BRUSSELS DIARY

Increasing the audit exemption threshold across the EU

Surprisingly, the vast majority of European companies (around 98.7%) are today exempt from statutory audit, covering almost half of all employees in Europe. It is also interesting to note that approximately 1.4 million audits are performed each year, while the EU mandates only 0.3 million and that the audit exemption threshold varies according to member states. Some, such as Belgium and Germany, keep it close to the €8.8m EU threshold, while others - such as Greece, Poland or Spain - keep it significantly lower.

However, at a time when governments are looking to the private sector to lead the economies of Europe out of recession and into full recovery, auditing and accounting contribution to the achievement of business confidence - in instilling financial discipline and ensuring better corporate governance - should not be treated lightly, even at the small entities level.

The value of audit needs nevertheless to be considered in the context of a wider societal approach to checks and balances, which provide assurance to all stakeholders and drive confidence in markets. In light of this, the EU is currently preparing the overhaul of the 4th and 7th Accounting Directives - to be unveiled end 2010-early 2011 - which could possibly encompass a part on audit exemption thresholds. Commissioner Barnier has announced two forthcoming EC green papers, respectively on corporate governance (to be published end of May) and on the role of audit due in September.

The issue was recently raised during an event organised in Brussels by ACCA about the role of audit and how it can be enhanced to better meet stakeholders' needs, following the publication of ACCA's study on Restating the Value of Audit. The outcome of the debate showed that if the benefit of incremental approaches to gradually raising the threshold needs to be recognised, this should be done at individual member state’s level, and not at EU level. In addition, any increase should be accompanied by an evidence-based impact assessment.

The role of audit in society is important and there is no doubt that having a respected form of auditors looking over the books helps businesses access finance. However, to better tackle SMEs' needs, we should start thinking about introducing a cheaper and quicker scaled-down version of the full audit and involve agreeing procedures with the business to provide assurance on the areas of risk that are of most importance to them, such as cash control using a 'segmented' approach.

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Belgian crisis - can the coalition government be saved?

The Belgian government was left in chaos in April after Belgium's King Albert II accepted the resignation of the Flemish Christian democrat and prime minister, Yves Leterme - Leterme's third resignation since July 2008. This was the latest installation in the long-term power struggle between the country's French-speaking Walloons and Flemish-speaking majority.

Leterme's five-month old coalition government, consisting of five parties from centre left and centre right (Dutch-speaking and Francophone centrists and liberals), collapsed after the centre-right Flemish liberal party (Open VLD) withdrew from the coalition. It stated it had lost confidence in the government’s ability to settle a dispute over rights for French speakers relating to electoral boundaries in the constituency of Brussels-Halle-Vilvoorde (BHV), which allegedly give special rights to Walloons living near Brussels.

These are crucial times for Belgium, which is suffering serious economic as well as political problems. The latest events risk threatening its upcoming stint in the rotating presidency of the EU, to begin on 1 July. Indeed, the king has commented that a political crisis would harm Belgium's status in Europe and hinder its economic prospects as it begins to emerge from this crisis.

ACCA is concerned that, should Belgium experience a deep political crisis, the country - with its over 100% GDP debt - could risk finding itself in a similar position to Greece. At a time when real leadership is needed in the EU, domestic troubles in Belgium could indeed potentially deprive the EU Council of an influential presidency.

The European Commission has reassured both the Belgians and other EU members states by saying that Belgium's political crisis and potential early elections will not hinder its presidency of the EU, but it would like to avoid the recurrence of events in the early 2009; the disintegration of the Czech government while in the EU presidency role caused havoc in Brussels and forced them to abandon much of the presidency agenda. The creation of a permanent EU president - Mr Van Rompuy, who is coincidently Belgian himself - will hopefully prevent Belgium's difficulties from negatively impacting the EU agenda's priorities this time, but this remains a test case.

Although Leterme tendered his resignation, he has been asked to carry on in a caretaker role until an election can take place, so as to maintain stability. New elections in June now seem inevitable. This would give Belgium a chance of forming a new government before it takes over the EU presidency, and ensure an appropriate government representative is able to attend the EU summit on 17-18 June.

