Thirtieth Report of Session 2012-13 - European Scrutiny Committee Contents


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2   Financial reporting and auditing
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COM(12) 782

Draft Regulation establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period 2014-20

Legal baseArticle 114 TFEU; co-decision; QMV
Document originated19 December 2012
Deposited in Parliament10 January 2013
DepartmentDepartment for Business, Innovation and Skills
Basis of considerationEM of 25 January 2013
Previous Committee ReportNone, but see footnote
Discussion in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested

Background

2.1  According to the Commission, the global nature of capital markets means that the harmonisation of financial reporting and audit rules at global level is essential to their smooth functioning, and for the realisation of an integrated market for financial services within the EU, and it says that this is why the EU decided in 2002 to adopt international accounting standards (IFRS), rather than introduce its own set of requirements. It also points out that, with more countries moving to adopt IFRS, Europe will need more weight in order for its voice to be heard, requiring it to speak with one voice, and it notes that the European Financial Reporting and Accounting Group (EFRAG), which is its technical adviser in accounting matters, has gradually taken on the role of providing technical input to the international standard setting process.

The current proposal

2.2  The Commission goes on to note that, in 2009, the European Parliament and Council adopted Decision No. 716/2009/EC establishing a Programme[14] with a budget of 38.7 million for the period 2010-13 to support specific activities in the field of financial services, financial reporting and auditing, which funded the Committees of Supervisors, the International Accounting Standards Committee Foundation (IASCF), the European Financial Reporting Advisory Group (EFRAG) and the Public Interest Oversight Board (PIOB). That Programme will end in December 2013, and this draft Regulation aims to renew it for the next financial framework (2014-2020), though, as the responsibilities of the Committees of Supervisors were taken over in 2010 by the European Supervisory Authorities, it would now apply only to the remaining beneficiaries — the International Financial Reporting Standards (IFRS) Foundation (the legal successor of the IASCF), EFRAG and PIOB (see Annex).

2.3  Funding of €58.01 million would be made available from the EU budget in this period, of which €32.22 million would be for the IFRS Foundation; €23.51 million for EFRAG and €2.27 million for PIOB. In addition, the Commission proposes that funding of €4.01 million will be needed in administrative expenditure for the Internal Market and Services Directorate to manage this budget.

The Government's view

2.4  In her Explanatory Memorandum of 25 January 2013, the Minister for Employment Relations and Consumer Affairs at the Department for Business, Innovation and Skills (Jo Swinson) says that the Government agrees with the overall strategic aim of the Commission's proposals to ensure stable, diversified, sound and adequate funding to enable the relevant bodies to carry out their EU related or EU public interest mission in an independent, efficient and satisfactory way. However, she notes that the Commission wishes to maintain (but not increase) the current level of funding for the bodies concerned, and that the proposal therefore accounts for an increase commensurate with the expected 2% inflation rate, and she says that, whilst the UK recognises the important roles these organisations fulfil and supports their continued funding in principle, it questions if a blanket increase in budgets is justified given the current austerity context. It therefore proposes to ask the Commission to explain what consideration it has given to prioritising the outcomes it wishes to see, and to linking funding accordingly.

2.5  The Minister also comments on individual beneficiaries, saying that the Government is supportive of the ISRG Foundation, but that, whilst it values the work of EFRAG as a technical advisor, it is concerned that it is unsuited to the task of presenting Member States' views on standards, given that these must include political, public interest, and economic considerations. She also says that, since that EFRAG's principal role is to provide a technical view at the end of the standard setting process, it is important to limit its involvement at earlier stages to avoid a process whereby it is called upon to pass judgment on decisions to which it has been party. She adds that this is a live debate with the Commission, the UK and other Member States having expressed concern about the legitimacy of EFRAG taking on this role, and that the UK considers that the EU Accounting Regulatory Committee (ARC) may be more suited to the task.

