Explanatory Memorandum to COM(2012)782 - Establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period of 2014-2020 - Main contents
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| dossier | COM(2012)782 - Establishing a Union programme to support specific activities in the field of financial reporting and auditing for the ... |
|---|---|
| source | COM(2012)782  |
| date | 19-12-2012 |
The single market is one of the European Union's greatest achievements. Integration and a well-functioning internal market are indispensable in making the Europe 2020 strategy successful and to put the EU economy on a sustainable growth path in order to overcome the financial and the subsequent sovereign debt crisis that unfolded since 2008.
As capital markets are global, harmonisation of financial reporting and audit rules at global level is essential for the smooth functioning of the capital markets and also for the realization of an integrated market for financial services in the EU. Instead of introducing its own set of regional financial reporting standards, and thereby harmonising the EU-level legislation but adding to regional fractions at the global level, in 2002 the EU has decided to adopt international accounting standards (IFRS).
With more and more countries moving towards and adopting IFRS, Europe will need more weight in the international standard setting process for its voice to be heard. In order to be heard and listened to, the Union has to speak with one voice. EFRAG, the European Commission's technical adviser in accounting matters has gradually taken up the role of providing upstream, technical and credible input to the IASB's standard setting process.
Both the international standard setter and the organisation representing Europe's interests need to be independent, possess the sufficient capacity and expertise to produce quality standards and input to those standards, and have sound financial basis in order to be able to carry out their public interest mission on a long-term basis.
To these ends, in 2009 the European Parliament and the Council established a Community Programme to support specific activities in the field of financial services, financial reporting and auditing. That Programme will end on 31 December 2013. The purpose of this Regulation is to renew that Programme for the next financial framework (2014-2020) and enable direct contributions to the funding of the Programme's beneficiaries from the Union budget in that period.
The original beneficiaries of the Programme were 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). The Decision also foresaw the possibility of including a new or replacing an old beneficiary.
In 2010, the European Supervisory Authorities have been set up and took over among others the responsibilities of the previous Committees' of Supervisors. Therefore this Regulation aims at extending the Union co-financing of the remaining beneficiaries, namely the IFRS Foundation (legal successor of the IASCF), EFRAG and the PIOB.
The crisis in the financial markets that unfolded since 2007 has highlighted the importance of transparency and consequently the issue of accounting standards rose high on the political agenda. It became clear that a favourable business environment and a global level playing field should be combined with transparency and comparability that are conducive to a well-functioning global capital market. Leaders around the world realized the key importance of a single set of high-quality, global accounting standards.[4]
The European Union showed leadership when it decided to adopt international accounting standards (IFRS and IFRIC) in the Union law. According to Regulation 1606/2002 (the ‘IAS Regulation’), companies listed in the EU have to draw up their consolidated financial reports using international accounting standards adopted in the Union. Member States may require or allow their use for annual accounts and/or non-listed companies.
The financial reports of European companies using IFRS adopted in the Union are accepted without restatement in several capital markets around the globe – including the US, Australia and Japan. With more and more countries adopting or converging to IFRS, progress towards the goal of one single set of globally accepted, international accounting standards is steady.
International accounting standards (IFRS and IFRIC) are developed by the IASB and the IFRS Interpretation Committee. The IFRS Foundation is an umbrella body of those organisations and cares for their smooth functioning and proper financing. The body developing high quality accounting standards has to be independent and needs sufficient capacity to recruit top-quality people. To this end, it needs a solid, neutral, reliable and calculable funding base for the long-term.
In addition to the funding, also the governance of the IFRS Foundation has to support the independent, credible and proper functioning of that organisation. The governance of the Foundation has been improved in the past years most importantly with the creation of the Monitoring Board. That body was set up to allow for accountability and the proper representation of public interest in the organisation. The effectiveness of the Standards Advisory Council has been enhanced and the Due Process Oversight Committee was set up. Further work will be needed to ensure that the IFRS Foundation strengthens its status of high quality standard setter that is representative of the global nature of capital markets.
To that end, by Decision 716/2009, the European Union has shown that it is willing to provide the IFRS Foundation (IASCF) with the necessary financial support in the form of a stable co-financing scheme. The Union, together with certain individual Member States started to contribute to the IFRS Foundation’s budget commensurate to its weight on the global capital markets. The EU contribution to the IFRS Foundation's budget in the 2011 fiscal year was €4.229.165,14 (17% of the Foundation's total eligible expenses for that year).
