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April 30, 2008

Transparency laws yield mixed response

The European Union’s journey towards a single internal market continues this year when several significant articles within the Eighth Company Law Directive come into effect. The International Accounting Bulletin discovers that the directive’s impact on firms is likely to vary in different countries.

Grant Thornton International (GTI) recently released its fourth transparency report, outlining information ranging from financial data such as fee income and partner remuneration to governance, management and audit clients.

Although it was the fourth time an annual review was produced, it was the first time a best practice was followed, GTI chief operating officer Mike Starr says. “It was our view that the EU Eighth Directive is a best practice on transparency and as a result we followed it. The Eighth Directive could be the [only current regulation] that really sticks to transparency reporting by accounting firms or accounting organisations,” he says.

The requirement for audit firms within the EU to produce transparency reports is contained in Article 40 of the Eighth Directive, which comes into effect for financial periods beginning on or after 29 June 2008. Expectations of the costs and benefits of these reports vary among firms from different member states.

Deloitte Sweden chairman Svante Forsberg welcomes the EU Eight Directive and says it will harmonise the rest of Europe with Sweden’s already stringent independence and ownership rules. Svante believes that Article 40 requirements will not have much effect in Sweden as the country already has a transparent system.

His comments are echoed by Ernst & Young UK regulatory and public policy directors Andrew Hobbs and David Parrish, who say the Big Four firm has produced annual reports and accounts since 1998. Hobbs says PwC will not be required to disclose any information that is not already publicly available.

Questionable value?

In Denmark, there is a different story. BDO ScanRevision partner Karl Aage Brasted says most of the information in the transparency report will not have been disclosed previously. One example is partner remuneration. “We have around 110 partners in Denmark and we are divided into five different regions,” Brasted says. “What partners get in one place is very different from what they get in another place – it will be quite difficult to tell how we do it.” Danish firms have also not traditionally disclosed which public interest entities they audit.

Brasted is not convinced of the benefits of the transparency report. “I think it will require quite a lot of work. And, I don’t think we will get any new clients by doing so,” he says.

Although Hobbs says the Article 40 requirements will not have much effect on UK firms, he warns there are still unanswered questions. There is scope within the directive for member states to enhance certain requirements. As some member states are yet to implement the directive, it remains to be seen whether there will be significant variations from country to country. If there are, it could prove a significant burden for firms with clients registered in multiple markets, Hobbs says.

Hobbs cites Ernst & Young US as an example, estimating the firm could audit companies that are registered in up to 16 EU member states. “So [E&Y] faces a risk of having to do 16 different transparency reports if they differ,” he warns.

Another significant Eight Directive article to come into play this year is Article 44, which dictates that subject to reciprocity, regulators may approve a third-country auditor or audit entity as a statutory auditor.

It is unlikely the provision allowing for third-country auditors will have any effect on the Danish profession, according to Brasted. Because BDO ScanRevision operates as a member of BDO International, it is unlikely to pick up work in other countries, he says. Brasted also predicts few foreign auditors are likely to work in Denmark due to language barriers.

Hobbs believes provisions relating to the registration of third-country auditors could prove problematic. “It will potentially be very tricky for European regulators to work through as it risks audit firms having to register in multiple countries where they audit companies that are listed on certain regulated markets. A lot of the European regulators haven’t really got their head around how they are going to register third-country audit firms… which leaves us a little bit in the dark,” he says.

TRANSPARENCY

New reporting requirements

Article 40 of the EU Eighth Company Law Directive says that statutory auditors or firms should publish an annual transparency report, which includes:

(a) A description of the legal structure and ownership;

(b) Whether the audit firm belongs to a network, a description of the network and the legal and structural arrangements in the network;

(c) A description of the governance structure of the audit firm;

(d) A description of the internal quality control system of the audit firm and a statement by the administrative or management body on the effectiveness of its functioning;

(e) An indication of when the last quality assurance review took place;

(f) A listing of public interest entities for which a statutory audit has been carried out during the last year by the audit firm;

(g) A statement about the audit firm’s independence practices which also confirms that an internal review of independence compliance has been conducted;

(h) A statement on the policy followed by the audit firm concerning continuous education of statutory auditors referred to in Article 13;

(i) Financial information showing the importance of the audit firm such as the total turnover divided into fees from the statutory audit of annual and consolidated accounts, and fees charged for other assurance services, tax advisory services and other non-audit services; and

(j) Information about the basis for partners’ remuneration.

Source: European Commission

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