However, having a new coalition up and running by the end of June is not a foregone conclusion - it took nine months to form a government after the previous general election in 2007.

Even if Belgium does manage to find a resolution and begin to build stability both politically and economically to sustain itself in Europe, this issue will rear its head again. Especially in a country where there has not been a national political party since the 1970s, a longer term solution needs to be considered to bridge the gap between the two main linguistic communities in order to ensure the survival of Belgium as one country.

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Erasmus for entrepreneurs: a worthwhile experiment?

Erasmus for Young Entrepreneurs is a European exchange programme financed by the EU, which aims to equip young entrepreneurs with the relevant skills to manage an SME by shadowing an established entrepreneur in another EU member state.

The European exchange programme has been extended for a second year and EU officials plan to make this a permanent fixture by the end of 2011. 
 
ACCA welcomes this programme, since it recognises the vital economic importance of SMEs. This idea, first highlighted in the Small Business Act in 2008, aims to unlock business potential, expose new opportunities and assist business holders in making better use of the internal market. More importantly, the €5m programme this extension to a second year will provide for a larger group of businesses.
 
The purpose of the programme is to stimulate entrepreneurship, competitiveness, and internationalisation and establish SMEs in the EU. It permits the exchange of experience among new entrepreneurs, and helps them access new markets and network with possible business associates. In addition, it enhances networking among SMEs and business people, as well as cross-border transfer of knowledge.
 
ACCA supports the notion that entrepreneurs should be given the support and skills needed to get through this programme, but emphasis should also be placed on training them to cope with the challenges that SMEs face in today's markets.
 
This programme is important, since entrepreneurship is vital for economic growth and equipping SMEs with the key skills and management experience necessary to help them work across borders and maximise growth can only be a positive thing.
 
However, the programme is confronted with considerable difficulties. An independent review reported that it would require considerably more resources to have a lasting influence. And a survey, while revealing broad satisfaction among new entrepreneurs benefiting from the programme, highlighted that it is too early to tell if these exchange visits will be new cross-border business schemes. 
 
Furthermore, critics have warned Erasmus for Young Entrepreneurs that it has a 'marketing problem', with the programme failing to reach aspiring entrepreneurs with business attributes. Many stakeholders have also raised the point that the word 'young' may be off-putting to some applicants who already have some real-world work experience. Others still highlight the extent to which the exchange programme overlaps with existing EU and other mentoring schemes.
 
Erasmus for Young Entrepreneurs is a good starting platform that ACCA welcomes, but further changes still need to be built in for the programme to be a lasting success.

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Time for Tobin?

On 25 March, the European Parliament's Financial, Economic and Social Crisis (ECON) Committee met to discuss the feasibility of an EU-wide financial transaction tax (FTT), two weeks after MEPs voted 536-80 in favour of such a measure.

Today, in the aftermath of the banking crisis and the anger it has caused, such a levy has become a byword for retribution. But the concept has existed for decades; John Maynard Keynes first conceived of a transaction tax in 1936 to abate the damaging effect of speculation in currency markets. His self-confessed disciple James Tobin developed the idea in 1972, at the inception of computer-driven financial activity. A levy of 0.5% on each exchange would, he believed, 'throw some sand in the wheels of international money markets'.

Prominent EU leaders, including UK prime minister Gordon Brown, President Sarkozy of France and German chancellor Angele Merkel have frequently championed the revenue-raising potential of an FTT. In fact, the so-called Tobin's tax, from which the idea is derived even if the proposed FTT differs slightly, was originally intended only to curb volatility. So the idea that was mooted at November's G20 summit might be better described as a hybrid of the high-profile 'Robin Hood' tax, with which it is often conflated.

Austrian economist Stephan Schulmeister told the ECON Committee that a levy of just 0.05% - a tenth of what Tobin originally suggested - would raise €300bn, which could be used to pay off national debts, ensure Europe's food security, tackle climate change, and perhaps increase development aid.

