Yet another piece in the jigsaw of legislation controlling corporate governance, accountancy and auditing, aimed at boosting investor confidence in European Union business, is coming into focus as upgrades are being considered to the 4th and 7th Directives on risk management and internal control for unlisted companies.Those enhancements cover both off-balance-sheet arrangements and company transactions with related parties such as family members.

Addressing an international forum in Brussels, Alex Schaub, director general of the European Commission's internal market section, brought to light several commission proposals that are now under consideration in the European Parliament. Previous general European financial legislative upgrades - from International Financial Reporting Standards (the EU's mandatory accounting guidelines for listed companies) to Basel II capital adequacy rules for banks, and the 8th Directive on auditing, among others - have applied only to the EU's 7,000 listed companies.

The new proposals enter a landscape where it is more difficult and expensive for companies to raise financing in Europe than in the U.S., which could be partly behind the EU's anemic 2 percent rate of economic growth.

Schaub explained that the revisions to the "Company Law Action Plan" for the unlisted sector were begun a year ago. European governments had agreed to a general mandate in June, he said. A deal with the European Parliament, where member Klaus-Heiner Lehne is coordinating the response to the proposals, should be reached before the end of 2005.

Important amendments in the pipeline cover related-party transactions and off-balance-sheet arrangements, Schaub said. These were to help investors assess the real risk of investing in the unlisted sector. Disclosure about material off-balance-sheet arrangements had to be improved, he argued. The proposals called for enhanced transparency for special purpose vehicles, because they could be organized so as to confuse investors.

Schaub said that related-party proposals concerned transactions by non-listed companies with their managers, with family members of company managers or other so-called related parties.

Turning to corporate governance statements, the commission was proposing that they should describe the main features of internal control. Yet another element confirmed that all of a company's board members should have collective responsibility for its financial statements.

At a forum organized by the European Accountants' Federation, Schaub said that on opt-out provisions for small and midsized entities, any disagreement could be dealt with by enlarging the threshold definition of such firms, by, say, a quarter.

However, it was clear that MEP Lehne himself wants SMEs generally excluded from any new obligations. His argument was that small firms are engines of employment growth, and should be left alone. In Europe, the current definition of a "small" company sets its annual revenue at less than 7.3 million euros ($8.75 million), with fewer than 50 employees. The limit for "medium-sized" firms is 29 million euros ($34.8 million) and under 250 employees.

Among the organizations taking the commission's side is the European Economic and Social Committee, which approved the commission's principle-based approach in its draft legislation. "Specific rules have the possibility of being circumvented or becoming out of date," notes the committee's rapporteur (coordinator), Harry Byrne. The EESC is a non-political advisory body representing various interest groups.

Reinhard Biebel, of the European Financial Reporting Advisory Group, which advises the commission's accountancy regulation committee, pointed out that the 4th Directive (applying to individual companies) and the 7th Directive (applying to consolidated accounts for groups) are, in cases of listed companies, to some extent being trumped by IFRS.

However, the directives would still apply to companies on an individual basis (that is, to companies even though they were parts of larger groups) and for non-listed - that is, smaller - companies. While IFRS applied to consolidated statements, there was still an obligation for subsidiaries to apply national laws, which would be based on the 4th and 7th Directives.

Biebel stressed that the next important phase will be enforcement of the different packages of legislation as they come into national legal codes. He would no doubt be aware of the EU's weak record in such enforcement matters. Just one example of its enforcement failures were bans by the EU on subsidies by governments to their national airlines. Years after that accord, Greek and Italian infringements with their airlines incur little effective protest.

Similar warnings about the future challenge of enforcement of the Financial Services Action Plan legislation come from the American Chamber of Commerce to the EU. This body, from its Brussels office, represents American interests in Europe. Against a firm position of strong support for Europe's move to improve its standards of financial regulation, the chamber asserted the need for legislation to be consistently implemented and enforced "in a timely fashion," in hopes that the European executive arm will face up to national governments over any backsliding.

AmCham EU "aims to ensure an optimum business and investment climate in Europe." It noted that total U.S. investment in Europe amounts to $850 billion and currently supports over 3.5 million jobs.

But matters go further than self-interest in the two economic zones. "Between us, the U.S. and the EU control something like 70 to 80 percent of the global capital markets ... . Closeness on standards between the two would result in the rest of the world following," said David Wright, director of financial services in the European Commission. Wright spoke for many in making clear Europe's need "to ratchet up our growth rate - which means integrating our financial markets."

He said that the challenge in Europe was to get the cost of capital down, to create jobs.

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