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Speech by Jonathan Hill, Member of the European Commission, responsible for Financial Stability, Financial Services and Capital Markets Union
Capital Markets Union
An emphasis on transparency, choice and competition also underpins our plans for the Capital Markets Union. Part of our drive to encourage growth and jobs, I see this as a classic single market project for all 28 Member States. And it is supported by all 28. Last Friday I was very pleased that ECOFIN agreed its Council conclusions and way forward. And on 16 June, the Committee on Economic and Monetary Affairs in the European Parliament published a Motion for a Resolution which also supports the project.
Alongside that, we have recently finished a consultation on the CMU. The hundreds of responses we have had, including one from FEE, are a sign of the interest that the Capital Markets Union project has generated.
One message that we are getting from the responses to the consultation is that audit, alongside effective supervision, good corporate governance, and high quality corporate and financial reporting is crucial to the sound functioning, integrity and efficiency of capital markets.
Auditors have developed expertise that is vital to shareholders and investors in their analysis of companies’ health. This in turn, can help to strengthen investor trust in the financial information of companies. This was one of the other messages FEE gave us in its contribution to the consultation on Capital Markets Union.
Overall, the responses to the consultation made clear that there is a shared analysis of the benefits that a stronger single market in capital would bring by supporting more cross-border risk-sharing, creating deeper and more liquid markets, and increasing the resilience of the financial system through diversifying sources of funding.
It will better link savings with growth. It will provide more options and better returns for savers and investors. It will offer businesses more choices of funding at different stages of their development. It will channel investment to where it can be used most productively, increasing the opportunities for Europe's companies and infrastructure projects. It will help to ensure that the financial system supports growth and jobs and help with the demographic challenges Europe faces.
So we are very pleased that our overall aims for the CMU and the various elements that we have identified as necessary to make it happen have received such broad endorsement.
Public authorities, market participants, issuers and investors also seem positive about the step-by-step approach we are taking; one that combines ambition, with realism and pragmatism. People want us to be ambitious for the Capital Markets Union, but they also want us to make quick progress where we can, for instance by creating a new market for simple, transparent and standardised securitisation products, and by reviewing the Prospectus Directive.
We are now reflecting on the consultation and will come back in September with an Action Plan setting out the way ahead. I think we have a new political opportunity to help improve the conveyor belt of funding for Europe's businesses, an opportunity I intend to seize.
Audit reform
A recognition that we needed to increase transparency and independence in the audit sector lay behind the new rules introduced in the EU in April 2014. Our goal was to boost confidence in financial statements. We will achieve this by reforms in three main areas.
First, by providing better information to investors through more detailed and better audit reports. Second, by increasing auditors’ independence by, for example, requiring mandatory rotation or prohibiting certain non-audit services so that they are at less risk of a conflict of interest. And third, by improving the supervision of auditors through greater cooperation between national audit authorities in Europe, and ideally through international cooperation.
Our reforms are also about promoting market diversity and boosting competition on the EU audit market. It will give auditors new opportunities to enter the audit and non-audit market, by encouraging tendering and joint audits and opening up the market for non-audit services. I will be keen to see how this develops, particularly as regards choice in the audit market, as we seek to reduce the risk of excessive market concentration.
Another aspect I will want to keep an eye on is whether measures to encourage tendering or joint audits are taken on board by Member States. If so, are they having a positive influence on competition between audit firms?
We will also need to consider how we can best measure the performance of audit committees in their new role with extra responsibilities such as the appointment of audit firms?
I also want to check that the new rules are fulfilling their ambition of helping to reduce unnecessary burdens on small and medium-sized enterprises that use auditors’ services.
Regulation should not dictate in minute detail how auditors should do their job, but I see audit reform as giving them a strong mandate to be independent and to exercise their professional scepticism. I look forward to seeing that put into practice.
Quality of statutory audit
To help companies, including small quoted companies, to attract new sources of financing, we needhigh quality audit.
The adoption of the new rules for more transparency and independence was an important step. But rules will only have the desired effect if they are put into practice. So what we now need is that the new rules are implemented quickly and effectively.
One of the key issues we need to address is the consistency of implementation of the EU measures at national level. The Regulation contains a number of “national options”. They include the definition of Public Interest Entities, mandatory firm rotation, the list of non-audit services that an audit firm is prohibited from offering to its audit clients, and the level of the cap on the provision of non-audit services.
We hope that the different approaches in these key areas will not increase costs and lead to unnecessary additional audit procedures which could ultimately reduce the positive effects of the reform.
To reduce possible inconsistencies, the Commission, as part of the implementation process, is working hard with the Member States and national authorities to address practical challenges relating to the new rules.
