Archives For EU

By Sue Almond, technical director, ACCA

reporting

 

I was fortunate to chair a roundtable on the future of audit while MEP Karim, rapporteur for the JURI committee on the EC audit proposals, was in New York recently on a fact-finding visit to understand more about the US and the global audit market, to consider the broader impact of the EU audit proposals. The roundtable attracted a wide range of attendees, and it was interesting to hear the perspectives from the US. Not surprisingly, much of the debate focussed on the critical EU proposals such as mandatory auditor rotation, tendering and non-audit services.

There were some general recurring themes that arose at the roundtable:

  • Although a single country, the US state system is not so different to EU member states – for example auditors are required to be registered with the state.
  • The distinction between public company audit (regulated by PCAOB and SEC) and private company audit (AICPA and state) is quite significant.
  • The rules on audit committees are set by the SEC. These tend to relate to the legal requirements, including independence of Audit Committee (AC) members, rather than the functioning of the AC, and there was strong support for an enhanced, and more transparent, role for the AC. There was general support for the role of the AC in evaluating non-audit service provision.
  • There was very strong disagreement with mandatory audit rotation across almost all sectors (in line with the feedback to the recent PCAOB consultation on the topic), and in fact the day before the roundtable a motion was tabled in Congress to prohibit any proposed rules on this. The practical impact on global businesses of potentially different mandatory rotation requirements in different jurisdictions was noted. However, it appears PCAOB may still be interested in pursuing rotation.
  • FASB will shortly publish going concern proposals. This is important because the current position is that management in the US have no requirement/responsibility to make a going concern assessment – it is purely the role of the auditor. This is causing significant problems for the IAASB in its auditor reporting project, where there is pressure for the auditor not to be generating ‘new’ information.
  • There was support for global standards, e.g. ISAs (International Standards on Auditing) and IESBA Code of Ethics.

MEP Karim published his final proposed amendments for the EU Audit proposals for vote just after the roundtable. They are very much in line with the position ACCA took on the original proposals more than 18 months ago:

  • We support adoption of global standards (e.g. ISAs, including on auditor reporting, IESBA Code, independence/non-audit services, ISQC1)
  • We support strengthening the role of the audit committee and increased transparency
  • We do not support mandatory rotation of auditors as we do not believe that there is evidence that supports an improvement in audit quality as a result
  • We do not support restricting the role of professional bodies, particularly in relation to the monitoring of auditors of unlisted entities.

Following the approval on MEP Karim’s report, the focus now moves to the Council. Let’s hope that they will recognise the good work that has been done in the Parliament as they now work on their revisions to the audit proposals …

By Ian Welch, head of policy, ACCA

Ian Welch

ACCA has consistently stated that the view of investors should be at the heart of standard-setting and financial policymaking. Too often their voice is not heard as rules are being made or proposals formulated.

But who exactly are the investors? How have their asset allocations and investment strategies changed since the Global Financial Crisis (GFC)? And, of most direct interest to accountants, what do they want from corporate reporting?
ACCA is undertaking a four-stage project examining the UK and Ireland investor landscape, post-GFC and the first two reports, based on interviews with key players and a survey of 300 investors carried out concurrently, reveal trends of far greater international application.

The increase in short-termism is one clear trend. The traditional domination of markets by pension funds and insurance companies has been eroded both by greater international ownership of companies, and by the emergence of other players such as hedge funds and private equity firms, with shorter-term investment horizons. And even the traditional players have switched much of their investment from equities to bonds, as a result of the GFC.

Added to this , the vastly increasing proportion (estimated by some to be 80%) of trades that takes place via computer in nano-seconds has left a question mark on who the owners of companies actually are – and how companies can meaningfully engage with investors who hold shares for a very short time. We have already seen international policymakers, such as the G20 and EU, responding with measures to enhance long-term finance and address the ‘ownership vacuum’. More is needed, it seems.

Low interest rates are another key trend. Central bank activism, leading to loose monetary policy, historically low interest rates and currency wars throughout Europe and the US has been a major response by the authorities to the GFC. This has had a clear effect on investors, making them search for yields in riskier investments.

Perhaps inevitably, the greater pressures on investors has seen a constant demand for more information and transparency -and the proliferation of new technologies such as mobile and social media has led to massively more corporate information being available, much of it on a real-time basis. But how much it is useful, and how do investors prevent themselves being overwhelmed?

