# C_2005294EN.01000401.xml

| 25.11.2005 | EN | Official Journal of the European Union | C 294/4 |
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25.11.2005

EN

Official Journal of the European Union

C 294/4

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Opinion of the European Economic and Social Committee on the Proposal for a Directive of the European Parliament and of the Council amending Council Directives 78/660/EEC and 83/349/EEC concerning the annual accounts of certain types of companies and consolidated accounts

(COM(2004) 725 final — 2004/0250 (COD))

(2005/C 294/02)

On 3 February 2005, the Council decided to consult the European Economic and Social Committee, under Article 44(1) of the Treaty establishing the European Community, on the abovementioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 23 June 2005. The rapporteur was Mr Byrne.

Mr Byrne

At its 419th plenary session, held on 13 and 14 July 2005 (meeting of 13 July), the European Economic and Social Committee adopted the following opinion unanimously.

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1.   Summary

| 1.1 | The proposal to amend the Accounting Directives is a follow up to the Action Plan adopted by the Commission on 21 May 2003, for Modernising Company Law and Corporate Governance at EU level. |
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1.1

The proposal to amend the Accounting Directives is a follow up to the Action Plan adopted by the Commission on 21 May 2003, for Modernising Company Law and Corporate Governance at EU level.

| 1.2 | The objective of the proposals is to further enhance confidence in the financial statements and annual reports published by European companies to provide shareholders and other stakeholders (e.g. employees and suppliers) with reliable, complete and easily accessible information. |
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1.2

The objective of the proposals is to further enhance confidence in the financial statements and annual reports published by European companies to provide shareholders and other stakeholders (e.g. employees and suppliers) with reliable, complete and easily accessible information.

| 1.3 | The EESC has made its comments on certain points of detail in this document but in general supports the stated objective and believes that this action is necessary to protect all stakeholders. |
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1.3

The EESC has made its comments on certain points of detail in this document but in general supports the stated objective and believes that this action is necessary to protect all stakeholders.

2.   Details of the Commission's proposal

| 2.1 | The proposal requires that the Accounting Directives (78/660/EEC and 83/349/EEC) be amended to:






  (a) | Establish collective responsibility of board members i.e. drawing up the financial statements is a collective responsibility of all board members (administrative, management and supervisory) |
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2.1

The proposal requires that the Accounting Directives (78/660/EEC and 83/349/EEC) be amended to:

(a)

Establish collective responsibility of board members i.e. drawing up the financial statements is a collective responsibility of all board members (administrative, management and supervisory)

| (b) | Enhance transparency about related parties' transactions i.e. involving all companies transactions with their managers, the latter's family or other related parties which are not carried out under normal commercial conditions |
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(b)

Enhance transparency about related parties' transactions i.e. involving all companies transactions with their managers, the latter's family or other related parties which are not carried out under normal commercial conditions

| (c) | Enhance transparency about off-balance sheet arrangements by updating the requirements currently set out in the Accounting Directives to cover for example Special Purpose Entities (SPE) |
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(c)

Enhance transparency about off-balance sheet arrangements by updating the requirements currently set out in the Accounting Directives to cover for example Special Purpose Entities (SPE)

| (d) | Introduce a Corporate Governance Statement so that each listed company should disclose in a specific section of its annual report information about its practices in a ‘corporate government statement’. |
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(d)

Introduce a Corporate Governance Statement so that each listed company should disclose in a specific section of its annual report information about its practices in a ‘corporate government statement’.

| 2.2 | The Commission emphasises that its approach is principle based; this is intended to ensure proportionality and provide flexibility. |
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2.2

The Commission emphasises that its approach is principle based; this is intended to ensure proportionality and provide flexibility.

| 2.3 | The Commission acknowledges that the proposal does not fall under the exclusive competence of the Community but points out that making financial statements comparable across the EU is necessary to improve public confidence in them. |
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2.3

The Commission acknowledges that the proposal does not fall under the exclusive competence of the Community but points out that making financial statements comparable across the EU is necessary to improve public confidence in them.

3.   General comments

| 3.1 | The EESC acknowledges the need to improve public confidence in financial statements of European Companies in the light of recent scandals within Europe and elsewhere. It therefore strongly supports this initiative. |
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3.1

The EESC acknowledges the need to improve public confidence in financial statements of European Companies in the light of recent scandals within Europe and elsewhere. It therefore strongly supports this initiative.

| 3.2 | The EESC supports the principle-based approach to the proposal as it agrees that specific rules have the possibility of being circumvented or becoming out of date. |
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3.2

The EESC supports the principle-based approach to the proposal as it agrees that specific rules have the possibility of being circumvented or becoming out of date.

| 3.3 | Given the need to encourage enterprise and employment within the EU it is important that reporting requirements should not be excessive. Excessive reporting could have the added disadvantage of reducing the focus on the things that really matter. The EESC welcomes therefore the inclusion of a ‘materiality’ criterion within the proposals; indeed it wonders if this criterion should not be an overriding feature of the Directives. |
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3.3

Given the need to encourage enterprise and employment within the EU it is important that reporting requirements should not be excessive. Excessive reporting could have the added disadvantage of reducing the focus on the things that really matter. The EESC welcomes therefore the inclusion of a ‘materiality’ criterion within the proposals; indeed it wonders if this criterion should not be an overriding feature of the Directives.

| 3.4 | The EESC is also concerned that the reporting requirements for unlisted SMEs should not be unduly burdensome as these entities are an engine for growth in the EU. The Committee is aware that Member States have discretion to permit small and medium-sized companies use less than the full reporting requirements. The EESC suggests that it would be appropriate to undertake a fundamental review of the thresholds for small and medium-sized companies with a particular focus on reducing the burden on the smallest entities (1). |
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3.4

The EESC is also concerned that the reporting requirements for unlisted SMEs should not be unduly burdensome as these entities are an engine for growth in the EU. The Committee is aware that Member States have discretion to permit small and medium-sized companies use less than the full reporting requirements. The EESC suggests that it would be appropriate to undertake a fundamental review of the thresholds for small and medium-sized companies with a particular focus on reducing the burden on the smallest entities (1).

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| 3.5 | The EESC is aware that the International Accounting Standards Board is currently undertaking a project to produce a set of standards specifically for SMEs. The EESC welcomes this development. |
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3.5

The EESC is aware that the International Accounting Standards Board is currently undertaking a project to produce a set of standards specifically for SMEs. The EESC welcomes this development.

4.   Specific comments

4.1   Responsibilities of board members

| 4.1.1 | The EESC supports the proposals establishing the collective responsibility of board members for the annual report and accounts that is already generally accepted in the EU. However where a two tier structure exists it is important that responsibility be placed on each board (administrative, management or supervisory) in relation to their respective functions and should not exceed the competences assigned to them by national law. |
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4.1.1

The EESC supports the proposals establishing the collective responsibility of board members for the annual report and accounts that is already generally accepted in the EU. However where a two tier structure exists it is important that responsibility be placed on each board (administrative, management or supervisory) in relation to their respective functions and should not exceed the competences assigned to them by national law.

the collective responsibility

| 4.1.2 | The EESC suggests that board members should, in good faith, be required to disclose to their auditor all information that is deemed to be relevant to the company's financial report and accounts without being specifically asked. |
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4.1.2

The EESC suggests that board members should, in good faith, be required to disclose to their auditor all information that is deemed to be relevant to the company's financial report and accounts without being specifically asked.

4.2   Related party transactions

| 4.2.1 | The EESC welcomes the Commission's objective of enhancing transparency about related parties' transactions for non-listed companies in order to restore public confidence in the companies' financial statements. Related party transactions are often of particular significance in privately owned companies including SMEs. |
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4.2.1

The EESC welcomes the Commission's objective of enhancing transparency about related parties' transactions for non-listed companies in order to restore public confidence in the companies' financial statements. Related party transactions are often of particular significance in privately owned companies including SMEs.

| 4.2.2 | The text of Article 1 amending the Fourth Directive under Article 43 7 (b) requires the disclosure of the ‘nature, business purpose and amount’ of transactions with related parties that are not carried out ‘under normal commercial conditions’. This disclosure goes beyond the requirements of IAS 24 in particular in requiring the disclosure of the ‘business purpose’ of such transactions. |
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4.2.2

The text of Article 1 amending the Fourth Directive under Article 43 7 (b) requires the disclosure of the ‘nature, business purpose and amount’ of transactions with related parties that are not carried out ‘under normal commercial conditions’. This disclosure goes beyond the requirements of IAS 24 in particular in requiring the disclosure of the ‘business purpose’ of such transactions.

| 4.2.3 | The EESC questions the proposal to go beyond IAS 24 that is likely to impose significant additional costs for many non-listed companies which would outweigh the benefits to users of their financial statements. |
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4.2.3

The EESC questions the proposal to go beyond IAS 24 that is likely to impose significant additional costs for many non-listed companies which would outweigh the benefits to users of their financial statements.

4.3   Off balance sheet arrangements and SPEs

| 4.3.1 | The Commission proposes to improve disclosure by imposing a specific requirement to include in the notes to the accounts disclosure of material off balance sheet ‘arrangements’ including SPEs. The EESC supports this requirement but is concerned that the term ‘arrangement’ is not defined and therefore remains a rather vague concept; the Committee therefore suggests that there is a need for clarification and guidance, possibly by using appropriate examples. |
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4.3.1

The Commission proposes to improve disclosure by imposing a specific requirement to include in the notes to the accounts disclosure of material off balance sheet ‘arrangements’ including SPEs. The EESC supports this requirement but is concerned that the term ‘arrangement’ is not defined and therefore remains a rather vague concept; the Committee therefore suggests that there is a need for clarification and guidance, possibly by using appropriate examples.

| 4.3.2 | To limit the impact on SMEs the EESC recommends that Member States be permitted to limit the information to be disclosed to what is strictly necessary to assess the financial position of the company. |
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4.3.2

To limit the impact on SMEs the EESC recommends that Member States be permitted to limit the information to be disclosed to what is strictly necessary to assess the financial position of the company.