Yet while they appeared poised with fistfuls of metaphorical sand last year, enthusiasm seems to have waned among EU leaders, as opposition from the US increasingly shifts the debate towards a levy on bank profits. International Monetary Fund managing director Dominique Strauss-Kahn has warned that because financial instruments are far more complex now than in 1972, a transaction tax would be complex to devise - and easy to avoid. He is nevertheless expected to propose a levy on the banking sector when he soon meets G20 finance ministers in Washington. However, since taxation remains a nationally reserved power, moves towards pan-European coordination could be met with fierce resistance.

Council president-in-turn José Luis Rodríguez Zapatero has said Europe should take the initiative on transaction taxes at future global forums, but is reluctant to pursue any path alone.

If it is generally agreed that global coordination is essential for a successful FTT implementation, a report recently published by the EU Commission assessing the main sources of 'innovative financing' shows that actions at EU level alone should not be discarded.

Now, as the future of an European FTT hangs in the balance, the pressure is on for MEPs to win round their leaders before the June's G20 summit in Toronto.

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More EU co-ordinated action to invest in new e-health technologies

The strategic value of advanced electronic health - or e-health - in the development of greater European cohesion has been recognised by EU health ministers, who signed an institutional declaration on the occasion of an e-health ministerial conference that took place during e-Health Week 2010 and the World of Health IT Conference and Exhibition on 15-18 March.

This step forward is welcomed by ACCA, which announced on the same occasion a study produced in collaboration with the European Commission, which demonstrates that the introduction of e-health technologies in large hospitals can improve efficiency, reduce financial costs, and deliver a significant return on investments.

The study shows that since the deployment of the new technology, patients spend significantly less time waiting for treatment, while doctors have increased their available time for direct patient care by around 40 minutes per day. This improves both patient and staff satisfaction.

The EU is the middle of a healthcare revolution, but while this 'e-health' approach is becoming an indispensable aspect of efficient and effective healthcare management in Europe, efforts to consolidate an EU-wide approach have so far been fragmented and experimental. It is estimated that spending on e-health worldwide stands at only around 2% of healthcare expenditure, yet it has the potential to reduce inefficiencies inherent in the healthcare environment by as much as 25-40%.

'The European Commission has been instrumental over the past decade in promoting e-health policies, but reaching a sustained increase in the level of ICT investments now requires the co-operation of all stakeholders in following a realistic strategy for the deployment of e-health technologies,' said Dean Westcott, ACCA's vice president and a senior health sector finance professional in the UK.

The real challenge is indeed the financial commitment from EU member states through a coordinated approach to invest in ICT in the health environment.

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Blame the PIIGS?

'Greece is itself responsible for what happened, and Greece has to hold up its own pants,' finance minister Jan Kees de Jager told a late-night session of the Dutch parliament. His comments reflect a certain indignation in some EU circles that has grown since the Greek economy crunched: should other member states be prepared to bail their poor neighbour out?
 
Maybe - but on their own terms. This appears to be the consensus of eurozone leaders, who have decided that individual governments can voluntarily offer loans at interest rates that will make Athens 'think twice' before asking. Greek PM George Papandreou has already warned this will not help; unless rates are reduced, he told Brussels last week, he will turn to the International Monetary Fund (IMF) as a lender at the last resort. 
 
The scale of the task is enormous; at 113% of GDP, Greek debt is almost twice as large as the UK's. The drastic austerity measures rolled out by Athens since February have provoked widespread and large-scale unrest and strikes among public and private sectors workers. 
 
However it plays out, the crisis could have long-term implications for financial governance within Europe. Though it would not be in place to help Greece through its woes, the Commission has confirmed it is considering its own version of the IMF. This would both secure the future stability of the eurozone, and preclude the prospect of international bailouts undermining European prestige. 
 
Critics of the scheme have balked at the prospect of the inevitable legislative changes a new European monetary fund would require - hardly surprising, considering the eight-year long Lisbon debacle. Even German ministers - staunch defenders of European sovereignty - have already indicated they would rather lose face to the IMF than risk violating the 'no bail-out' clause of the European Treaty as it currently stands. 
 
There are also concerns that creating such a safety net would create a 'perverse incentive' to behave irresponsibly. Not only would Europe's already heavily indebted PIIGS - Portugal, Ireland, Italy, Greece and Spain - have little incentive to balance their books; other countries might also start spending beyond their means, knowing they would simply be bailed out should things go wrong,
 
Europe's leaders will meet again to discuss their options at a summit in Athens on Thursday. They must decide whether Greece and the wider eurozone can afford to 'stick it out' for much longer - and, if not, how to go forward.

