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Johannes Guigard Chartered Accountant Italy and ACCA

UNIVERSITY OF MOSCOW 13-17 October 2008 General overview on the European Accounting and Auditing legislation. Johannes Guigard Chartered Accountant Italy and ACCA. Foundation of the European Union (EU).

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Johannes Guigard Chartered Accountant Italy and ACCA

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  1. UNIVERSITY OF MOSCOW 13-17 October 2008 General overview on the European Accounting and Auditing legislation Johannes Guigard Chartered Accountant Italy and ACCA

  2. Foundation of the European Union (EU) • The EU is a family of democratic European countries, committed to working together for peace and prosperity • The historical roots of the EU lie in the WWII. The idea of European integration conceived to prevent such killing and destruction from ever happening again was proposed by the French Foreign Affaires Minister Robert Schuman on 9 May 1950, EU"birthday“, now annually celebrated as Europe Day.  • Started off with just six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Denmark, Ireland and the United Kingdom joined in 1973, Greece in 1981, Spain and Portugal in 1986, Austria, Finland and Sweden in 1995. In 2004/7 with the enlargement 12 new countries joined. EU is now made of 27 Member States

  3. Basic Data* Some data*: • 493 million citizens EU (Russia 143 Million) • Area: 4,4 Million Square Km (Russia 17,1 Million) • 1.300 Directives • 23 million SMEs, of which 91% are micro-enterprises • 7.365 domestic companies ^ • 1.400 foreign companies • Market capitalisation Euro 6.800 billion • US figures: • 6.000 domestic and 850 foreign (+- 280 EU) • Market capitalisation USD 13.000 billion *2005 ^ CESR report on enforcement - November 2007

  4. The world and the European Union • Europe’s role • Economy: major world power • Political and diplomatic role? • EU and USA • Share same values • Competition in trade and technology • EU and Mediterranean countries • Creation of a free-trade area by 2010 • Economic and trading relations • Partnership in social and cultural fields • EU and Russia • Partnership and Cooperation Agreement • future “Common Economic Space”:

  5. Legal foundations of the European Union (1/2) • Treaty of Paris (1951) • European Coal and Steel Community The 2 WWII commodities pooled under an Authority • Treaties of Rome (1957) • EEC European Economic Community • Euratom The nuclear energy treaty • The European Monetary System (1979) • Currencies fluctuations limited 2.25-6% • Single European Act (1987) • Foundations of the Single Market • Treaty of Maastricht (1992) • Plan for EMU’s creation The Monetary Union • Upgrade from EEC to European Community-> towards European Union • Introduction of the Subsidiarity Principle

  6. Legal foundations of the European Union (2/2) • Schengen Agreement (1990) • Abolishes borders and checks on persons within many EU countries • Introduces a common policy on visas • The Single Market (1993) • No borders between Members States • Treaty of Amsterdam (1997) • Stability and growth pact: budget discipline by EU countries on deficits • Treaty of Nice (2001) • EU Charter of Fundamental Rights, in preparation for the Enlargement • Introduction of Euro • 1 January 1999 - 1 January 2002 - 28 February 2002 • Treaty of Lisbon (2007) • Change in proposal and adoption of EU legislation.

  7. The European Constitution • 2004: Agreement for a new Constitution • 2005: Rejected by FRANCE and HOLLAND • 2008 Rejected by IRELAND • Where will we end up? • PLAN C anyone?