2.6  The Minister also observes that the proposal delegates power to the Commission to select new beneficiaries for the Programme, subject to the proviso that these should be non-profit making legal persons pursuing an objective which forms part of, and supports, EU policy in the field of financial reporting and auditing, as well as being a direct successor of one of the beneficiaries already funded by the Programme. She says the Government will consider if the use of delegated powers is the most appropriate mechanism for this purpose, and will ask the Commission to explain how it will consider if successor bodies merit continued funding.

Conclusion

2.7  Since this document would essentially extend for a further period a programme which has been in force since 2009, it does not raise any significant new issues, but, given its aims and objectives, we think it right to draw it to the attention of the House. We also note that, although the Government supports the overall aim of the programme, it has raised some questions about the level of funding proposed for 2014-2020, the role of the European Financial Reporting and Accounting Group, and the proposed use of the Commission's delegated powers. We are therefore holding the document under scrutiny, pending further developments on these various points.

Annex

The IFRS Foundation is an umbrella body which brings together the organisations that develop international accounting standards: the International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS) Interpretation Committee. The IFRS Foundation oversees their smooth functioning and proper financing.

The EU decided to adopt IFRS in 2002 on the basis that, given the global nature of capital markets, harmonisation of financial reporting and audit rules is essential for the sake of transparency and comparability. It proposes to fund the IFRS Foundation to ensure that both the IASB and the IFRS Interpretation Committee have the solid, neutral, reliable and calculable funding base which will allow them to operate independently, recruit top quality people, and develop high quality accounting standards.

IFRS are incorporated into Union law and applied by companies with securities listed on regulated markets in the Union (provided they meet the criteria set out in EU regulation). The EU therefore has a direct interest in ensuring that the process through which IFRS are developed and approved delivers standards consistent with the requirements of the legal framework of the internal market.

In the current Programme, the co-financing stemming from the EU aims at covering 20-25% of the IFRS Foundation's budget, in line with Europe's weight in the total global economy. The Commission acknowledges that since the increased use of IFRS globally will result in an expansion of the IFRS Foundation's membership with an associated increase in its costs and total budget, the Commission's relative contribution is unlikely to be maintained in the next financial period (it may even drop to 10%). This will mean the Foundation will need to seek additional funding from other sources in order to be able to carry out its public interest mission satisfactorily.

EFRAG

The European Financial Reporting Advisory Group (EFRAG) is a private organisation, established in 2001, originally to provide the Commission with technical expertise in financial reporting matters. It provides the Commission with opinions on whether an accounting standard issued by the IASB or an interpretation issued by the IFRS Interpretations Committee complies with the endorsement criteria set out in the regulation governing the adoption of international standards for use in the EU. It has gradually widened its role into actively influencing the IASB in its standard setting work, and the Commission has indicated that it envisages this developing further, such that EFRAG becomes the leading platform to form a single accounting voice of the EU and to deliver the EU's input to the IASB.

The Commission is concerned that, as more and more countries move towards adopting the IFRS, the EU will need to take steps to prevent a gradual loss of influence and weight in the IASB. To this end, it regards it as essential that European interests are well represented at international level, and that Europe 'speaks with one voice' that is credible and technically sound.

For the 2011 financial year, the EU provided 43% of EFRAG's budget. The proposed co-financing level for the period 2014-2020 will not support additional tasks to be taken up by the organisation; these will have to be financed from EFRAG's own resources.

PIOB

The Public Interest Oversight Board is a not-for-profit foundation created in 2005. Its key role is to ensure that the International Standards on Auditing (ISAs) are developed and adopted by the International Auditing and Assurance Standards Board (IAASB) with due process, public oversight and transparency. The IAASB is an independent standard-setting body that sets international standards for auditing. Currently, 78% of the funding for PIOB is provided by the International Federation of Accountants (IFAC) and 22% by the EU. Work is ongoing to diversify this funding.




14   (30397) 5783/09: see HC 19-ix (2008-09), chapter 3 (4 March 2009), HC 19-xiv (2008-09), chapter 3 (22 April 2009) and HC 19-xv (2008-09), chapter 5 (29 April 2009). Back


 
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Prepared 6 February 2013