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Women and business: more work needed

Across the EU, women represent a majority of students and university graduates. Yet, evidence suggests that there are significantly fewer female than male owned businesses, and that women face a number of obstacles when setting up a business. This is in spite of the fact that women entrepreneurs are innovative, as equally successful as their male counterparts and that the control they can have over working hours and so on often suits them.

Further research, such as the World Economic Forum's Corporate Gender Gap Report 2010 shows that there are not yet enough women represented at higher levels in larger businesses either, in spite of a significant body of evidence that shows that the representation of women at all organisational levels reduces excessive risk-taking, improving performance and profitability.

In addition, an EU Eurobarometer survey shows that 82% of Europeans think that urgent action should be taken to tackle the gender pay gap. This will therefore be one of the European Commission's main priorities.

It has already taken an encouraging step in publishing a Women's Charter in March, setting out key areas for action and committing the Commission to including a gender perspective into all its policies for the next five years. The Charter will be followed by a new strategy for gender equality up to 2015.

This is a complex area where many issues still need to be addressed. These might be a good place to start:

• Encouraging female entrepreneurship. Lack of confidence and fear of failure can make some women reticent to set up in business. The fact that a greater proportion of women than men take advantage of flexible working arrangements can influence their ability to reach higher-level positions. However, both issues will incur a considerable waste of talent if left unaddressed.
• Strategic planning. Alongside the Women Entrepreneurship Portal, the EU needs a long-term strategy for female entrepreneurship, similar to the US 10-year 'Strategic Roadmap' to be launched in June. This should be developed in line with other countries to ease EU businesses’ entry into the global market.
• CSR - gender and equality reporting. Reporting offers companies the means to win the recognition of investors, consumers and employees, and to improve the recruitment, retention and motivation of female staff. Both legislative and non-legislative mechanisms are important in the process of improving monitoring and reporting to the public, although ACCA's 2008 report found that regulation to report to government has played a critical role in driving action and reporting on gender issues in some companies.
• Role models for women in business. Alongside careers advice, mentoring and education, role models have a vital role in encouraging female entrepreneurship. Further, women on boards should be encouraged to support others, rather than 'pulling up the ladder' behind them.
• Banks and access to finance. Do banks look differently at women who are looking for finance than they do at men? Should they cater for the genders’ differing needs?

This is not about bringing in more legislation but introducing simple, common sense changes to foster change to allow women to flourish and to bring benefits both to business and to themselves.

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XBRL: a matching challenge towards simplification

eXtensible Business Reporting Language (XBRL) is a tool designed for the digital communication and presentation of financial and business data. It has been developed to allow users throughout the world to easily access timely accurate and relevant financial information from both worldwide and local organisations.

However, although internal use and basic forms of digital reporting are commonly accepted - with most people having knowledge of PDF and HTML documents - very few practitioners seem to be fully aware of the benefits of XBRL, according to a study produced by ACCA, entitled XBRL: The Views of Stakeholders. The main obstacle to widespread use of XBRL seems to lie in the lack of knowledge of the technology, as well as the time necessary to learn its functioning and the resources within practitioners' organisations to undertake its implementation.

In light of this, FEE (the Federation of European Accountants) and two of its member bodies, ACCA and Royal NIVRA (Koninklijk Nederlands Instituut van Registeraccountants), recently organised a roundtable entitled 'XBRL - the impact on accountants and auditors' to raise awareness of the new tool. It was built on a recently published FEE policy statement that outlines XBRL benefits and what auditors, accountants and other stakeholders will need to do in order to make a success of XBRL and contribute to the current simplification exercise.

In February 2009, the European Commission published a consultation paper entitled Review of the Accounting Directives: Cutting Accounting Burden for Small Business / Review of the Accounting Directives, which is supportive of an 'only once' filing system facilitated by e-government portals, and encourages member sates to develop this further.

