Tag Archives: Audit

Commission Action Plan towards an Integrated Internal Control Framework

Commission Action Plan towards an Integrated Internal Control Framework

Outline of the Community (European Union) legislation about Commission Action Plan towards an Integrated Internal Control Framework

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Budget

Commission Action Plan towards an Integrated Internal Control Framework

Document or Iniciative

Communication from the Commission to the Council, the European Parliament and the European Court of Auditors of 17 January 2006 entitled “Commission Action Plan towards an Integrated Internal Control Framework” [COM(2006) 9 final – Not published in the Official Journal].

Summary

For each financial year, the European Court of Auditors (ECA) issues a Statement of Assurance (DAS) as regards implementation of the budget for which the Commission is responsible. In this connection, the Commission must provide the ECA with audit evidence for each financial year. Given the present Commission’s objective of obtaining a positive DAS during its term of office, it is proposing to introduce an integrated internal control framework.

The communication reports on the progress made since the roadmap and on the gaps identified and lays down the main practical measures to be taken in 2006-07 with a view to introducing a coherent internal control framework. The concrete proposals for action have been grouped around four themes:

  • simplification and common control principles;
  • management declarations and audit assurance;
  • single audit approach: sharing results and prioritising cost-benefit;
  • sector-specific gaps.

Simplification and common control principles

The Commission is aiming to simplify as much as possible the regulatory framework proposed for the period 2007-13, including expenditure eligibility rules. Integrating common internal control principles will ensure that all stakeholders will be bound by a fundamental set of control principles. These common principles will also provide the ECA with a clearer basis for auditing management processes and procedures.

In order to ensure that supervisory and control systems are in place to limit the risk of any irregularity, it is necessary to demonstrate the assurance and to provide evidence that the control strategy is effective.

The Commission wishes to initiate an inter-institutional dialogue on the definition of reasonable assurance in terms of tolerable risk in underlying transactions.

Management declarations and audit assurance

In order to promote management declarations and audit assurance, the Commission intends to encourage declarations at operational level and the drawing up of synthesis reports at national level for each policy area.

Other measures proposed by the Commission in order to promote management declarations and audit assurance are aimed at:

  • examining the utility of management declarations outside shared and indirect centralised management mode;
  • promoting best practices for increasing the cost-benefit of audits at project level;
  • facilitating additional assurance from supreme audit institutions (SAIs) regarding the management of Community funds.

Single audit approach; sharing results and prioritising cost-benefit

In order to avoid duplication of control work, sharing control information makes for greater effectiveness at each level in the chain. In the single audit approach, the sharing of audit and control data is key to improving the targeting of audit and control efforts.

A model for determining costs and for estimating and making an initial analysis of the costs of controls must be introduced for shared management and centralised indirect management.

The Commission stresses the importance of initiating pilot projects for evaluating the benefits to be gained from the different controls.

Sector-specific gaps

The proposed integrated framework must be capable of flexible application given the varying nature of individual EU policies. The Commission proposes measures for closing the gaps via management plans, with back-up in the form of annual activity reports from its participating departments.

The controls under shared management (in particular as regards the Structural Funds) at regional level must be analysed, and especially the existing statements. In this connection, promotion of the “contracts of confidence” initiative for the Structural Funds provides audit assurance on an annual basis.

Lastly, the Commission proposes establishing common guidelines per policy family in 2006 and 2007 in order to adopt consistent approaches, notably with regard to management of the risk of errors in the Structural Funds.

Background

For the Action Plan, the Commission has based itself primarily on:

  • ECA Opinion No 2/2004 on the “single audit” model (and a proposal for a Community internal control framework);
  • the Commission communication of June 2004 on a roadmap to an integrated internal control framework;
  • the assessment of gaps between the internal control framework within the Commission departments and the control principles set out in Opinion No 2/2004 of the Court of Auditors;
  • four Commission working groups that helped in October 2005 to draft the questions to be addressed in the communication;
  • the conclusions of the ECOFIN Council of 8 November 2005;
  • the reactions of the European Parliament and the Court of Auditors.

Related Acts

Report from the Commission to the Council, the European Parliament and the European Court of Auditors on the progress of the Commission Action Plan towards An Integrated Internal Control Framework [COM(2007) 86 final – Not published in the Official Journal].

Communication from the Commission to the Council, the European Parliament and the European Court of Auditors of 15 June 2005 on a roadmap to an integrated internal control framework [COM(2005) 252 final – Not published in the Official Journal].

