Referencing the need to address recent corporate failures in Europe, notably Wirecard and Carillion, the Commission is calling for evidence to help evaluate the EU audit and corporate governance framework, as far as relevant to reporting. As the Commission papers make clear, ‘the three pillars that underpin the quality and reliability of corporate reporting by listed companies have not fully played their intended role; without a new EU intervention, it is likely that problems will persist.’

As stressed by Michael Izza, ICAEW CEO, ‘this is a very wide-ranging consultation, and the Commission is taking a holistic approach in seeking input on three main pillars: audit, corporate governance and supervision, all of which are linked and interdependent.’ He added ‘it raises many of the same issues which have surfaced during the UK’s efforts to reform audit and corporate governance, such as how much responsibility should fall on boards. This is to be expected, as the UK and EU systems are still aligned. It will be interesting to see whether the Commission comes to the same conclusions as the UK Government.’

Corporate governance

The consultation questionnaire seeks feedback on the effectiveness, efficiency and coherence of key features of the EU corporate governance framework relevant to corporate reporting. These include board responsibilities for reporting, the liability of boards for reporting, and the obligation to establish an audit committee. 

The stated aim of the intervention is the improvement of the corporate governance framework to ensure that companies strengthen the quality of their corporate reporting and reinforce related responsibilities of company boards and audit committees. To this end, the Commission raises a number of questions on collective board responsibilities in relation to systems of controls, the prevention of risks of frauds, and going concern. Views are also sought on whether audit committee tasks should be increased alongside their position vis-à-vis the external auditor and shareholders.

Statutory audit

The bulk of the consultation document is centred on audit, with the Commission particularly interested in understanding the impact of the changes brought about by the 2014 EU audit reform package, focused on public interest entities (PIEs). The Commission’s last market monitoring report issued earlier this year had already revealed a number of deficiencies with audit quality (based also on inspection reports) and divergent use of the country options allowed under EU audit rules, potentially undermining the integrity of the single market. The Commission papers emphasise the high levels of concentration for the PIE audit market and persistent barriers to cross-border audits of PIEs. 

General questions are raised on independence, firm rotation, the content of the audit and audit reporting, the provision of non-audit services, transparency rules and the internal governance of firms. Specific questions also ask for feedback on whether joint audits for PIEs should be incentivised or mandated; whether caps on auditor liability should be increased or removed; and whether a passporting system should be established to ease the cross-border provision of audit services. 

The Commission also asks for input on the supervisory framework for auditors at both national and European level, as well as audit committees. Options put forward include the potential to further harmonise investigation and sanctioning powers, as well as the potential to grant a European body registration and supervisory powers for PIE auditors.

Supervision

Reflecting a number of concerns with the supervision of corporate reporting – the third pillar of the consultation document – feedback is also sought on deficiencies in the EU’s supervisory framework. These address the roles and responsibilities of national authorities, the exchange of information between authorities, the need for greater enforcement powers, as well as the role of the European Securities and Markets Authority (ESMA). Other questions ask for views on whether authorities’ independence and/or resources need strengthening. 

Reactions

Jens Loeffler, EU audit policy leader and partner at Deloitte said: “we welcome the consultation from the European Commission and its approach to consider the effectiveness of the whole corporate reporting system. We support measures that will build trust and confidence in the European markets, and look forward to contributing before the Commission’s deadline.”

Dr Nigel Sleigh-Johnson, Director of Audit and Corporate Reporting at ICAEW, added: “This is an important consultation, to which ICAEW will be responding. The outcome of what is expected to prove a protracted legislative process is likely to have some significant implications for UK companies and auditors. We will monitor developments closely”.

Next steps

The initiative complements the fitness check of the EU’s reporting framework for financial information published in the spring, which highlighted the positive impact of IFRS adoption in the EU while raising concerns over potential weaknesses in enforcement practices across the bloc. It also builds on work carried out by ESMA, including in relation to the Wirecard collapse.

The twelve-week consultation closes on 4 February 2022 and will be accompanied by targeted interviews and meetings with stakeholders as well as a series of focused workshops in the early part of next year. Input from the process will feed into an impact assessment due for publication in 2022, which will assess problems with the quality of corporate reporting and compare possible remedies. Legislative proposals are expected in late 2022 or 2023. 

Find out more

Commission consultation page and questionnaire