The Commission is working in parallel with national audit oversight bodies to enhance the supervision of the audit sector, within the framework set out by the new rules. In this regard, the new Committee of European Auditing Oversight Bodies that is to be set up by this time next year will have an important part to play. It should make it easier to exchange information, expertise and best practice; and provide reliable expert advice to the Commission. I also attach a lot of importance to our discussions with the audit profession, companies and investors to help them anticipate the new rules and smooth the path to implementation.
When the time is ripe, we will assess the impact of the new rules and take any further measures that might be necessary to deal with any unintended consequences.
International developments
Our new framework puts the EU at the forefront of the wider international developments. I know that several other jurisdictions are very interested in our audit reform. Some might follow us and are keen to learn what impact the reform is having on audit practices and on the financial markets.
As regards international cooperation on audit oversight, I would like to pay tribute to James Doty, the Chair of the PCAOB, who spoke yesterday on the many opportunities for us to work together on audit regulation and oversight. Cooperation between our two institutions is good and improving and a lot of progress has been made recently towards a closer partnership on audit oversight. I very much look forward to continuing that cooperation and to making more progress in making the process of oversight in the EU and MS as seamless as possible.
Accounting
While on the topic of areas where we work closely with international partners, I would like to say a few words about recent developments in accounting.
As many of you will have seen, last week we published our report on our findings based on nearly 10 years of using international accounting standards in Europe. I know the FEE contributed to our public consultation and that you were represented on the expert group that advised us on our work. Thank you for your contribution.
Our findings showed that, by and large, the experience of using IFRS has been a positive one for Europe – companies and users of their financial statements are mostly positive about the benefits. But IFRS are not perfect. They are sometimes seen as overly complex and as leading to an overload of financial information: key messages can be lost by being buried in too much information just as they can if there is too little information.
Generally, the process we follow to bring these standards into EU law is seen to be working well. There is a good degree of consultation with interested partners to help make sure that the standards are of high quality. But the downside is that all this takes time and that leads to regulatory uncertainty for companies and their auditors.
We heard in the consultation that the important thing is to focus on having the right influence over the standard setter to ensure that the final standard that emerges is reliable and suitable for use in Europe. Then the process of adopting the standards can go faster and more smoothly.
We hope that the governance reform of EFRAG will increase our influence and here I would like to thank Mark Vaessen for his work in representing FEE as a Board member of EFRAG.
Of course, governance is also an important element in the success of the IASB as a global standard setter and we look forward to participating in its forthcoming governance review to raise some concerns, including on its funding structure.
I have spoken several times today about transparency and the need to allow people to make informed choices. Many people criticise international accounting standards for their complexity. However, in many instances that complexity is unavoidable given the transactions they are seeking to portray.
We see this in two standards that are currently in the process of being endorsed. First, IFRS 15, which deals with revenue recognition, is a more sophisticated standard than the standard it replaces. When we consider the way in which we now rarely buy one thing at a time – we buy an item and it comes with a package of other things such as a maintenance contract or warranty or an option to upgrade later, the updated standard has to reflect this complexity.
Secondly, in the case of IFRS 9, financial instruments, I understand that the old standard was criticised for being too complex to the extent that the Chairman of the IASB joked "if you think you understand IAS 39, you haven't read it properly". Well, I certainly hope the same won't be true of IFRS 9. But as with the revenue standard, this standard has a long implementation period to allow companies to put in place the many changes that are needed to meet the new principles.
Your role as auditors is key to ensuring that companies implement these changes in their financial reporting so that the objectives of the standards are truly met. This is where your experience and judgement as professional auditors is so vital in challenging companies to ensure that standards are applied in a disciplined way.
The findings of our evaluation showed that financial reporting based on IFRS has improved transparency and comparability across the EU. This in turn appears to have had beneficial effects on investment as it can contribute to higher liquidity, lower costs of capital, improved investor protection and increased cross-border transactions.
Clear communication between companies and the investors who risk their money by investing in them is necessary to build trust. Our role in the areas of accounting and auditing is to ensure that the financial reporting standards really contribute to good communication and that the trust in companies is deserved.
Ladies and gentlemen, I want to see a healthy and dynamic audit sector in which auditors play their role in helping the economy grow.
The new audit rules are a cornerstone of the EU’s financial governance framework. Reliable financial reporting and auditing, effective supervision and consistent application of the new rules can help our efforts to deepen the single market in capital.
The EU efforts are also relevant internationally and can contribute to drive global initiatives to enhance the contribution that audit can make to financial markets.