Opinion No 2/2004 of the Court of Auditors of the European Communities on the “single audit” model (and a proposal for a Community internal control framework) [Official Journal C 107, 30.04.2004].

These two documents provide the reference framework for the Action Plan. They should help to set in place an integrated framework for ensuring effective and efficient internal control of European funds. This framework should be the basis on which the ECA will draw up the DAS.

More effective and more accessible grants for research

More effective and more accessible grants for research

Outline of the Community (European Union) legislation about More effective and more accessible grants for research

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Research and innovation > General framework

More effective and more accessible grants for research

Document or Iniciative

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 29 April 2010 – Simplifying the implementation of the research framework programmes [COM(2010) 187 final – Not published in the Official Journal].

Summary

The Communication from the Commission aims at simplifying the rules and procedures applying to the award and management of European Union (EU) grants in the field of research and innovation. The Communication is divided into three main strands.

Strand No 1 – Rationalising the management of proposals and grants within the current regulatory and legal framework (short term)

The aim of the first strand is to improve the current system of proposal and grant management, and to make it less burdensome, simpler and quicker. Most improvements aim at a reduction of time-to-grant and time-to-pay. They mainly consist of:

  • better IT systems (which should enable participants to access documents related to their proposals or grants);
  • more coherent application of rules, in particular those relating to audit;
  • an improvement of the structure and content of “calls for proposals” through which research organisations request funding from the Union;
  • forming smaller consortia; and
  • awarding prizes which have a positive impact on research and innovation.

Strand No 2 – Adapting the rules under the current cost-based system

The second strand consists of adapting the existing financial rules whilst maintaining effective control. The new system should allow for wider acceptance of usual accounting practices (including average personnel costs). This adaptation should also lead to a reduction in differences in the specific conditions that apply to many activities (research, demonstration, and management) and types of participants (research organisations, universities, non-profit organisations, etc.). Lump sum options for certain cost categories will allow for actual costs, a source of complexity, to be fully abandoned. Such lump sums are already widely used under the “People” programme. They can now be introduced for all projects, particularly for personnel costs or owner-managers of SMEs who carry out a major part of the project themselves without a salary registered in the accounts. Furthermore, an amendment of the grant selection progress will contribute to reducing time-to-grant and to a removal of administrative burden both for Member States and Commission services.

Strand No 3 – Moving towards result-based instead of cost-based funding

The options presented in the two strands above will not remove the administrative efforts connected with cost reporting and financial auditing. However, the gradual introduction of “result-based remuneration” will minimise the administrative burden for accounting and the needs for financial ex-ante and ex-post checks. This amendment will apply to future research framework programmes. Beneficiaries of EU grants will receive lump sumps to carry out specific scientific tasks. They will have to demonstrate that they have acted in an efficient and effective manner instead of justifying their expenditure.

Perspectives

Most options proposed under the second and third strands require changes to the rules. They will therefore be addressed in the triennial review of the Financial Regulation and, on that basis, in the forthcoming review of the regulatory framework of research policy.

However, the Commission may present amendments to the Seventh Framework Programme (FP7), following its interim evaluation, expected in October 2010.

Context

FP7 has provoked considerable interest in the research community – so far, more than 30,000 proposals have been received each year and around 7,000 projects funded. Almost all European universities have participated in the programme.

Several measures have already been taken to simplify procedures, both in the preparation of FP7 and during its operation. Amongst these measures is a new guarantee fund and a single registration system which allows organisations requesting funding for a number of projects over several years to communicate their data only once. In addition, eight participants in FP7 out of 10 are now exempt from ex-ante financial capacity checking.

Two new executive agencies were put in place by the Commission in 2007:

  • the Research Executive Agency, and
  • the European Research Council Executive Agency.

The European Research Council is an essential part of FP7. It awards grants to projects led by researchers (both new and experienced project leaders), without these projects needing to be included in cross-border consortia.

This summary is for information only. It is not designed to interpret or replace the reference document, which remains the only binding legal text.

Corporate and financial malpractice

Corporate and financial malpractice

Outline of the Community (European Union) legislation about Corporate and financial malpractice

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for capital

Corporate and financial malpractice

The aim of this Communication is to provide a holistic approach on how to reduce the risk of financial and corporate malpractice covering also taxation and law enforcement.
There are four lines of “defence” against corporate malpractice: internal control in a company, independent third parties, and supervision and enforcement.

