The European Commission’s consultation on the three pillars of corporate reporting
EC consultation: Corporate reporting – improving its quality and enforcement.
On 12 November 2021, the European Commission (EC) issued a consultation paper in the form of an online questionnaire entitled: Corporate reporting – improving its quality and enforcement.
In the context of this consultation, corporate reporting comprises the financial statements of companies, their management report, which includes the non-financial and corporate governance statements, and country-by-country reporting. It would also include sustainability information pursuant to the EC’s proposed Corporate Sustainability Reporting Directive.
The consultation contains questions to evaluate aspects of the EU Audit Regulation, Audit Directive and Accounting Directive. It covers the EU framework on corporate governance only in so far as relevant for corporate reporting by listed companies and the statutory audit of public interest entities (PIEs). It also builds on the work carried out by the European Securities and Markets Authority (ESMA) and the Committee of European Audit Oversight Bodies (CEAOB).
It is intended that the consultation will directly feed into an impact assessment that the EC will prepare in 2022 with a view to: (i) assessing problems with the quality of corporate reporting; and (ii) comparing possible options to remedy these problems.
The consultation is divided into the following five parts:
1. The EU Framework for high-quality and reliable corporate reporting
This part focuses on the overall impact of the EU framework on the three pillars of high-quality and reliable corporate reporting: corporate governance, statutory audit and supervision, and the interaction between them. Matters on which the EC seeks views include the following:
- The importance of corporate reporting (information contained therein) compared with other sources of information.
- The overall effectiveness, efficiency, relevance, coherence and EU added value of the legislation, considering each of the pillars underpinning corporate reporting individually.
- The quality and reliability of corporate reporting by listed EU companies. This includes whether it would it be useful to have specific indicators to measure the quality of corporate reporting, statutory audits, and effectiveness of supervision.
- Whether it should take action to increase the quality and reliability of reporting by listed companies in the following areas:
- corporate governance pillar
- statutory audit pillar
- supervision of PIE auditors and audit firms
- supervision of corporate reporting.
2. Corporate governance
This part focuses on the corporate governance pillar, as far as is relevant for corporate reporting. Matters on which the EC seeks views include the following:
- The effectiveness, efficiency and coherence of the key features of the EU framework on corporate governance, considering how they underpin quality and reliability of corporate reporting.
- The main issues, if any, as regards corporate governance (e.g., the roles of the various actors including the board, audit committee, shareholders and other stakeholders).
- How effective and efficient certain potential actions would be in increasing the quality and reliability of reporting by listed companies (e.g., giving company boards an explicit responsibility to establish effective risk management and internal control systems for the preparation of corporate reporting, including as regards controls for risks of fraud and going concern).
3. Statutory audit
This focuses on the statutory audit pillar. Matters on which the EC seeks views include the following:
- The effectiveness, efficiency and the coherence with other relevant EU frameworks of the key features of EU audit legislation, in so far as it applies to PIE auditors and audit firms.
- Certain specific statements related to audit.
- The extent to which quality issues can be attributed to deficiencies in the EU legal and supervisory framework for statutory audit.
- How effective and efficient certain possible actions would be in increasing the quality of statutory audits of PIEs (e.g., incentivise or mandate the performance of joint audits for PIEs, including to enhance competition on the PIE audit market).
4. Supervision of PIE statutory auditors and audit firms
This focuses on the supervision of PIE statutory auditors and audit firms. Matters on which the EC seeks views include the following:
- The efficiency and coherence of the key features of the EU supervisory framework for PIE statutory auditors and audit firms.
- The main issues, if any, in relation to the supervision of statutory auditors and audit firms.
- How effective and efficient certain possible actions would be to increase the quality and effectiveness of supervision of PIE statutory auditors and audit firms (e.g., grant a European body the task to register and supervise PIE statutory auditors and audit firms).
5. Supervision and enforcement of corporate reporting
The EC seeks views on the supervision of corporate reporting and how it could be improved.
The consultation closes on 4 February 2022. The envisaged adoption date for legislative proposals is intended to be in Q4 2022.