This is an encouraging step, supported by an European Parliament resolution issued in September 2009 calling for the delivery of common reporting standards using a multi-purpose format such as XBRL. It is hoped that the new EU Institutions will pursue these efforts.

The business case for XBRL should be made more effectively since it could be extremely beneficial to numerous stakeholders. XBRL has the potential to reduce filing costs, to facilitate the re-use of electronic data stored, as well as to speed up the preparation and increase the accuracy, integrity and reliability of data. Not only it is time for small and medium-sized practitioners to get ready and understand the need to invest in XBRL, but it is also important for Europe to take a more harmonised stance regarding XBRL.

It is imperative for the European capital markets as a whole not to be left behind, and to take advantage of the opportunities offered by the next generation of financial reporting technology by promoting a European regulatory framework, similar to the requirements currently put in place in the US.

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Exempting micro-entities from accounting requirements: yes to better regulation but no to lack of transparency

The European parliament will vote on the 25 March on the report to amend the EU Commission's proposal to amend Directive 78/660/EC on the annual accounts of certain types of company. 

However, if efforts to reduce or eliminate burdens - where their identifiable net benefits are exceeded by the costs of compliance - are supported, this could allow member states to exempt micro-companies from the current standard requirements to prepare and publish annual accounts. This would not achieve any significant reductions towards this aim.

In a recent joint statement, ACCA and EFAA (the European Federation of Accountants and Auditors for SMEs) indicated that they are committed to reducing administrative burdens for SMEs and making compliance easier and cheaper, but stressed that the main effect of the adoption of the new proposal would be to reduce the amount of corporate information that is freely available to users via the public record.

This could have adverse consequences for cross-border comparability of performance, standards of financial management in small companies, result in a lack of transparency and, potentially, even have implications for the incidence of financial crime.

Given the special character of limited liability enterprises, such controls are particularly relevant to the objective of protecting the interests of members and third parties. Limitation of liability for a company’s debts should indeed always be accompanied by an obligation of transparency.

In addition, accounting information needs to be prepared by businesses for reasons other than simply to comply with the requirements of the Accounting Directive, such as meeting the requirements of the tax authorities and, very often, of lenders of finance. The importance of obtaining reliable accounting information for the purpose of safeguarding the interests of shareholders should also not be under-estimated.

Dr Steve Priddy, ACCA's director of technical policy and research, stressed that 'effective internal controls are essential for every commercial business, regardless of their size' and that 'an integrated approach should be taken to reform the rules on accounting and reporting by limited liability companies'.

The joint position paper, in line with the opinion of the ECON Committee of the European Parliament, urges the European Commission to withdraw its current proposal, and to come back with a comprehensive proposal of revision of the 4th and 7th Company Law Directives.

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An urgent challenge

The current crisis in the financial market has highlighted the need to ensure greater transparency in the market as well as greater protection of and involvement by Europe’s consumers - the end users of financial products - especially since consumer expenditure generates a significant part of the EU's wealth.

Due to the sophisticated and complex nature of many financial products, consumer engagement has invariably been limited and consumers have been left significantly under-represented and sidelined. The subject is very relevant today as we see a reconstruction of European financial services policy and regulation.

As Commissioner-designate for Internal market and Services Michel Barnier repeatedly stressed in his hearing at the European Parliament: 'It is vital to put back consumers and the human dimension at the heart of financial services.'

ACCA recently organised a roundtable, entitled How to reconcile financial products and consumer’s protection in the aftermath of the financial crisis?, that set out to examine more innovative ways to ensure that information about financial products is provided in a simple, inclusive and consumer-friendly manner.

The debate highlighted a combination of activities that could contribute to ensure and promote a fair and well-governed banking system, including appropriate regulation, better corporate governance, corporate behaviour and simplification of the financial products.

Reconciling financial products and consumers' protection in the aftermath of the financial crisis is an urgent challenge, which involves restoring morality and integrity of the financial system, changing the way of policies’ implementation by involving more consumers, and linking financial services and sustainable development.

According to Professor Robin Jarvis, ACCA head of small business: 'If the purpose of companies is to maximise shareholders return, there are few chances to change corporate behaviour, but this is a challenge that has to be tackled.'

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