to be adopted into Community law;
- the purpose of Community funding would be to
reduce the current dependence of Board on the International Federation
of Accountants for 93% of its funding, which is felt to be inappropriate
given the role in providing independent oversight of key Federation
work; and
- the Community would provide, under the proposal,
30% of the Board's funding.
3.9 In discussing the Lamfalussy Level 3 committees
the Commission says that:
- they are inadequately equipped
with the financial means to carry out certain strategic projects
which significantly exceed the current funding arrangements
- it proposes, therefore, co-financing the committees
for specific tasks — in particular, information technology
projects and projects relating to staff training and secondments
— through awarding grants;
- the committees have estimated the funding needs
for the development of staff training and secondment projects
and a number of information technology at €16.61 million
(£14.90 million) over five years; and
- it proposes to finance 48% of these estimated
costs, providing the committees' supporting structures (their
legal personalities) with €2.00 million (£1.8 million)
each year for the 2010-13 period, totalling €8.00 million
(£7.20 million).
The Government's view
3.10 In his Explanatory Memorandum of 20 February,
the Parliamentary Under-Secretary of State, Department for Business,
Enterprise and Regulatory Reform (Ian Pearson), says, in relation
to the International Accounting Standards Committee Foundation,
the European Financial Reporting Advisory Group and the Public
Interest Oversight Board that the Government agrees with the aim
of the Commission to ensure stable, diversified, sound and adequate
funding to enable these bodies to carry out their Community related
or Community public interest mission in an independent, efficient
and satisfactory way. But it is as yet unconvinced that the Commission's
proposals will achieve this aim. The Minister also says that the
Government supports the provision of funding for these bodies
on condition that it comes out of a reallocation of the existing
Community budget and does not cause an increase in that budget.
3.11 On the International Accounting Standards Committee
Foundation the Minister comments that:
- it is unclear whether the funding
proposed is additional or replacement funding, and if new what
it is for, or if a replacement what it replaces;
- it is most likely that it is designed to replace
the current Member State schemes of funding — if this is
the case the proposal meets few of the Commission's stated objectives
and will not meet the most important objective at all;
- that is, it is unlikely to replace funding by
the "big four" accountancy and audit firms, but even
if it did it would not reduce influence by auditors and other
knowledgeable parties because they constitute the knowledge base
for accounting and audit regulation and staff many of the posts
in the Foundation bodies;
- the UK is one of the approximately eight Member
States that contribute funding from the Community to the Foundation
— but the Government is not only unperturbed by the bias
in funding provided, it is also unaware of any concerns among
other Member States who also contribute;
- the voluntary nature of the Foundation's funding
has not caused any serious practical issues in its continuity
or operation;
- the USA has, however, raised the voluntary nature
of the funding as a governance obstacle in the way of its acceptance
of International Financial Reporting Standards and a compulsory
funding model would relieve fund-raising burdens on the Foundation's
Trustees;
- the Commission suggests the funding the Community
should provide would be 25% of the Foundation's budget allowing
elimination of the contribution of the "big four";
- but as that contribution is £4.00 million
and that of the eight Member States is also £4.00 million
the Community contribution would have to be €13.40 million
(£12.00 million) more than that proposed by the Commission;
and
- this aspect needs to be clarified in the negotiations
on the draft Decision.
3.12 In relation to the stronger European Financial
Reporting Advisory Group proposed by the Commission the Minister
says that this would appear a useful outcome for all Community
stakeholders and that the sums involved are probably not unreasonable.
3.13 The Minister tells us that the Government supports
the principle of funding the Lamfalussy Level 3 committees from
the Community budget for specific projects asked of them by the
Community or, for example, projects to raise supervisory standards,
share best practice and enhance supervisory convergence. He comments
further that:
- the Government would support
proposals to fund, for example, staff training, secondment opportunities
and specific Community-wide information technology projects;
- it does not, however, support funding the general
functions of the committees, for example, in their role in providing
guidance to national supervisors on Community legislation, as
this might undermine their independence;
- the proposal does not change the national accountability
or role of national supervisors; and
- the proposal would appear to be aligned with
the Government's objectives — restricting the criteria of
eligible projects, primarily to staffing and information technology
projects, and excluding activities that are included in the committees'
mandates. The Government will seek to further clarify this in
the negotiations.
3.14 The Minister also says that the Government will:
- seek clarification on how the
proposed funding appropriations were determined;
- seek clarification on a provision in the draft
Decision allowing the Commission to add, through the comitology
procedure, other eligible beneficiaries to the funding programme;
and
- ask the Commission to justify the proposed administration
costs and to consider options for sharing and reducing these cost
implications.
Conclusion
3.15 Clearly enhancement of these various bodies
may make for better regulation of accounting and audit practices
and for better supervision of financial services. But we note
the various reservations the Government has about the draft Decision
and before considering the document further we wish to hear from
the Government about the clarifications it is seeking in the negotiations
on the proposal.
3.16 Meanwhile the document remains under scrutiny.
15 See http://www.iasb.org/About+Us/About+the+IASC+Foundation/About+the+IASC+Foundation.htm.
Back
16
See http://www.efrag.org/content/default.asp?id=4103. Back
17
See http://www.ipiob.org/index.php. Back
18
See http://www.ifac.org/. Back
19
See http://www.ifac.org/IAASB/. Back
20 The Lamfalussy process is a four-level approach
to regulation of the Community's financial services industry.
At the first level the European Parliament and the Council adopt
legislation, setting framework principles and the Commission's
implementing powers, on the basis of Commission proposals on which
it is advised by sector-specific committees of high-level representatives
of Members States chaired by the Commission. At the second level
sector- specific committees of national regulators prepare and
advise on implementing measures to be adopted by the Commission.
At this level the committees of high-level representatives perform
a "comitology" role (comitology procedures regulate
exercise by the Commission of implementing powers conferred on
it by the Council and the European Parliament and are essentially
intended for detailed measures to implement Community legislation)
of voting on the Commission's implementing measures before their
adoption. At the third level the committees of national regulators
work on strengthening coordination of regulation, for instance
by establishing common interpretations of legislation and peer
group review of regulatory practice. At the fourth level the Commission
strengthens compliance with and enforcement of EU rules. Back
21
See http://www.cesr-eu.org/index.php?page=cesrinshort&mac=0&id=.
Back
22
See http://www.c-ebs.org/Aboutus.aspx. Back
23
See http://www.ceiops.eu/content/view/2/2/. Back
24
Deloitte, Ernst and Young, KPMG and PriceWaterhouseCoopers. Back
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