  8. Agreements with other European Countries • WIPO countries (Norway, Liechtenstein, Iceland) are part of Internal Market • EFTA Member Switzerland has agreement • Other countries are in the process of asking for membership

  9. Treaties of Rome 1957 • EEC European Economic Community A common market in a wide range of goods and services • EURATOM • GOALS OF THE TREATIES → free movement of goods, people, services, capitals → closer relation among the Member States → Increase in stability → Continuous and balanced expansion → Ensuring fair competition between businesses → Protecting consumer interests

  10. Treaty of Maastricht 1992 • The principle of subsidiarity EU and its institutions act ONLY IF action is more effective at EU level than at national level: limited EU interference in its citizens’ daily life • European Monetary Union by 1999 • Maastricht parameters - Budget deficit ≤ 3% of Gross domestic product - public borrowing ≤ 60% of GDP • Rights of the EU’s citizens

  11. The EU’s Internal Market • Based on the principle of an open market economy with free competition • Freedom of establishment • free exchange of: • Goods NO BORDERS AMONG MEMBER STATES • Capitals SIMILAR FINANCIAL RULES • People ANYONE CAN SETTLE ANYWHERE IN EU • Services STILL TO BE ACHIEVED

  12. The Institutional Framework EU is more than a confederation of countries but not a Federal State • The Council of Ministers • The European Parliament • The Commission • The Economic and Social Committee • The Court of Justice

  13. The Council of Ministers (1/2) • It’s the highest level policymaking body of the EU • Brings together all EU countries’ Presidents and Prime Ministers PLUS EU Commission President • Shares with the European Parliament • legislative power • responsibility for the budget • Concludes international agreements negotiated by the Commission

  14. The Council of Ministers (2/2) • Each country in turn presides over the council for a 6-month period [EU Rotating Presidency] • Decisions taken unanimously or by qualified majority • Meets in principle 4 times a year

  15. European Parliament (1/2) • Elected body, at universal suffrage every 5 years: next elections JUNE 2009 • Represents the EU’s citizens • Takes part in the legislative process • Debates and adopts with Council the EU Budget proposed by the Commission • By 2/3 majority may censure and therefore dismiss the Commission

  16. European Parliament (2/2) • Located in Strasbourg (plenary sessions) and Brussels • Share of Legislative power with the Council • 3 different procedures • cooperation procedure: gives its opinion on draft Directives and Regulations proposed by the EU • assent procedure: Parliament gives its assent to int’l agreements negotiated by the Commission • co-decision procedure

  17. EU Commission • EU’s executive arm • It has a complete political independence • It does not take instructions from any Member State Government • It’s the only institution that has the right to propose new EU legislation • It’s the guardian of the Treaties • It’s assisted by 36 Directorates General (DGs) • Located in Brussels and Luxembourg

  18. The European Economic and Social Committee • It’s an advisory body that gives its opinion on EU initiatives • Assists EU Commission in adopting detailed technical implementing measures • Council and Commission consults EESC in taking decisions in policy areas covered by EC and Euratom treaties • Members represent the various interest groups that collectively make up “organised civil society”. Appointed by Council for 4 years.

  19. The Court of Justice • Ensures that EU law is complied with • Ensures treaties’ interpretation and application • Makes void EU legislation’s lawfulness • Checks whether EU legislation respects the fundamental rights • Made up of one judge by each EU country + 8 Advocates general • Each judge is appointed for 6 years • Headquarters: Luxembourg

  20. The European Central Bank • Manages the European monetary policy • Manages the €: sets interest rates and intervention policy • Lead by a President and an Executive Board • Headquartes: Frankfurt

  21. Other institutions • Court of auditors • European Investment Bank • Committee of the regions • …and many others…

  22. European Institutional Renewal 2009 • 1 Jan 2009 The new Constitution was proposing a full time President and a Foreign Policy Chief … but… all this is now postponed • In June 2009 the election of new EU Parliament • In November 2009 appointment of the new Commission

  23. Background to EU Legislation • Primary EU legislation Member States delegate some of their national sovereignty to the Institutions who represents both the national and collective interest by signing Treaties, which constitute the Primary Legislation • Secondary EU legislation: • Regulations • Directives • Decisions • “Soft law”: (form of guidance) • Interpretative Communications • Recommendations

  24. Background to EU Legislation • Comitology • A simplified way to amend legislation on technical aspects (non-essential elements) based on a delegation of executive powers from Council to Commission : • COMMITTEE OF PUBLIC SERVANTS • Member States represented in a Committee chaired by the Commission • Parliament informed • Comitology with scrutiny: more powers for EP • Subsidiarity

