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))
Date: 2005-07-13
Institutions: European Economic and Social Committee
Subjects: accounting, auditing, company law, corporate governance, publication of accounts, small and medium-sized enterprises

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Official Journal of the European Union

25.11.2005

recognise the full freedom of choice that is the right of every
shareholder. At the same time, however, there will be a few
cases in which governance requires control of all shareholders:
these are the only cases where such a rule would be justified,
and then only with the authorisation of the supervisory autho-
rities.

is the mirror image of

4.8
Article 39b (modelled on Article 16 of the takeover
the previous point:
bids directive)
minority shareholders may, individually or jointly, oblige the
majority shareholder to buy their shares, again ‘at a fair price’.
The comments made in the previous paragraph apply mutatis

Brussels, 13 July 2005

mutandis. Here too,
the authorities should only approve a
forced sale in cases of proven necessity, excluding that of
selling off a shareholding simply because the company is fore-
cast to perform badly.

In both of

the above two cases,

4.8.1
the Committee's
conclusions are prompted by the same concern for fairness and
respect for general legal principles: the shareholders' right to
choose must be fully upheld and must not be restricted by
considerations extraneous to their interests unless there is a
proven necessity that dictates otherwise.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

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.

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.

1. Summary

2. Details of the Commission's proposal

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.

The proposal requires that the Accounting Directives

2.1
(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 responsi-
bility 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

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

(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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(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 ‘corpo-
rate government statement’.

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.

The Commission emphasises that its approach is prin-
this is intended to ensure proportionality and

2.2
ciple based;
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.

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.

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.

The EESC suggests that board members should,

4.1.2
in
good faith, be required to disclose to their auditor all informa-
tion that is deemed to be relevant to the company's financial
report and accounts without being specifically asked.

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.

4.2 Related party transactions

is important

Given the need to encourage enterprise and employment
3.3
within the EU it
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 Direc-
tives.

3.4
The EESC is also concerned that the reporting require-
ments 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 thresh-
olds for small and medium-sized companies with a particular
focus on reducing the burden on the smallest entities (1).

(1) Articles 11 and 27 of the Fourth Directive set the size criteria for
for application

respectively small and medium-size companies
within the Directive. The criteria are:

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 finan-
cial year

50

250

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 compa-
nies 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,
transactions with related
business purpose and amount’ of
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.

The EESC questions the proposal to go beyond IAS 24
4.2.3
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 there-
fore 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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4.3.2
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 compa-
nies 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.

A problem seems likely to arise however since some
4.4.2
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 state-
ment — subject to a full audit. The EESC believes that not all
elements in the corporate governance statement lend them-
selves 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.

Brussels, 13 July 2005.

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

4.5 Other points

The terminology used in Article 2 i.e.

4.5.1
‘of direct rele-
vance and assistance’ amending the Seventh Directive is
‘material
different from that used in the Fourth Directive i.e.
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 memor-
andum ‘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.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND