The European Commission launched a consultation on 12 November to help evaluate “the three pillars that underpin the quality and reliability of corporate reporting by listed companies”, the outcome of which is likely to have significant implications for public interest entities and auditors active in the EU. ICAEW is advocating an approach that addresses the quality of corporate reporting, statutory audits and the effectiveness of supervision, and that any reform also needs to focus on practical measures.

In its response, ICAEW says improvements across all areas will be required to improve the overall corporate reporting ecosystem, and any eventual measures will need to involve all key actors: company boards, audit committees, investors, auditors, regulators and standard setters. ICAEW also notes that strengthening, rather than rebuilding, existing corporate reporting rules needs to be a focus: “To our mind, some of the concerns on the effectiveness of the current EU framework relate to issues of implementation which call for greater consistency in how rules are applied rather than a significant rewrite of legislation.”

Commenting on the consultation, Michael Izza, ICAEW CEO, said: “Now that the consultation period is over, it is important that all parties take the time to consider which measures could have the greatest impact in enhancing the quality of corporate reporting in Europe, across the three main pillars: audit, corporate governance and supervision. The Commission, in particular, will need to reflect on how to align the broad EU regulatory frameworks to the changing realities of business and stakeholder needs in the next decade.” 

He added: “Although many of the issues addressed by the EU consultation are similar to those raised in the UK, it remains to be seen whether the Commission will come to the same conclusions as the UK Government.”

A focus on specific measures could lead to important outcomes, according to ICAEW. Any eventual legislative changes should help companies better manage and mitigate key risks, including fraud, going concern, digital and sustainability matters. ICAEW highlights the need for clarity over the responsibilities of management and auditors for internal control frameworks, including fraud and going concern, and says that this should be accompanied by a more consistent role for audit committees across Europe.

ICAEW calls for targeted steps to enhance audit quality, with a stronger emphasis on professional judgement. A set of overarching audit quality objectives is needed, supported by a range of AQIs at firm and engagement level, calculated on a widely understood and accepted, transparent and consistent basis. “A framework for the development, measurement and evaluation of a wider basket of measures, such as AQIs, requires the involvement of all parties (audit regulators, audit committees, investors and auditors) interested in audit quality,” the ICAEW response says. ICAEW also stresses the importance of a more comparable and affirming approach to supervision across Europe, which facilitates improvement and innovation while also ensuring compliance.

Dr Nigel Sleigh-Johnson, Director of Audit and Corporate Reporting at ICAEW, said: “There has been a significant amount of research on the overall EU financial reporting framework, including on the positive benefits relating to the application of IFRS. Corporate reporting does not stand still, but our assessment continues to be that the quality of corporate reporting by listed companies in the EU is generally high.”

Dr Susanna Di Feliciantonio, ICAEW’s Head of European Policy, added: “This consultation paves the way for an important and timely period of reflection on how to ensure that the EU’s corporate reporting system is best in class for 21st-century needs.”

The consultation also comes alongside other proposals impacting the EU corporate reporting and corporate governance framework. These include the draft Corporate Sustainability Reporting Directive now under legislative scrutiny and the repeatedly delayed proposals on sustainable corporate governance expected this week and due to set out new corporate directors’ duties and changes to due diligence requirements over supply chains.

The Commission has indicated that it will likely move ahead with legislative proposals at the end of the year or early in 2023.

ICAEW’s submission to the EU consultation on audit and corporate governance can be found here