Board Responsibilities and Improving Financial and Corporate Governance Information
ACCA is pleased to comment on the above consultation paper. ACCA is a member body of the Federation des Experts Comptables Europeens (FEE) and supports the representations which FEE is making to the Commission on this matter. In this paper, we make a number of additional points.
Our responses to the specific questions posed in the paper are as follows.
Clarification of board members' responsibility for financial and key non-financial information
2.0 Should the term �responsibility' be defined at Community level?
There are at least two connotations to the term �responsibility', though they may be related. One connotation refers to the accountability or liability of persons to other persons in respect of the exercise of particular obligations. The other, more simple meaning of the term is concerned with the simple attribution of duty to perform a specified task or tasks. In the context of the question, we assume that the second connotation is being considered here.
It would not be difficult, in our view, to arrive at a workable shared understanding of the basic term �responsibility'. A person would be �responsible' for the performance of a particular task if he or she is subject to a legal requirement to do it.
The more difficult task in the context of the question would be to harmonise what responsibility means in relation to the obligation to prepare and approve financial and non-financial statements and who is to be subject to that responsibility. Where national laws require a board, on a collective basis, to prepare and approve prescribed statements, then the board itself is �responsible' for their preparation and approval. But in some member states the directors, or the management board, are required only to prepare the statements, approval being a matter for the shareholders, in which case responsibility for preparation and approval attaches to different entities. The distinction between unitary and two-tier boards also make it problematical to impose standardised, targeted rules on responsibility regarding statements.
It should, therefore, be possible to define what �responsibility' means by reference to a legal obligation which falls on a person or body to perform specified tasks. This would at least allow member states to establish with certainty where legal responsibility lies in respect of the preparation and approval of financial and other statements.
2.1 Should responsibility be differentiated between management and supervisory board members?
While clarity is essential in national laws, attribution of responsibility should be a matter for member states to decide.
2.2 Should responsibility be differentiated between executive and non-executive board members?
In a unitary board, we believe that there should be collective responsibility for the company's statements, with no differentiation between executive and non-executive directors.
2.3 Should board members be allowed to limit their responsibility?
In any democratic situation there will always be the possibility that collective decisions will be made by a majority of the participants, with a minority dissenting. The possibility that a board member will not concur with a decision to approve a set of financial statements should always therefore be respected and allowed for. Provided, however, that the required majority is achieved, any decision made by a board to approve a set of accounts should be sufficient to enable the board to fulfil any obligation it is under to approve those accounts. The dissenting member should be required to accept the majority decision. Where accounts are required to be signed by each member of the approving board, the dissenting member should be prepared to sign or, alternatively, to resign from his position.
We would not support allowing dissenting members to publicly disclose their disagreement with a particular set of statements. This would detract from the credibility of those statements and create potentially serious problems for auditors. But it should be possible for dissenting directors to have their objections formally recorded in the board's minutes at the time when the approval decision is made. It would be proper for member states' laws to make provision for such objections to be taken into account by the legal process when criminal or civil proceedings are brought against individual directors. This should protect directors' legitimate interests while not impeding the company's ability make decisions and comply with its own obligations under the law.
2.4 What kind of non-financial information should board members' responsibility also cover?
Company directors should bear ultimate responsibility for all the matters covered in this question.
2.5 To whom should board members be responsible?
Member states' legal systems seem to vary widely in the way that they treat the issue of board members' duty of care. We do not consider that it would be desirable to undertake harmonisation of current practice with regard to the duty of care in relation to financial statements only, i.e. in isolation from other aspects of directors' legal duties. In view of this, we do not see it as being, currently, feasible to provide for such harmonisation. This is a matter which should be left to domestic legislation.
2.6 Should there be common sanctions at Community level?
There should be appropriate sanctions in all member states. Their exact form should be capable of being set at member state level, though we consider there is a case for setting minimum sanctions at EU level.
2.7 Should board members be responsible for providing all relevant information to the auditors?
We consider that legal requirements for the directors to co-operate with the independent auditor and not to mislead him in relation to any matter relevant to the accounts are vital safeguards for the integrity of the financial reporting system. We would also favour introducing a positive requirement for the directors to volunteer information to the auditor where that information is relevant to the auditor's work.
Related party transactions
3.0 Should disclosure of transactions with related parties in the financial statements take place only at group level?
No. Disclosure should take place both at group and company level. Disclosure at company level should include relevant related party transactions with entities that are consolidated in the group as well as non-consolidated entities and other related parties outside the group. As a general point, any new provisions in EU law should be based on and compatible with the provisions of IFRS 24 as far as practicable.
3.1 Should EU law provide for common definitions?
Where necessary, EU law should cross-refer to the definitions set out in the relevant IFRS.
3.2 Should relevant requirements apply for listed and unlisted parent companies?
Yes.
3.3 Should individual accounts disclose material transactions with related parties?
Yes.
3.4 Should material transactions with related parties which are directly or indirectly controlled by the parent company be disclosed?
No, on the ground that such disclosure would go beyond the requirements of IFRS 24. The transactions concerned would be eliminated on consolidation anyway.
3.5 Should material transactions with related parties that are significantly influenced by group company board members be disclosed?
Yes.
3.6 Should the key financial figures of the most important group companies be disclosed?
No, on the ground that, for listed companies at least, this is already covered by IFRS 24. Any extension of these requirements to unlisted companies should not be made until after careful consideration of the costs and benefits.
3.7 Should the parent company disclose relations with specified related parties?
Such disclosure should only be required where the SPV or other relevant entity has not been consolidated.
3.8 Should any group company disclose relations with specified related parties?
See response to previous question.
3.9 Should any group company disclose significant asset sales to other group companies?
Yes, but this is already covered by IFRS 24.
3.10 Should the nature and extent of cash management agreements be disclosed?
No. This would be in excess of the requirements of IFRS 24 and would not result in information which would justify the additional work and disclosure.
3.11 Should the disclosure of intra-group transactions be made in the notes to the accounts?
Yes.
Corporate governance statement
4.1 Should the corporate governance statement require listed companies to disclose compliance with a code or describe specified, key elements of corporate governance?
We consider that listed companies should be required to disclose whether they apply a particular code of corporate governance and also disclose any areas of non-compliance with that code.
4.2 Other disclosure items
The statement should concentrate on elements of corporate governance which go beyond national legal requirements.
4.3 Should the statement inform about shareholder rights in the case of cross-border investments?
No. The corporate governance statement is not the place for a full exploration of shareholder rights.
4.4 Should the statement contain information on controlling shareholders?
Yes. This information would be helpful as a means of allowing members and other readers to understand the control structure of the company. A legal requirement could apply where such disclosure is not required by the code which the reporting company follows.
4.5 Should the statement contain the names and voting rights of controlling shareholders?
Yes.
4.6 Should the statement contain an overview of significant transactions between controlling shareholders and the company (where not disclose in the accounts)?
Disclosure of this information should already be assured under IFRS 24.
4.8 Location of the statement
The corporate governance statement should not be included in the notes to the company's accounts. That would create complications for the involvement of the auditor in respect of it. It should, instead, take the form of a free-standing statement in the company's annual report.
4.9 Should the statement be published on the company's web site?
Yes.