Document or Iniciative

Communication from the Commission to the Council and the European Parliament of 27 September 2004 on preventing and combating corporate and financial malpractice [COM(2004) 611 final – Not published in the Official Journal].

Summary

This Communication is the Commission’s response to the Enron and Parmalat financial scandals that caused immense disruption to capital markets. The Commission is aware that there is an effective EU framework for dealing effectively with most of the financial issues raised, viz. the Financial Services Action Plan (FSAP) and the existing action plans (COM(2003) 284), and it sets out in this Communication a holistic strategy covering financial services, internal issues, justice and tax policy.
The Commission identifies four lines of “defence” against corporate malpractice that focus on a series of measures involving matters ranging from the internal control in a company, through auditors and supervision to measures necessary to comply with the law.

First line of defence – internal control in a company and corporate governance

Boards of companies have fiduciary obligations towards the company itself and its shareholders as well as obligations towards stakeholders at large.
Before the end of 2004 the Commission will take the following measures:

  • enhance transparency of intra-group transactions as well as of transactions with related parties;
  • clarify the responsibilities of board members for financial statements and key non-financial information;
  • oblige all listed companies to make public annually a corporate governance statement.

The Commission will look into:

  • after 2006, criteria for the disqualification of directors and wrongful trading;
  • the use of bearer shares and bonds, which can be used to blur the ultimate beneficial owners;
  • bond market transparency in accordance with the Directive on Markets in Financial Instruments (MiFID), including risk transfer to the retail sector.

Second line of defence – independent third parties

The second line of defence is made up, above all, of the auditors, but accounting firms, banks, investment bankers and lawyers, as well as rating agencies and financial analysts, also have an important role to play. At this control level, transactions must be transparent and conflicts of interest reduced to a minimum.

In this connection, the Commission has presented a proposal for a directive on statutory audit of annual accounts and consolidated accounts (COM(2004) 177 final). The proposal provides for:

  • full group auditor responsibility for consolidated accounts;
  • the establishment of audit committees in public-interest entities;
  • auditor rotation;
  • strengthening of sanction regimes.

In the area of customs cooperation, the EU acquired two important legislative instruments in 2005:

  • a Regulation to prevent money laundering that requires cash control based on a declaration system for amounts exceeding EUR 15 000;
  • an anti-money laundering Directive covering trust and company service providers.

The Commission will look more closely at financial analysts and credit rating agencies as regards:

  • access to inside information from insurers;
  • the way they carry out their credit assessment;
  • entry barriers in the industry;
  • conflicts of interest.

Third line of defence – supervision

Member States play a key role in enforcing EU legislation regarding supervision and public scrutiny.
In October 2005 the EU Council reached a political agreement on the proposal for a directive on statutory audit (COM(2004) 177 final) that requires adequately funded, effective and independent public supervision for all statutory auditors and audit firms.

More than one authority is involved in supervising the institutions operating on financial markets. In the Commission’s view, it is important to develop deeper cooperation between sectors:

  • in the Member States, between the different authorities with the task of supervising institutions operating on their financial markets, and in particular in the securities, banking and insurance sectors;
  • at European level, between the European supervisory authorities. A framework for voluntary cooperation exists here between the members of the Committee of European Securities Regulators (CESR), the European Banking Committee (EBC), the European Insurance and Pension Committee (EIOPS), the Committee of Insurance and Occupational Pension Supervisors (CEIPS) and the Committee of Banking Supervisors (CEBS).

The Commission envisages a clear division of labour between the national level and the European level of supervision, and one that favours the latter in the event of cross-border transactions. As part of more wide-ranging cooperation between these two levels, the Commission would like to see improved transparency of tax systems by facilitating access to, and the exchange of, information. The possibility of using a single direct tax identification number for companies will be looked into.

In order to improve administrative cooperation, the Communication sets out the following practical measures:

  • in the short term, better use of existing EU instruments and the exchange of best practices between Member States;
  • in the medium term, broadening of the scope for joint investigations in direct tax matters both between Member States and, at national level, between the different services involved;
  • in the longer term, possible extension of the automatic exchange of information could be extended to other areas of direct taxation or other types of income by using new technologies.

The Commission and the Member States are developing concrete proposals targeted at cases of tax fraud and avoidance involving complex and opaque structures.

Outside the EU, far greater transparency and exchange of information with third countries as well as with dependent or associated territories should be promoted. For this, better consistency is essential in defining EU policies towards cooperative and non-cooperative tax havens.