According to the Monitoring Board's final report on the Review of the IFRS Foundation’s Governance published on 9 February 2012, membership in the Monitoring Board will be tied to financial contribution to the IFRS Foundation's budget. It is therefore essential that the EU continues to contribute to the IFRS Foundation's budget according to its global economic weight if Europe wants to maintain its current position in the international financial reporting arena.
EFRAG was established in 2001 as a private organisation to provide the European Commission with technical expertise in financial reporting matters. At the beginning, EFRAG provided mainly advices to the Commission on whether an international accounting standard to be adopted in the Union meets the technical endorsement criteria. EFRAG has gradually taken on the role of pro-actively influencing the IASB in its standard setting work. It provides input by issuing comment letters on draft standards and early-stage contribution by publishing discussion papers on current accounting issues. EFRAG comment letters are read and cited all around the world.
Originally, representation and voting rights at EFRAG's governing bodies (such as the General Assembly and the Supervisory Board) were tied to the financial contribution to EFRAG's budget. The body in charge of the core technical work, the TEG (Technical Expert Group), has always been independent.
In 2008, EFRAG's governance was thoroughly reformed in order to mirror its enhanced public policy role – becoming a platform to form the single European accounting voice. The aim was to ensure increased public oversight and accountability.
Two major changes were introduced:
· The setting up of the Planning and Resource Committee (PRC) where the early-stage pro-active work is centred – with the participation of national standard setters; and
· The strengthening the role of the Supervisory Board: its members are no longer representatives of the funding organisations but are appointed in their personal capacity. Members represent diverse stakeholders – preparers (including SMEs), users and financial institutions; or have a public policy background – and all are expected to act in the public interest. Out of the 17 Supervisory Board members, four are so-called public policy members: they have in particular a background in public policy making and are nominated by the Commission.
The TEG has remained responsible for the core of EFRAG's technical work. Any EFRAG position on the international accounting standards has to be discussed and approved by the TEG, which acts as an independent technical expert committee. EFRAG's chairman chairs the TEG meetings and EFRAG has its own secretariat (consisting of accounting professionals). Endorsement advices to the Commission and comment letters to the IASB form the bulk of TEG’s work.
The majority of EFRAG’s meetings are open to the public and the Commission services may attend as observers all EFRAG meetings.
The targeted governance reform in 2008 allowed EFRAG to expand its pro-active activities in cooperation with the European National Standard Setters. Through further governance reforms to be engaged in the coming months, EFRAG will continue to develop means to ensure that it becomes the leading platform to form a single accounting voice of the EU and to deliver the Union's input to the IASB. For that purpose, EFRAG will undertake a comprehensive review of its governance structure taking due account of the most recent developments in the arena of international financial reporting.
With more and more countries adopting IFRS, the EU needs to take steps to prevent the gradual loss of influence and weight at the IASB. It is therefore of vital importance that the European interests are well-represented at international level. To this end, it is essential that Europe ‘speaks with one voice’ which is credible and technically sound.
EFRAG needs solid, long-term, diverse funding to be credible and independent and be able to produce top-quality documents by employing top-quality experts. Also, the pan-European view is represented only if along with the big Member States, the Commission co-finances EFRAG on behalf of the smaller MS.
The 2010-2013 financing Programme was set up with a view to establish a reliable funding in the long-term. On the basis of EU financing Decision of 16 September 2009, the EU contribution to EFRAG in the 2011 fiscal year was €2.288.160 (43% of EFRAG's total budget for that year).
The goals of that Programme are long-term objectives; therefore it is difficult to draw conclusions after only two full years of financing. Based on the experiences of the financing so far, the Programme has met its main objectives. Among others, it has allowed EFRAG to expand its activities and engage in the pro-active work, go out to stakeholders and gather their views at outreach events and increase its independence by taking its chairperson on its own payroll. For more details about the experiences so far, please refer to the Commission services' ex ante evaluation annexed to this proposal.
The Public Interest Oversight Board (PIOB) is a non-for-profit Spanish Foundation set up in Madrid. The key partners of the PIOB are the Monitoring Group (MG), which is the body representing international regulators and institutions[7], and the International Federation of Accountants (IFAC), which is the private body representing accountants and auditors worldwide[8]. The PIOB consists of ten members including its Chairman. Two of the members are nominated by the European Commission.
The PIOB members are persons nominated by the Monitoring Group for a three-year period according to a Memorandum of Understanding. The PIOB constituency comprises a variety of stakeholders: legislators (e.g. the European Parliament, national legislators), regulators and supervisors of financial markets including auditor's oversight bodies, national standard setters for accounting and auditing, auditors and audit profession in general, preparers of financial statements (companies), users of financial statements (e.g. investors, analysts, researchers, suppliers), academics.