Intriguingly our research revealed a dichotomy – and one which leaves policymakers with much to ponder. Three-quarters of investors say that, that the quarterly report remains a valuable input to their investment decision-making. Yet, at the same time, almost half of investors believe mandatory quarterly reporting should be abandoned, with almost two-thirds believing the increase in information has encouraged “hyper-investment” and taken up excessive amounts of management time.

This suggests a “tragedy of the commons” effect, whereby individual investors want to consume quarterly reporting for their own self-interest, despite recognizing that this focus on shortening time horizons is damaging for the overall market’s long-term interests.

Fully 45% said they had little use for the annual report – and worryingly, two-thirds said their faith in company reporting had declined since the GFC. Almost half that believe management has too much discretion in the financial numbers they report. While perhaps not surprising, these are nonetheless chastening findings for standard-setters and policy-makers to reflect on.

Is there any good news for the profession? Yes for auditors – much maligned of late – as external assurance of company figures seemed to be their main source of credibility. And investors claimed that they would be prepared to pay more to have additional information available contemporaneously as long as it was externally verified. This would put pressure on the audit profession – but it should consider it carefully as a way of regaining the initiative following recent critical political and regulatory inquiries on audit.

There is much here for many other parties to chew over, and ACCA will be following this up with a series of events designed to bring key players together to thrash it out, before releasing stages 3 and 4 in this research series, which will look at the ‘real-time’ issue in greater depth and investigate corporate reaction.

But for now, accounting standard-setters and regulators must consider the criticism of standards and the annual report. Policy- makers must wrestle with the quarterly reporting conundrum. And the investors themselves must consider how to get their voice more clearly heard when policy decisions that affect them are being made. If they really are prepared to pay more for a wider audit, then now would be a good time to let that be clearly known.

This post first featured in The Accountant, June 2013

 

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By Mark Gold, chair of the Global Forum for SMEs, ACCA

Despite representing more than 90 per cent of global businesses, and accounting on average for 50 per cent of gross domestic product and 63 per cent of employment, SMEs have by and large been marginalised in the debate about sustainable business – both in terms of policy and practice. ACCA Global Forum for SMEs  has published a new policy paper  that looks at why this is the case and how we can change that. We know that SMEs have been slow to adopt environment-related improvements with only 29 per cent of SMEs in the EU thought have introduced measures to save energy or raw materials, compared with 46 per cent of large enterprises (see here).

The picture is likely to vary across Europe but as an average, the potential for improvements are certainly there, as well as the resulting benefits. So why are SMEs still thought to be slow in terms of recognising the importance and benefits of sustainable business practice?

One aspect is certainly that all too often we end up talking about SMEs as one homogeneous group, which is usually unhelpful. If you consider that this includes businesses with zero employees (only the owner manager) and those that have up to 250 employees, it becomes clear how vastly different these entities are. Their levels of formability, internal capacity and specialisms, not to mention motivations can mean that they end up in fact having very little in common when it comes to sustainability. But all too often we have sought to engage them without appropriately recognising how diverse and disparate this segment or the business population is.

The second question is: are we able to capture all the activities that SMEs do in this area appropriately? Are we asking the right questions? If we ask a business owner what their CSR strategy or sustainability practice is they may draw a blank face. They won’t think to tell us about the local charity they are supporting, about providing young people with work experience nor will they think about the cost savings they are seeking to make in their energy consumption as relevant answers. So are we capturing all the ‘business as usual’ activities that they are already doing?

Finally, are we giving them the right tools to communicate these and to engage? We talk about sustainability reporting, assurance, environmental management systems not to mention all the ‘jargon’ that has developed over time in the sustainability field. It is no secret that much of this has been developed with large businesses in mind so it is therefore no wonder that we are not seeing many enough SMEs engaging.

What I know from my own practice that specialises in creative industries and deals with thousands of SMEs each year is that these are responsible businesses, with a positive impact on society and a careful approach to environment. We ought to be able to capture this better.

By Manos Schizas, senior economic analyst, ACCA

If you have been following any European politics this week, apart from the ECB’s bond-buying programme, you will already know the European Commission is expected to propose that, by 2020, 40% of all non-executive board members of European companies should be women – with companies risking fines or other penalties if they fail to comply. Although no one has seen anything other than leaks for the time being, plans are predictably meeting opposition from many quarters.

