sou · GSB347 · 2005-01-01 00:00:00 — Financial reporting is based on an extensive regulatory regime of laws and best practice in accounting and auditing, an area that is constantly being developed and that is characterised by extensive internationalisation. The EU's regulation on the application of international accounting standards means that all listed companies are to prepare their consolidated financial accounts in accordance with the inter- national accounting standards issued by (), which have been adopted by the EU Commission. These standards are currently called the International Financial Reporting Standards (IFRS). tion applies with certain transitional provisions for financial years beginning January 1, 2005 or later. The regulation adopted satisfies all the requirements that could be made today of standards in accounting. The regulation of auditing is being reviewed in the EU, which recently published a proposal to update the 8th Company . In short the directive provides that the International Standards on Auditing () will apply in Union beginning in 2005. The scope for specific Swedish regulations to deviate from what was agreed at the international level or in the EU is very limited. A new auditing standard comes into force in beginning in 2004. It replaces the earlier recommendation of FAR, profession in . Under the proposal for a Swedish code of corporate governance, the board and the managing director, immediately before signing the annual report, are to certify that the annual accounts, to the best of their knowledge, have been prepared in accordance with generally accepted accounting practices for a stock market com- pany, that the information presented is consistent with the actual conditions and that nothing of material value has been omitted. Responsibility for financial reporting must be made clear in the annual report. This proposed clarification should also become the subject of legislation. The board of directors should also require that the director of finance certify in writing that the companys financial reporting – both the annual report and the quarterly reports – meets the requirements of the existing rules and regulations in all essential respects. The board of directors of all major companies listed on the stock exchange should have an audit committee with explicit instructions. The chair of the board should not chair the audit committee, but may be included on the committee. With the exception of the chair of the board of directors, members of the audit committee should be independent of the company. At least one member should be independent of major owners. Rules to this effect can be found in the proposal for the corporate governance code. The board is responsible for seeing that the company has good internal control and must oversee and evaluate the companys system of internal control on an ongoing basis. The corporate governance code stipulates that the board of directors is to make a separate annual report reviewing internal control, which is also to be examined by the auditors. In addition a stock market company should have internal auditing in the form of an independent unit reporting directly to executive management. Companies that do not have internal auditing should annually evaluate the need for it and in their annual report explain why there is no internal auditing. The audit committee or the board of directors as a whole should examine all the critical accounting issues in the company. These issues should then be reported separately in the financial reports and should be highlighted at the shareholders meeting. The audit committee should review all financial reports before they are published. The board of directors and the auditors should confer on their views of the companys risks and internal controls. The specific requirements of the Swedish law on management and operational audits (a recommendation for or against discharge of liability in the auditor's report) should be reviewed as the audit- ing regulations should be harmonised at the international level. The issue should be discussed within the framework of a review of legislation on auditing. Under the listing agreement with the , stock market companies at present are to issue quarterly financial statements but these reports do not need to be audited. However, audit of these interim financial statements would make possible an earlier discovery of potential problems. Therefore, at least one interim report – the half-yearly or nine-month report – should be reviewed by the auditors. At present it is sufficient that this requirement is included in the code. The selection of the auditor is a key issue in the owners govern- ance of a company. The Code therefore stipulates that the nomi- nation committee is to propose auditors at the shareholders meeting, together with proposals on auditing fees. The rules on rotation in the EU recommendation on independence are included in FARs rules on professional ethics; therefore, further regulation in the code or the laws is not required. The services in addition to auditing that the auditors may provide are prescribed by the regulations in the laws on auditing and the supplementary regulations on the auditors independence. However, in listed companies, the board of directors should stipu- late the services that the accounting firm is allowed to furnish to the company, as is stated in the corporate governance code. Co-ordinated Standard Setting and Supervision The new demands being put on standard setting and supervision against the background of developments in the past few years and expected forthcoming EU requirements bring the issue of the appropriate organisation and division of work among the various authorities and private bodies to the fore. The bases for the future organisation of accounting and auditing matters should be the following: The role of the Swedish Financial Supervisory Authority (, FI) should remain focused on the finan- cial sector; Closely connected fields, such as accounting and auditing, should be placed under the same authority; Self-regulation should be used where possible; Standard setting and supervision should be kept separate; Activities that are related to supervision should be financed by the objects of that supervision. The Commission proposes putting accounting and auditing mat- ters under a single new accounting supervisory authority (in Swedish, named ). Standard setting and supervisory tasks should be separated as far as possible, and this new authority should have the right to delegate some tasks to private bodies. The supervisory panel should remain a private body, which formally has its mandate from the proposed new authority but the panel should work independently. Under the proposal, a new authority with three main areas of responsibility would be created: accounting in unlisted companies; accounting in listed companies and their supervision; and auditing. trative as well as competence-related advantages in having accounting issues handled in proximity to auditing issues. The proposal includes an increase in the resources for standard setting and supervision in this area by 50 per cent compared with the current situation. The Commission is of the opinion that the entire cost of the new authority should be financed by the central government budget. This means a gross cost increase of about million. However, a considerable part of that amount should also continue to be collected in the form of fees paid by the companies and organisations that are to be supervised by the authority. System Stability and Improved Consumer Protection in the The financial sector plays a key role in the economy and depends very much on good confidence. The requirements of system sta- bility and consumer protection have necessitated more comprehen- sive state regulation and supervision in the financial sector than in other sectors. System risks in the financial sector mean that throughout society, core functions such as payments services and credit supply could be disrupted. Legislators, central banks and supervisory authorities have made extensive and partly internationally co-ordinated efforts in the 1990s aimed at improving the conditions for financial stabil- ity and the ability to handle stability problems. Regulatory regimes have been reformed and the new Swedish banking legislation is clearly aimed at system stability. Risk awareness and risk manage- ment capacity in financial companies is much higher today than it was when the financial crisis began fifteen years ago. The Commission stresses the importance of pursuing work to develop the regulatory framework and to strengthen financial supervision in – largely through continued international co-operation - but does not see any grounds for presenting any proposal for measures in this area. The consumers disadvantage with respect to information when buying financial services is caused by the appearance of a wide spectrum of citizens who have come to use complex financial services that previously were the concern chiefly of professional actors or services that simply did not exist. Developments in the financial industry have meant many positive changes for the con- sumer but consumer protection needs to be strengthened. How- ever, the aim can never be to relieve the consumer of every type of financial risk. Excessive protection easily becomes overregulation with weak competition, a low rate of growth, low efficiency and high costs in consequence. The goal is not freedom from risk but risk taking that is conscious and controlled. Self-regulation on the stock market. In a few years, several EU directives involving changed conditions for self-regulation on the securities market will have been incorporated into Swedish legisla- tion. The regulations require a competent authority with respon- sibility for supervision of the regulatory regime, which is presumed to be a central government authority. The Commission is of the opinion that self-regulation will still continue to fulfil important purposes and that it needs to be developed and be more widely supported. Actual and potential conflicts of interest need to be exposed and managed and a more proactive approach should be aimed at. The authorities responsible should also consider a better integrated and resourced organisational framework for the activi- ties. The role of the stock exchange. Stock exchanges and other finan- cial market places play a key role in the financial market. Efficient market places, managed in a way that instils public confidence, contribute to good liquidity, low transaction costs and efficient price formation. The Commission proposes that the Government appoint a commission to look into the future role of stock exchanges and market places with respect to performing tasks similar to public authorities, such as the issuance of rules and supervision. The bases for the work should be the new EU direc- tives in the area of securities and the requirements that these direc- tives may involve, as well as the effort to eliminate conflict of interest risks in the as much as possible. Changed supervisory responsibility. The Commission proposes that responsibility for consumer protection in the financial sector be given to the Financial Supervisory Authority, which has the knowledge of how the financial sector functions, the contact interface with the market and thus the means of identifying prob- lems and pitfalls even before the consumer is affected. However, the Authority should not handle individual consumer matters or pursue legal processes, as doing so could mean a conflict of interest with its supervisory function. The Authority should therefore not assume the role of the Consumer Ombudsman in the financial area. Individual consumer matters and consumer information should be looked after by the consumer for bank and insurance matters. These should be restructured, given