PIOB's role is to guarantee that due process, oversight and transparency are respected in the proposal, development and adoption of international standard for auditors in the framework of the International Federation of Accountants (IFAC). The Foundation is governed by a Board of Trustees in which each member of the PIOB is a trustee.
On the basis of EU financing Decision of 16 September 2009, the EU contribution to the PIOB in 2010 fiscal year was €286.231. Such an amount represented 22% of the PIOB's total eligible expenses (€1.301.050). On the other hand, the EU contribution to the PIOB in 2011 fiscal year was €288.991,78 which also represents 22% of the PIOB eligible expenses for that year (€1.313.599).
The PIOB co-funding experience has been up to now positive. The European Commission has had the opportunity to visit the PIOB premises twice (March 2010 and April 2011) and to verify its financial controls. The European Commission also trained its staff on EU budgetary procedures. From a practical point of view the activities involved in the management of the operating grant for the 2010 and 2011 fiscal years have been a very useful learning experience for both sides. This has paved the way for more efficient management of future funding contributions.
The EU co-financing of the PIOB has become an example for other potential contributors. Currently only IFAC (around 78%) and the EU (around 22%) co-finance the PIOB. The European Commission's efforts are on-going to diversify the funding of the PIOB and to reinforce its independence vis-à-vis the audit profession. Several international institutions are expected to provide funds to the PIOB already for the 2013 fiscal year. Moreover, the Monitoring Group, the PIOB and IFAC have created a Task Force to select and convince a group of donors from all over the world to provide funding to the PIOB on a stable and long-term basis.
For the EU to reduce its financial commitment from the current level (representing 22% of the total budget) would give the wrong message at a time when the PIOB is trying to diversify its funding structure. But this is also extremely critical in view of our current audit market reforms, which are aiming to increase the independence of firms, the standard setters of international auditing standards (ISAs) as well as audit supervisors.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- LEGAL ELEMENTS OF THE PROPOSAL
- BUDGETARY IMPLICATION
- 1.1. Financial reporting: the IFRS Foundation
- 1.2. Financial reporting: the European Financial Reporting Advisory Group (EFRAG)
- 1.3. Auditing: the Public Interest Oversight Board (PIOB)
- 3.1. Legal basis
- 3.2. Subsidiarity principle
- 3.3. Proportionality principle
In its ex-ante evaluation accompanying the Commission proposal for the establishment of the 2010-2013 Programme[9], the Commission assessed the possible alternatives of funding. The objectives of the programme were to ensure stable, diversified, sound and adequate funding and to enable the bodies concerned to accomplish their mission in an independent and efficient manner. It has been clearly established that Union co-financing is the most efficient and appropriate option of reaching those objectives.
In the ex ante evaluation accompanying the current proposal, the Commission found that the Programme so far met the expectations and objectives set and that financing should be continued. Moreover, the financing Programme was set up with the aim of meeting long-term objectives. Thus, it is appropriate to propose it being continued in the next financial framework of 2014-2020.
The Treaty on the Functioning of the European Union, and in particular Article 114.
In accordance with the Commission legislative policy adopted in the framework of the Multi-Annual Financial Framework, the present funding programme is proposed as a Regulation.
The Union programme provides for the possibility to co-finance activities of certain bodies pursuing an objective forming part of and supporting the Union policy in the field of financial reporting and auditing. The proposal complies with the subsidiarity principle since, in accordance with Article 5 of the Treaty on the European Union, its objectives cannot be sufficiently achieved by the Member States and can, by reason of the scale and the effect of the action, be better achieved at Union level.
The proposal complies with the proportionality principle as set out in Article 5 of the Treaty on the European Union. As assessed in the ex-ante evaluation, this Regulation does not go beyond what is necessary in order to achieve its objectives. Union funding is proposed for a well-defined and limited number of the most important bodies in the field of financial services. Within the current institutional framework, the new funding arrangements will ensure stable, diversified, sound and adequate funding to enable the relevant bodies to carry out their Union-related or Union public interest mission in an independent and efficient manner. Financial support will be granted according to the conditions laid down in Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the European Union and Commission Delegated Regulation (EU, Euratom) No …./.. of 29 October 2012 on the rules of application of Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union.
The total amount to be borne by the Union’s budget is EUR 58.01 million in current prices for the 2014 – 2020 period. The Programme is a seven year programme aligned with the duration of the financial perspectives 2014 – 2020.