The Communication states that:

  • the EU partners should improve transparency and the exchange of tax information;
  • the EU should provide reinforced technical assistance or economic support for a limited period of time;
  • bilateral agreements on the exchange of information on tax havens should be reached between the EU and the individual member countries of the Organisation for Economic Cooperation and Development (OECD).

Fourth line of defence – law enforcement

This line of defence is concerned mainly with police forces and the judicial authorities responsible for investigations and prosecutions that may have both a preventive and a repressive effect. The Commission has attempted to provide the Member States with more effective legal instruments to combat financial crime. These are:

  • the Millennium Strategy published in 2000 by the Commission;
  • the Framework Decision on combating fraud and counterfeiting of non-cash means of payment adopted by the Council in 2001;
  • the Framework Decision on money laundering, the identification, tracing, freezing, seizing and confiscation of instrumentalities and the proceeds of crime adopted in 2001;
  • the 2000 Council Decision concerning arrangements for cooperation between financial intelligence units (FIUs) of the Member States;
  • the 2003 Communication on a comprehensive EU anti corruption policy.

At EU level, the Commission has identified a number of improvements that need to be made:

  • the exchange of information and cooperation between national authorities, Europol and Eurojust regarding investigations and prosecutions. In 2004 Eurpol and Eurojust signed a cooperation agreement (PDF )
  • cooperation between regulatory bodies and law enforcement services;
  • the exchange of information on bank accounts and other bank-related information already provided for in the Protocol to the Convention on Mutual Assistance in Criminal Matters between the Member States of the European Union;
  • cooperation between the financial and other business sectors and law-enforcement authorities as part of a close partnership between the public and the private sector;
  • financial investigation, which must be accompanied by severe penalties for the wilful destruction of documents;
  • the traceability of financial flows, which could be introduced for the recording of electronic payments. The ” Cyber Tools OnLine Search for Evidence ” project (CTOSE) (could enable the gathering of electronic evidence;
  • the effects of certain disqualifications should be enforced throughout the EU and not simply in the country ordering the disqualification.

The Commission would like to see Member States establish specialised national bodies that could cooperate at European level with a view to effective identification, freezing, seizing and confiscation of laundered proceeds.

Context

The Communication fits into the general framework laid down by the Financial Services Action Programme (FSAP) and the Action Plan modernising company law and enhancing corporate governance (COM(2003) 284), which lay down the political foundations at Community level. The Communication stresses that these action plans should not be changed but, instead, should be implemented in a timely manner and by ensuring effective control of the application of legislation.

Statutory audits of annual accounts and consolidated accounts

Statutory audits of annual accounts and consolidated accounts

Outline of the Community (European Union) legislation about Statutory audits of annual accounts and consolidated accounts

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Businesses in the internal market > Company law

Statutory audits of annual accounts and consolidated accounts

Document or Iniciative

Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC [See amending acts].

Summary

This Directive aims to reinforce and harmonise statutory audit procedures throughout the EU. It clarifies the duties of statutory auditors and establishes ethical principles to guarantee their objectivity and independence.

Approval, continuing education and mutual recognition

A statutory audit may be carried out only by statutory auditors * or audit firms * which are approved by the Member State requiring the statutory audit.

The Directive updates the course of studies auditors must follow. An auditor may be approved to carry out a statutory audit only after having attained university entrance or equivalent level, then completed a course of theoretical instruction, undergone practical training and passed an examination of professional competence.

Audit qualifications obtained by statutory auditors on the basis of the Directive should be considered equivalent by the Member States. The knowledge of auditors should be tested before a statutory auditor from another Member State can be approved.

The regulatory arrangements of Member States must respect the principle of home-country regulation and oversight by the Member State in which the statutory auditor or audit firm is approved and the audited entity has its registered office.

Registration

The Member States must ensure that all approved statutory auditors and audit firms are entered in a register which is accessible to the public and which contains basic information concerning statutory auditors and audit firms. They must also ensure that statutory auditors and audit firms notify the competent authorities in charge of the public register without undue delay of any change of information contained in the public register.

Professional ethics, independence, objectivity, confidentiality and professional secrecy

All statutory auditors and audit firms are subject to principles of professional ethics, covering at least their public-interest function, their integrity and objectivity and their professional competence and due care.

Member States must ensure that, when carrying out a statutory audit, the statutory auditor and/or the audit firm is independent of the audited entity and is not involved in the decision-taking of that entity. A statutory auditor or an audit firm must not carry out a statutory audit if there is any direct or indirect financial, business, employment or other relationship between the statutory auditor, audit firm or network and the audited entity.