a broader mandate, allotted greater resources and financed by the Authority. All in all, the Commission proposes additional resources of about million annually for the Authority, of which about million would be provided to the consumer . The funding should come from the central government budget, but, like the supervision in general, it will in the end come from fees from the financial companies. The Commissions proposal will increase these net costs by about million annually. In obvious cases of corporate infractions of the Marketing Prac- tices Act (Marknadsföringslagen), sanction charges should be per- mitted. The charges are to be large enough to act as a deterrent. As the Financial Supervision Authority should not pursue individual consumer matters, responsibility for these matters most suitably lies with the () and/or the Consumer Ombudsman. Decisions may be appealed to the courts. Life insurance companies. The boards in non-profit-distributing insurance companies must take into account both policy holders and owners interests. To minimise conflict of interest risks in such life insurance companies, the structure of their board of directors and its guidelines should be changed. The Commission supports the proposals for corporate governance in the () memorandum on improved pro- tection for policy holders in life insurance companies. The Commission recommends that the corporate structure of a mutual insurance company in a profit-driven concern be scrapped and welcomes the commission that has been appointed to review company law in the insurance area with the aim of improving transparency and minimising the risk of conflicts of interest. When an insurance broker is commissioned, the brokers fee is usually paid by the insurance company. Instead, the insurance broker should be paid directly by the person pur- chasing a policy. The customer should pay the insurance company only for the service that is being purchased from the company. Asso- ciation () should publish clearer and fuller guidelines to its member companies. The duty to inform should include key ratios that clearly show if the fund management com- pany acted in the mutual fund owners interests. The companies should display greater openness respecting individual fund man- agers holdings and trading in the fund that he or she manages, together with the design of the fund managers remuneration sys- tem. In addition the same measures in the area of corporate governance that were proposed for life insurance companies should be adopted for the fund management companies in order to strengthen their independence and reduce the risk of conflicts of interest. To improve public confidence, the Financial Supervisory Authority should introduce stricter regulations to thwart conflicts of interest in the activities of securities companies. This should be accomplished with the guidance of the new American rules known as the Spitzer rules, which mean, among other things, that analysts compensation/bonus is not to be linked to corporate finance and an internal committee is to approve recommendations made by the firms analysts. In addition the company is to draw up procedures for internal supervision to guarantee that the rules are observed. The Financial Inspection Authority should study what addi- tional changes are required to check conflict of interests and improve consumer/investor protection and thereby improve confi- dence in the securities firms. The main problems in the area of competition are abuse of a domi- nant position and companies unlawful anti-competitive co-opera- tion (formation of cartels). Other circumstances such as inappro- priate public procurement and public subsidies that distort compe- tition may also affect the functioning of the economy and public confidence. The Authority () should take over the functions now performed by (, NOU). The total effect of competition policy will be strengthened if the responsibility for and the supervision of issues of procurement and competition are co-ordinated to the greatest extent possible. In the area of public procurement, the Competition Authority at present is focused on the producers of goods and services and on the com- petition in the market. monitors how the procurer or the buyer follows the rules in force. In the opinion of the Commission, should be abolished and its functions should be transferred to the Competition Authority. Authority should be given the responsibility for supervision and co-ordination of government support. The responsi- bility for supervising government support now rests with the Government. An integrated responsibility for supervising govern- ment support by the Competition Authority, including adherence to the proposed Transparency Act (transparenslagen), would increase the effectiveness and the credibility of this part of compe- tition policy. The role of the Competition Authority in the markets for electronic communication should be strengthened. Special regulations aimed at achieving a functioning competition in certain markets where the rules have been reformed carry the risk of leading to high transac- tion costs for the actors, owing to requirements in addition to the general laws on competition. The responsibility for market analyses and reviews of competition in the telecommunications market now resting with the and () should be transferred to the Competition Authority. The appropriations for the Competition Authority should be increased. The credibility of competition policy requires effective rules, sanctions that are sufficiently forceful and a supervisory authority that has enough resources to discover and take measures against the most serious competition problems in the market. present, the activities of the Competition Authority are largely limited to fighting cartels. The appropriation to the Authority for managing present and future tasks should therefore be increased by million annually. Stronger Laws on Competition