ACCA being well versed in Brussels etiquette, we do not comment publicly on proposals the EU institutions haven’t placed in the public domain. However, we’re also not new to the debate on quotas, which has been going on throughout Europe and beyond (e.g. in Pakistan) for quite a few years. Our positions have evolved over time (see here, here and here) and will continue to do so, reflecting the new experiences and evidence in our markets. On the other hand, our core values of diversity, opportunity, innovation, integrity and accountability haven’t changed.

While we wait for the full proposal and ACCA’s response, I thought I’d share with you a real gem in the diversity research literature. It comes from the Bank of Finland of all places, which recently published a remarkable research paper on the subject by Yiwei Fang, Bill Francis and Iftekhar Hassan. Its title: More than connectedness – Heterogeneity of CEO social network and firm value.

Rather than focusing on diversity among board members, the researchers looked instead for the diversity within – the extent to which individuals have access through their social networks to truly different perspectives and could draw on experience, skills, knowledge and mindsets different from their own.

In order to measure the diversity of CEOs’ social networks, the researchers used a massive biographical database of EU and US CEOs in order to track down business leaders’ contacts among the business world from their school days onwards. They then analysed the heterogeneity of these social networks in terms of gender, ethnicity, academic and professional background, as well as geographical dispersion around the globe. To be safe, they controlled for the overall size of CEOs’ social networks – after all, it’s easy to have a more diverse network if you know more people!

They also included as control variables a battery of factors already known to influence firms’ financial performance, including two traditional measures of board diversity (by ethnicity and gender), and tested against four kinds of outcomes:

a) sustained share price reactions following a change of the CEO

b) patents filed (as a proxy for innovation)

c) sustained share price reactions to mergers and acquisitions initiated by the CEO’s company

d) proxies of firm value and financial performance.

Their overall finding was that the more diverse the CEO’s social network, the more value they tended to add to their companies – they made a difference by enhancing innovation and export potential, as well as extracting more value from the firm’s investments, including major items such as mergers and acquisitions. As a result, investors typically pay a premium for the shares of companies who have just replaced their CEOs with someone with a more diverse network.

This resonates with earlier ACCA research. Back in 2011, we worked with Forbes Insights to look into the personalities of Europe’s business executives and whether they help influence company performance, and our work resulted in the report, Nurturing Europe’s Spirit of Enterpriseas well as some excellent online coverage. But what we found was even more satisfying.

The most innovative business executives, and the ones most likely to become CEOs, were a category we named ‘the Star Pupils’. This is what we had to say about them at the time:

STAR PUPILS. These are professionals who invest heavily in their own personal development, acquiring mentors with ease and making the most of other people’s expertise. Of the entire sample they are the likeliest to rise through the hierarchies of organisations, even when the dominant business culture is stacked against them. Women who thrive in masculine environments often fall into this category, and CEOs are significantly more likely than other executives to match the Star Pupil profile.

Star Pupils form the largest category at about 24% of the respondents. Over half of the Swiss respondents fall into this group, as well as 30% of the French and Italians, as opposed to only 16% of British executives.

Otherwise, Star Pupils exist in similar numbers everywhere: large companies and small, finance and IT, men and women. However, only 5% of CFOs, treasurers or controllers are Star Pupils. It is not clear why this might be, as the traits of Star Pupils would appear to be adaptive in any function, but one possible explanation arising from the research literature would point to the lack of a full-fledged mentoring culture in these functions.

Looking even deeper into the Forbes data, we were able to unpack the particular personality traits that made up different categories – ‘pursuing personal development through others’ was the dominant characteristic of Star Pupils (see a comparison here). The Movers and Shakers, who shared a lot of the Star Pupils’ innovative capacity, also scored well in this dimension.

Here’s an interesting question – would the findings of Fang et al apply to CFOs as well? Do CFOs with more diverse social networks create more value? Is it important that the social networks of CEOs and CFOs overlap/complement each other? And at any rate, how diverse are the social networks of CFOs? Going by the Forbes data on ‘pursuing personal development through others’, finance professionals were slightly worse than average social networkers and our small sample of CFOs in particular were even worse. I’ve written to the researchers and maybe one day we can repeat their analysis.