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Internal audit’s central role in the future of corporate reporting
July 2016

Internal audit has a central role to play in the future of corporate reporting as an adviser on, and a builder and consolidator of the reporting process itself, according to the ECIIA’s response to a consultation on the issue by the Federation of European Accountants (FEE).

“Internal audit adds value to corporate reporting by providing an informed and independent review on processes, risks and controls,” ECIIA President Henrik Stein said in the confederation’s formal response to FEE.

In the future, developing integrated thinking would be critical if organisations were to be able to present a coherent and comprehensive picture of their long-term strategy and performance, he said. This would require the creation of cross-functional teams, which would include all key areas within the organisation.

He said organisations needed to adopt clear and unambiguous assurance models to report effectively.

“It is necessary for internal and external assurance providers to form a common view on issues of relevance, materiality, accuracy and completeness,” he said. “Combined assurance is needed to achieve an informed view on whether reports are fair and balanced and also to improve efficiency.”

FEE has been consulting on how to evolve corporate reporting in a way that will keep pace with the developing economic reality and address the needs of a wider stakeholder audience.

To read ECIIA’s response, click here.

To visit FEE’s page on corporate reporting, click here.

Meeting the challenge of tax reporting
July 2016

Internal auditors can provide boards with help and assurance that the European Union’s new rules on tax reporting have been properly implemented in their enterprises, according to speakers at a recent co-hosted ECIIA event at the European Parliament on the issue.

“As the third line of defence in organisations, and depending on the maturity of the taxes processes, internal audit may provide assurance about tax reporting, or function as an adviser,” Silvio de Girolamo, Chief Audit Executive at Italy’s Autogrill, said at the breakfast meeting, which was organised by the confederation in conjunction with the Federation of Risk Management Associations.

He said internal auditors would be able to coordinate their work with chief risk officers and tax managers to ensure controls around tax reporting were complete and effective. This would also help minimise the duplication of the effort needed to comply with the new provisions.

Jonathan Blackhurst, Head of Risk Management at Capita (UK) told delegates that getting it right would be important because the rules would increase reputational risk. “It will be a challenge to determine whether or not the public will believe that you have paid enough tax or not, as figures can be sensationalised when taken out of context,” he said.

The idea behind so-called country-by-country reporting is to get citizens closer to businesses and to restore trust, Jean-Philippe Rabine, European Commission DG FISMA explained to attendees at the event. The rules are meant to ensure that profits earned in any one country are taxed at the local rate, rather than allowing companies to aggregate their profits across all of the European countries in which they operate and have them taxed in a jurisdiction of their choosing.

MEP Evelyn Regner, Shadow Rapporteur on the directive and MEP Jeppe Kofod also attended the meeting.

The European Commission is proposing a one-year implementation period for all member states and between half a year and one year for businesses. The first Country-by-Country Reporting can be expected by fiscal year 2018.

European Parliament Committee on Legal Affairs recently reported that the rules for country-by-country tax reporting had not been included in the transparency legislation intended for institutional investors and asset managers, but expects the matter to be resolved shortly.

Click here for a summary of the event.

Click here for more on the legislation.


Audit committees must balance independence with competence
July 2016

Audit committees must balance their ability to be independent with the right level of competence if they are to effectively challenge management, according to attendees at a recent event organised by European Confederation of Directors Associations (Ecoda) and Pwc.

“Too much independence for audit committee members could come at the price of less competency,” UK non-executive director Philip Johnson, told delegates in Brussels in June. He said finding independent members can prove to be difficult as a result of over-regulation and, therefore, said their effectiveness should be prioritised over independence.

Inge Boets, a member of several audit committees in Belgium, said that while it was preferable to have a majority of independent members on the audit committee, having a committee that had complementary and diverse experience was also key.

Tjalling Tiemstra, Chairman of the Audit Committee at ABN Amro Bank and various other non-executive positions in the Netherlands, said that it was important that audit committee members were on a similar level of competency as the chief financial officer.

“I feel there is a lack of recognition of the importance of competency, as the audit committee requires ability and character to challenge management,” Tiemstra added.

The event focused on the corporate governance implications of the recent EU Audit Directive and Regulation, which was adopted by the European Union in 2014. The rules, which came into force this year, give additional oversight responsibilities to audit committees.

Alain Deckers, Head of Unit, Audit and Credit Rating Agencies, DG for Financial Stability, Financial Services, and Capital Markets Union (FISMA) from the European Commission, told delegates that twenty countries would have had completed their preparations for the new legislation by the end of the summer. He said that better engagement with the European Commission and audit committees would help bed in the new rules.

“There appears to be an unequal experience when it comes to engaging with audit committees,” he said. “Better engagement can allow us to understand how processes are handled.”

Click here for an EC fact sheet on the new rules.

Click here for a summary of the event.

EU’s non-audit “blacklist” services include internal audit
June 2016

Internal audit is now officially on a “blacklist” of services that accountancy firms are forbidden from providing to their statutory audit clients.

The EU’s revised Statutory Audit Directive and its Regulation include measures aimed at strengthening auditor independence, compulsory auditor rotation, a broader role for the audit committee and restrictions to the work that statutory auditors can provide to their clients.

“We fully support the move to make the statutory audit more transparent,” ECIIA President Henrik Stein says. But the rules have serious implications for the way that internal audit is resourced in larger organisations, he adds. Chief audit executives will need to think carefully about the balance between out-sourced internal audit requirements and those provided in-house.

Internal audit will also play a critical role in ensuring the systems put in place to help the audit committee monitor the work of external audit are robust and accurate. “In large organisations, statutory audits can take several months to perform over many legal jurisdictions and it will be a challenge to get this right,” Stein says.

While audit oversight will continue to be conducted at a national level, a new Committee of European Auditing Oversight Bodies will replace the existing European Group of Auditor Oversight Bodies. The precise details of how the latter is to operate are unclear.

Those affected are listed companies and other so-called public interest entities, such as credit institutions and insurers.  The European Union’s revised rules on auditing came into effect on 17 June 2016.

Jury still out on EU regulatory reforms
June 2016

The combined effectiveness of the various regulatory reforms made in the financial sector following the crisis of 2007-8 are unknown, according to respondents to the EU’s recent review of the issue.

Some attendees at a meeting in May, following the EU’s Call for Evidence on EU regulatory framework for financial services, said that the review was premature because many of the reforms had not had time to take effect.

“The reforms need time to bed in before there is further legislation in this area,” ECIIA President Henrik Stein says. “Internal auditors working in the sector are still helping their organisations put in place and test the appropriate controls and it will take time to see where further action may be required.”

Commissioner Jonathan Hill told the public hearing that the Commission was committed to legislating less and legislating better. He said he wants the Commission “to be more proportionate in the way legislation’s applied, more cautious before doing anything that might reduce liquidity, and more ambitious about reducing reporting and disclosure requirements where it’s appropriate”.

Many respondents urged the Commission to refrain from embarking on a process of deregulation until the full effect of the reforms was known.

For the summary of contributions to the call for evidence click here.

For the conference web stream, click here.

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