All information and documents to which a statutory auditor or audit firm has access when carrying out a statutory audit must be protected by adequate rules on confidentiality and professional secrecy.

Auditing standards and audit reporting

The Commission may decide on the applicability of international auditing standards * within the EU. Member States must require statutory auditors and audit firms to carry out statutory audits in compliance with international auditing standards adopted by the Commission.

Where an audit firm carries out a statutory audit, the audit report must be signed by at least the statutory auditor carrying out that audit on behalf of the audit firm.

Quality assurance

Member States are obliged to organise a system of quality assurance for statutory audits that must meet the criteria laid down in the Directive. These cover, for example, the independence of those responsible for ensuring public oversight, secure funding and adequate resources for the system and the selection of reviewers for specific quality assurance review assignments.

Investigations and penalties

There must be effective systems of investigations and penalties to detect, correct and prevent inadequate execution of statutory audits.

Public oversight and regulatory arrangements between Member States

Member States must organise an effective system of public oversight for statutory auditors and audit firms. All statutory auditors and audit firms must be subject to public oversight, governed by non-practitioners * who are knowledgeable in the areas relevant to the statutory audit.

Regulatory arrangements of Member States must respect the principle of home-country regulation and oversight by the Member State in which the statutory auditor or audit firm is approved and the audited entity has its registered office.

The statutory audit of public-interest entities

Each public-interest entity must have an audit committee, responsible, among other things, for:

  • monitoring the financial reporting process;
  • monitoring the effectiveness of the company’s internal control, internal audit where applicable, and risk management systems;
  • monitoring the statutory audit of the annual and consolidated accounts;
  • reviewing and monitoring the independence of the statutory auditor or audit firm, and in particular the provision of additional services to the audited entity.

International aspects

The competent authorities of a Member State may approve a third-country auditor as a statutory auditor if that person has furnished proof that he or she complies with requirements equivalent to those laid down in the Directive. The competent authorities of a Member State must register every third-country auditor and audit entity that provides an audit report concerning the annual or consolidated accounts of a company incorporated outside the EU.

Member States may allow, in accordance with the Directive, the transfer to the competent authorities of a third country of audit working papers or other documents held by statutory auditors or audit firms approved by them.

Key terms used in the act

  • Statutory auditor: a natural person who is approved in accordance with the Directive by the competent authorities of a Member State to carry out statutory audits.
  • Audit firm: a legal person or any other entity, regardless of its legal form, that is approved in accordance with the Directive by the competent authorities of a Member State to carry out statutory audits.
  • Non-practitioner: any natural person who, for at least three years before his or her involvement in the governance of the public oversight system, has not carried out statutory audits, has not held voting rights in an audit firm, has not been a member of the administrative or management body of an audit firm and has not been employed by, or otherwise associated with, an audit firm.
  • International auditing standards: International Standards on Auditing (ISA) and related Statements and Standards, insofar as relevant to the statutory audit.
  • International accounting standards: International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and related Interpretations (SIC-IFRIC interpretations), subsequent amendments to those standards and related interpretations, and future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB).

References

Act Entry into force – Date of expiry Deadline for transposition in the Member States Official Journal

Directive 2006/43/EC [adoption: codecision COD 2004/0065]

29.6.2006 29.6.2008 OJ L 157 of 9.6.2006
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2008/30/EC [adoption: codecision COD 2006/0285]

21.3.2008 OJ L 81 of 20.3.2008

Related Acts

Commission Recommendation of 5 June 2008 concerning the limitation of the civil liability of statutory auditors and audit firms (notified under document number C(2008) 2274 – Official Journal L 162 of 21.6.2008].
The Commission notes that the increasing volatility of market capitalisation has led to much higher liability risks for statutory auditors and audit firms that carry out statutory audits for listed companies. At the same time, access to insurance against these risks has been reduced. The Commission considers that this situation may deter auditors from entering the international audit market for listed companies in the Community and reduce the prospect of new actors emerging in this sector. Consequently, the Commission recommends limiting the civil liability of auditors and audit firms, except in cases of intentional breach of professional duties. In view of the considerable variations between civil liability systems in the Member States, the Commission considers that each Member State should be able to choose the method of limitation which it considers to be the most suitable for its particular case. The Commission invites Member States to inform it of actions taken by 5 June 2010. The Commission adds that the limitation of the liability of auditors should not however prevent injured parties from being fairly compensated.