  25. The co-decision procedure (1/2) • Established by Maastricht Treaty • Article 251 of EC Treaty • Legislative procedure par excellence following adoption of European Constitution • Principle of Parity: neither institution (EP or Council) may adopt legislation without the other’s assent • Adopted for issues such as Internal Market, education, research, environment, consumer protection, health, culture, free movement of workers

  26. The co-decision procedure (2/2) Commission proposes (right of initiative), Parliament and Council decide jointly. • Parliament (1st reading) and Council agree on Commission proposal: it is approved • if disagreement, EP (2nd reading) can either accept Council’s (common) position, or reject or amend it by a majority of its members, • if Council cannot accept EP’s amendments: conciliation meeting. If agreement found in conciliation, proposal approved. If no agreement, proposal deemed not to have been adopted.

  27. Lisbon Treaty 13 December 2007 • Aims at providing EU with streamlined institutions and optimised working methods after the Enlargement • To be ratified by Member States by beginning of 2009 • Changes to proposal and adoption of EU legislation: • Election of President of the EU Council by qualified majority for 2,5 years, renewable once • Election of President of EU Commission by simple majority of MEPs following a proposal of the Council • Creation of a post of EU Foreign Minister • Increased number of fields covered by qualified majority voted by the Council

  28. Lisbon Treaty 13 December 2007 • Clarification of division of powers • Exclusive EU competences in the financial sphere: • Euro • Competition policy • Monetary policy • Common commercial policy • Member States cannot take measures inconsistent with: • Existing liberalization of movement of capitals • Damaging of existing financial instruments • Competence shared with member States • Internal market limited to the following • Environment • R & D • Consumer policy

  29. Lisbon Treaty 13 December 2007 • European Parliament will have greater legislative and budgetary powers • Member States Parliaments will have a role in ensuring that the EU complies with the principle of subsidiarity • EU ‘s powers on coordination of economic, industrial and employment policies of the Member States remain the same

  30. EU Legislation: the DIRECTIVES • One of the binding legislations of EU • Offers OPTIONS to Member States • Indicate to the Member States what they have to implement. How they do it’s up to them. The EU Commission supervises • GOLD PLATING exercise by Member States, adding accomplishments, but harmonisation makes it difficult to detect.

  31. EU Legislation: the REGULATIONS • Have to be implemented into the national legislation of each member State as it is • No amendment and no delay are accepted • In case of delayed implementation it is nevertheless applicable in the Member State: anyone can ask for ruling at the European Court of Justice, just in case

  32. Eu Legislation: the DECISIONS • Decisions are made by the Court on all issues brought to its attention • Main interventions are on the areas of: 1.- Taxes 2.- Antitrust • Ensures correct application of treaties and of secondary legislation

  33. Definition of Recommendation (Article 249/EC) • It’s one of two kinds of non-binding acts as per Treaty of Rome , while Regulations, Directives and Decisions are compulsory • No legal force but negotiated and voted according to the appropriate procedure • Though without legal force, has political weight • Instrument of indirect action aiming at preparation of legislation in Member States, differing from the Directive only by the absence of obligatory power.

  34. The Lisbon strategy 2000 (1/2) AIMS: EU economy expected to be by 2010: a) The most competitive b) The most dynamic IN THE WORLD c) Knowledge based a) Sustainable growth WITH b) more and better jobs c) greater social cohesion a) globalisation REASONS b) technological rivolution

  35. The Lisbon strategy 2000 (2/2) • Major targets • Growth 3% per annum • Employment rate 70% • 3% GDP to be spent on R&D • 20 MILLION new jobs to be created • European research area (to link universities) • Encourage students (Socrates and other prgms) • TOO Many other targets (28+120) • Monitoring the development of the strategy • Once a year: spring economic summit EU COUNCIL OF MINISTERS

