European consultation on strengthening of the quality of corporate reporting and its enforcement

Corporate reporting by listed companies is the bedrock of capital markets as it gives investors the essential information they need to make sound investment decisions such as information about the financial situation of companies. Moreover, it enables stakeholders to hold companies accountable on, for instance, sustainability issues.

The quality and reliability of public reporting by listed companies rely on three main mutually reinforcing pillars: (i) corporate governance in these companies; (ii) statutory audit; and (iii) supervision and enforcement by public authorities.

Several recent failures of companies in Europe (e.g. Wirecard, Carillion) suggest that the three pillars that underpin the quality and reliability of corporate reporting by listed companies have not fully played their intended role.

European Commission has initiated a broad review on the three core pillars of corporate reporting for large companies. This review will directly feed into an impact assessment that the Commission will prepare in 2022 with a view to:

1. assessing problems with the quality of corporate reporting; and
2. comparing possible options to remedy these problems.

Five-part consultation

The consultation is divided into five parts seeking views about the overall impact of the existing EU framework for the three pillars of high-quality and reliable corporate reporting: corporate governance, statutory audit and supervision. It also seeks views about the interaction between the three pillars:

• The first part seeks views about the overall impact of the EU framework on the three pillars of high quality and reliable corporate reporting - corporate governance, statutory audit and supervision. It also seeks views about the interaction between the three pillars.
• The second part of the questionnaire focuses on the corporate governance pillar, as far as relevant for corporate reporting. It aims to get your feedback in particular on the functioning of company boards, audit committees and your views on how to improve their functioning.
• The third part focuses on the statutory audit pillar. The first questions in this part aim at getting views on the effectiveness, efficiency and coherence of the EU audit framework. It focuses in particular on the changes brought by the 2014 audit reform. Subsequently, the questions aim to seek views on how to improve the functioning of statutory audit.
• The fourth part asks questions about the supervision of PIE statutory auditors and audit firms.
• Finally, the consultation will ask questions about the supervision of corporate reporting and how to improve it

This consultation, which runs until 4 February 2022, will directly feed into an impact assessment that the Commission will prepare in 2022 with a view to possibly amend and strengthen the current EU rules.

What the Institute is doing

A working party from the Institute's committees will be reviewing the consultation, debating the issues and submitting a consultation.  We welcome comments from members interested in the project. Please send any comments to us via email.

UPDATE: You can read the Institute's response here. 

The three pillars of corporate reporting

1. Corporate governance

   The consultation questionnaire seeks feedback on the effectiveness, efficiency and coherence of key features of the EU corporate governance framework relevant to corporate reporting. These include board responsibilities for reporting; internal control, fraud prevention obligation to establish an audit committee.

2. Statutory audit

   The bulk of the consultation document is centred on audit, in particular the impact of the changes brought about by the 2014 EU audit reform package, focused on public interest entities (PIEs). The Commission’s last market monitoring report issued earlier this year had already revealed a number of deficiencies with audit quality (based also on inspection reports) and divergent use of the country options allowed under EU audit rules.

   General questions are raised on independence, firm rotation, the content of the audit and audit reporting, the provision of non-audit services, transparency rules and the internal governance of firms. Specific questions also ask for feedback on whether joint audits for PIEs should be incentivised or mandated; whether caps on auditor liability should be increased or removed; and whether a passporting system should be established to ease the cross-border provision of audit services. 

3. Supervision

Reflecting a number of concerns with the supervision of corporate reporting – the third pillar of the consultation document – feedback is also sought on deficiencies in the EU’s supervisory framework. These address the roles and responsibilities of national authorities, the exchange of information between authorities, the need for greater enforcement powers, as well as the role of the European Securities and Markets Authority.

Background

High quality and reliable corporate reporting are of key importance for healthy financial markets, business investment and economic growth. The EU corporate reporting framework should ensure that companies publish the right quantity and quality of relevant information allowing investors and other interested stakeholders to assess the company’s performance and governance and to take decisions based on it. High quality reporting is also indispensable for cross-border investments and the development of the capital markets union.

In the context of this consultation, corporate reporting comprises

• the financial statements of companies,
• their management report that includes the non-financial and corporate governance statements, and
• sustainability information pursuant to the proposed Corporate Sustainability Reporting Directive.

The consultation takes into account the outcomes of the 2018 consultation on the EU framework for public reporting by companies and the 2021 Fitness Check on the EU framework for public reporting by companies. This current consultation focuses on companies listed on EU regulated markets that is a subset of the companies subject to public reporting requirements under EU law.

Find out more

• Commission consultation page and questionnaire
• ESMA letter to Ms Mairead McGuinness Commissioner in charge of Financial services, financial stability, and Capital Markets Union following Wirecard: Microsoft Word - ESMA32-51-818 Letter to EC on next steps following Wirecard (europa.eu)
• The European Commission’s second audit market monitoring report which takes stock of changes to the European audit market several years after the implementation of the 2014 audit reform package.