4.4   Corporate governance statement

| 4.4.1 | The EESC welcomes the requirement for listed companies to disclose information about governance structures that are of great importance for investors. Inclusion of the statement in the annual report will require the auditors to express an opinion concerning the consistency or otherwise of the annual report with the annual accounts for the same financial year which already applies to the annual report itself under Article 51.1 of the Fourth Directive. |
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4.4.1

The EESC welcomes the requirement for listed companies to disclose information about governance structures that are of great importance for investors. Inclusion of the statement in the annual report will require the auditors to express an opinion concerning the consistency or otherwise of the annual report with the annual accounts for the same financial year which already applies to the annual report itself under Article 51.1 of the Fourth Directive.

| 4.4.2 | A problem seems likely to arise however since some Member States have gone beyond the requirements of the Fourth and Seventh Directives and made the annual report — which would in future include the corporate governance statement — subject to a full audit. The EESC believes that not all elements in the corporate governance statement lend themselves to full audit. A solution to this could be found by requiring listed companies to provide a corporate governance statement ‘together with the annual report and accounts’ but the statement should still remain subject to a consistency check as outlined in paragraph 4.4.1.above. |
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4.4.2

A problem seems likely to arise however since some Member States have gone beyond the requirements of the Fourth and Seventh Directives and made the annual report — which would in future include the corporate governance statement — subject to a full audit. The EESC believes that not all elements in the corporate governance statement lend themselves to full audit. A solution to this could be found by requiring listed companies to provide a corporate governance statement ‘together with the annual report and accounts’ but the statement should still remain subject to a consistency check as outlined in paragraph 4.4.1.above.

| 4.4.3 | The EESC believes that Article 46a.3 is too widely drawn. The following wording is suggested ‘a description of the main features of the company's internal control and risk management system in relation to the financial reporting process’. |
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4.4.3

The EESC believes that Article 46a.3 is too widely drawn. The following wording is suggested ‘a description of the main features of the company's internal control and risk management system in relation to the financial reporting process’.

4.5   Other points

| 4.5.1 | The terminology used in Article 2 i.e. ‘of direct relevance and assistance’ amending the Seventh Directive is different from that used in the Fourth Directive i.e. ‘material and of assistance’. There does not seem to be any reason for this apparent inconsistency. The EESC would suggest that the latter wording that includes the important word ‘material’ be used in both cases. |
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4.5.1

The terminology used in Article 2 i.e. ‘of direct relevance and assistance’ amending the Seventh Directive is different from that used in the Fourth Directive i.e. ‘material and of assistance’. There does not seem to be any reason for this apparent inconsistency. The EESC would suggest that the latter wording that includes the important word ‘material’ be used in both cases.

| 4.5.2 | The words ‘not under normal commercial conditions’ are used in Article 1 amending Article 43(1) under 7(b) of the Fourth Directive. Similar wording is used in relation to the Seventh Directive in Article 34 7(b). In the explanatory memorandum ‘not under normal commercial conditions’ is defined by adding ‘i.e. not at arm's length’. Since the latter is the generally recognised accountancy term it is suggested that it is more appropriate for use in the amended Directives. |
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4.5.2

The words ‘not under normal commercial conditions’ are used in Article 1 amending Article 43(1) under 7(b) of the Fourth Directive. Similar wording is used in relation to the Seventh Directive in Article 34 7(b). In the explanatory memorandum ‘not under normal commercial conditions’ is defined by adding ‘i.e. not at arm's length’. Since the latter is the generally recognised accountancy term it is suggested that it is more appropriate for use in the amended Directives.

Brussels, 13 July 2005.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

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(1)  Articles 11 and 27 of the Fourth Directive set the size criteria for respectively small and medium-size companies for application within the Directive. The criteria are:

1

| | Art. 11
  (Small companies) | Art. 27
  (Medium-size companies) |
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| Balance sheet total | EUR 3 650 000 | EUR 14 600 000 |
| Net turnover | EUR 7 300 000 | EUR 29 200 000 |
| Average number of employees in the financial year | 50 | 250 |

Art. 11

(Small companies)

Art. 27

(Medium-size companies)

Balance sheet total

EUR 3 650 000

EUR 14 600 000

Net turnover

EUR 7 300 000

EUR 29 200 000

Average number of employees in the financial year

50

250

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