  36. The two EU Action Plans The two main pillars of EU legislation are: • Financial Services Action Plan, 1999 - 2006 • Capital Markets regulation • Lamfalussy approach in four steps • Company Law Action Plan 2003 – 2010 • Review of co. Law Directives • Corporate Governance

  37. How to Reach a European Single Financial Market? • Not only: • Identify problems to be addressed • Coming up with legislative solutions • But mainly: • Look at the most effective way of ensuring that those solutions actually work • Deliver the results everybody want to see

  38. Towards Single Financial European Market • Consultation and Transparency in the legislative process • all documents out for consultation • active role of the professions involved • Respond quickly and flexibly to market changes • Convergence and Cooperation among European regulators • Working together on day by day basis to develop common understanding and approaches • Effective Implementation and Enforcement across Member States • Look beyond EU: cooperate internationally

  39. Loyalty • It is an investment in Trust Transparency in legislative process • Transparency is the core of the European Legislative Process • Investors need to be able to invest across borders easily and with confidence Not only WHAT information is disclosed • Transparencyis But also HOW it is disclosed that matters

  40. Financial Services Action Plan • 42 PLUS measures in order to create • a) Integrated European Financial Market • b) The break down of barriers 1Currency 1 Capital Market 1 Set of Financial Rules … and….

  41. Financial Services Action Plan … and… • Objective, accurate, comparable financial information throughout the EU • Fighting market abuse • Efficient fast track decision making

  42. Financial Services Action Plan • Amongst other measures: • IFRS adoption for all listed Co on EU markets • -introduction of fair value • - modernisation • - update for company law issues • Money laundering Directive (3 rd) • Revision investmentservices directive on protection of investors • Taxation of savings income • Take-over bids directive

  43. Financial Services Action Plan • Markets in financial instruments Directive MiFID • Market abuse Directive Against manipulation of markets • Prospectus Directive Detailed document to be filed to the Registrar of Companies before offering the shares to the public 9 Statutory auditor Directive Quality assurance -> UE Recommendation - Auditors’ independence - review of 8 th Directive 10. Transparency - frequency and contents of interim reporting by listed companies

  44. EU Company Law legislation (1/2) Key Political objectives • Facilitate participation of shareholders to corporate life • Vote in absentia • Right to table resolutions • Strengthening shareholders rights and third parties protection • Modern company law making • Efficiency and competition • Facilitate cross-border activities • Participate to general meetings via electronic means • Co web used to inform shareholders and publish info

  45. EU Company Law legislation (2/2) Modern company law making • flexible, adaptive instruments • principle based, not rule based legislation • disclosure, instead of substantive regulation • encourage use of modern technology • use of company’s website • central electronic filing system per Member State • connection of Member States archives • access to info in advance of AGM

  46. Company Law Action Plan • Modernising the Board of Directors • Coordination of Corporate Governance in Member States • Corporate restructuring and mobility • European private Company • European Cooperative Society

  47. Next step … let’s get into more detail on the Financial Reporting and Auditing…

  48. Companies interested in the subject • Listed • Non-listed • Small medium size entities • Micro entities • Banks • Insurances • Plus, in certain cases: 1.- public sector 2.- partnerships 3.- professionals

  49. EU Legislation on Financial Reporting • Fourth and Seventh Directives (1978 and 1983) • Directive on Banks and other financial institutions • Directive on Insurance undertakings • 2001 Fair Value Directive • 2002 IAS Regulation • 2003 Modernisation of the Accounting Directives • Adoption of certain IAS + IFRSs in accordance with the IAS Regulation • June 2006: Amendments to the 4th and 7th Directives • June 2006: Statutory Audit Directive

  50. EU Legislation on Financial Reporting and Auditing National “auditable” entities 4th, 7th and Statutory Audit Directives Small companies National companies with statutory audit Other legal forms Transparency Prospectus Directives and IAS Regulation Listed companies Specific sector Directives on financial institutions Foreignlisted

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