The Public Procurement Act (Lagen om offentlig upphandling, ) should be given effective provisions for sanctions. The extensive prac- tice of procurement in conflict with the Act the risk of leading to inefficient resource utilisation and losses to the econ- omy. The authority responsible for procurement supervision should be given the right to sue for market damage fines in the event of serious breach of the rules, such as unlawful direct pro- curement. In order to concentrate as much as possible all cases concerning competition to the same court, the Market Court (,) should rule on all cases concerning fines for market damages. Improved possibilities for sanctions, etc. for infringements of the Local Government Act (Kommunallagen). Municipal business activities are to be conducted without a profit motive and must have as their aim the provision of facilities or services for the public good. In practice, however, it has proved difficult for companies to appeal local government decisions – for example, on the munici- pality starting to operate business activities in a competitive market – or getting actions that may be in conflict with the Local Government Act tested in courts. Consequently, there is good reason to review the Act. Competition considerations should be given more weight in the Planning and Act (PBL). Consumers have a legitimate interest in good competition, which leads to a larger and often more varied supply of goods and services and lower prices. One factor that affects the opportunities for the of retail businesses is the local governments planning for retail trade by their application of the Planning and Act. A parliamentary committee is currently reviewing the planning and laws. It is desirable that competition considerations be taken into account more clearly in the detailed planning. A changed order of courts of appeal in cases of Competition Act infringement. The present procedure of sanctions in cases involving breaking the Competition Act is often very lengthy. In many countries, the competition authority decides on sanctions and in the EU the Commission decides on sanctions. The latters deci- sions may be appealed to the Court of First Instance and in some cases further to Court. In there is a similar appeals procedure for the Competition Authoritys decisions on injunctions according to paragraph 23 of the Competition Act, which may be appealed directly to the Market Court. One way of making the time between an initiative to a final ruling shorter and more efficient would be to introduce this procedure in other areas as well. There should be a possibility to appeal the rulings of the Market Court in order to avoid the risk of impairing the legal rights of the individual. Such appeals should be made to the Supreme Court, which would then become the court of last instance for test cases in all matters of competition law. Administrative fines for prevention and deterrence. At present, a company may be required to pay administrative fines for competi- tion damages of up to 10 per cent of its annual turnover, which usually can be regarded as sufficiently high. Taking the levels of fines handed out in recent cases into account, however, the Com- mission finds reasons for clarifying the rules for deciding the size of fines in order to strengthen their preventive and deterring effects. The resources, composition and competence of the Market Court. There is reason to review the composition and staffing of the Market Court in view of the proposed focus on the role of the Court in hearing competition cases and matters. The Courts resources should be increased by about million annually if the Commissions proposals are acted on. Intensified Efforts against Economic Crimes Economic crime here refers to such crimes as bribery and corrup- tion that have financial gain as their motive and that are committed within the framework of business activities that are not themselves criminalised. The Commission has limited its consideration to three areas of particular importance to improve public confidence in the business sector. A Stronger Economic Crimes Authority The responsibility for combating eco- nomic crimes is today divided between the (, ECB) and public prosecutors in general. The Commission proposes that the fight against economic crimes be rendered more effective by having the handle all types of economic crimes, wherever possible, throughout the country. The long turnaround times at the need to be countered by a combination of increased resources and increased efficiency in management through such measures as the establish- ment in every department of a special chamber with the chief responsibility for handling large economic crime cases. resources should be raised by about million on an annual basis. Economic crime cases, by the time they reach the court of appeals, can be almost ten years old. In the the process often goes much faster because of the plea bargaining system. The prosecuting authority there can come to an agreement with a person suspected of various crimes. The suspect admits responsibility for certain crimes and helps the prosecutor with evidence and so forth in exchange for which the prosecuting authority writes off any remaining suspected crimes. In order for and prosecutors to react more quickly in the event of business irregularities, a prosecutor should also have the duty in his or her area of responsibility actively to cover what ever is happening and if there is cause, decide to begin a preliminary investigation or hold a preliminary hearing. The Commission pro- poses that the matters of introducing a Swedish variant of the plea bargain and assigning prosecutors proactive surveillance duty be given further study. Changed methods for preliminary investigations. The outcome of the long turnaround times is that evi- dence becomes weaker, it becomes more difficult to present enough proof to get a conviction and the sentence may be lighter.