Wirecard has illustrated what can happen if the three pillars of corporate reporting – corporate governance, audit and supervision – fail.And if you look at the amount of money – around €20 billion of investors’ money was lost – this is a major, major issue.
And I think what is particularly worrying with Wirecard is that the
FT reported as early as 2015 about allegations of accounting fraud by
the company.
But neither Wirecard’s statutory auditor nor its supervisors detected or reported the accounting fraud in a timely manner.
Indeed those media reports were dismissed as an attempt to undermine a high-profile company.
Wirecard claims that short-sellers were seeking to undermine its position were actually taken at face value.
I think even worse, action was taken against the journalists who reported on the fraud.
For me, it serves as a clear reminder that there is no smoke without fire.
And Wirecard is not the only corporate reporting failure.
Clearly there is cause for concern.
Our financial system depends on corporate reporting and we have
high-profile cases where all aspects of that reporting ecosystem failed
to work as they should.
Wirecard is a very severe wake-up call. The company told and sold a great story that wasn’t true.
Meanwhile those who reported the real story were ignored.
Because of all of that, I have asked DG FISMA to undertake a thorough assessment of the ecosystem around corporate reporting.
So after the summer, I intend to launch a public consultation.
At the same time, we expect the outcomes of our study on the
application of the Audit Directive and Audit Regulation. Our intention
is to complete our assessment and present a legislative proposal towards
the end of next year.
Obviously, at this stage, it is too early to say exactly what’s
needed to ensure the quality of corporate reporting and indeed its
enforcement.
But I will share with you some of the considerations as we launch this process.
[Why corporate reporting is important]
Before I start, I think it is worth emphasising exactly why corporate reporting is important.
Of course it’s about preventing cases like Wirecard.
But fundamentally: corporate reporting helps capital markets work. It
gives investors the information they need to assess a company’s
performance and governance.
And it allows wider society hold companies to account, particularly in the area of sustainability reporting.
Trust-worthy reporting means that investors can be confident in the decisions that they are making.
Corporate reporting by listed companies is particularly important.
Because anyone can invest in the stock market. And there is a lot of cross-border investment in shares.
Just to that point, a recent Commission study indicates that in EU
Member States on average 59% of shares are held across borders.
Those share-holders make decisions about the companies they invest in on the basis of corporate reporting.
And so if we want to build up the Capital Markets Union, and we do,
we need high-quality, reliable and easily accessible corporate
reporting.
We are doing a lot of work already on corporate reporting.
Recently we presented our proposal for a new Corporate Sustainability Reporting Directive.
This is about making sure more companies report better, more reliable
information about sustainability – both their impact on people and the
environment, as well as the impact of possible risks to the company
including climate risks.
We are also working on an EU-wide platform, the European Single
Access Point, to provide investors with seamless access to financial and
sustainability-related company information.
But having the right standards and tools to access information is not
enough. We also need to make sure that the information is correct and
reliable.
There are three core pillars to high-quality corporate reporting:
First is corporate governance. So correct, reliable reporting is
primarily the responsibility of companies themselves. The corporate
governance framework should incentivise high-quality corporate
reporting.
The second pillar is audit. Auditors have an important public
interest role to certify that financial statements are correct and
reliable.
And third, there is supervision and enforcement, to back-up and check the work of the first two pillars.
Overall, the aim is to have an ecosystem around corporate reporting
that creates the right incentives for high-quality reporting, with good
rules that are enforced.
[Corporate governance]
If we look at the area of corporate governance, we will be looking at the responsibilities here of board members.
Board members are responsible to shareholders to explain the activities of the company.
And they are responsible for making sure that reports on financial and sustainability information are correct.
So we should ask if their responsibilities on reporting are clearly defined enough.
Audit committees play a key role in companies’ reporting process.
But setting up an audit committee is not always mandatory.
And how audit committees are overseen varies widely amongst Member
State supervisors, which could limit the impact of their work.
So we will therefore reflect on how to improve the role of audit
committees, whether they should be mandatory, and how to improve
oversight.
Needless to say, whistle-blowers can play an important role in
companies’ overall system of governance. The transposition of the
Whistle-blowers Directive this year will be helpful.
[Audit]
Moving to audit. While good corporate governance should be the most
important guarantee for the quality of corporate reporting, we need
checks and balances.
And indeed we have entrusted external auditors with an essential public interest task.
Statutory auditors are there to identify and assess the risk of
material misstatement in financial statements, and publicly report on
what they find.
So if we cannot be sure that auditors do a thorough job and that an
auditor’s signature has real value, we have a significant problem.
At the beginning of this year, we published the second monitoring
report on the EU audit market for public interest entities with some
interesting conclusions on the level of competition, audit quality and
the work done by audit committees.
Audit supervisors across the EU found problems with internal quality control systems.
They also found a lack of or inappropriate monitoring of high-risk
audited entities and insufficient audit evidence and documentation.
So we will assess what the reasons are for this lack of quality.
Is it due to a lack of competition, considering that the Big Four
audit firms have a 92% market share for the audit of public interest
entities?
Recent proposals, such as the proposal for a Corporate Sustainability
Reporting Directive, open up the assurance market to other independent
service providers.
However, more and stronger action might be needed to ensure competition.
Other reasons might be a focus of audit firms on more attractive
non-audit services, which could also cause conflicts of interest.
Moreover, are auditors shielded too much from liability or from the risk of supervisory sanctions?
Some Member States are taking steps to address some of the problems
in audit, for instance shorter rotation periods for auditors, a better
separation of audit and non-audit services and higher liability for
auditors.
Some Member States have also imposed joint audits.
So we will learn from the ongoing experience of Member States on these particular questions.
We will also look in detail at the supervision of auditors.
Despite progress through the work of the Committee of European Audit
Oversight Bodies, ensuring consistent supervisory approaches and
sanctioning regimes remains challenging.
More transparency about the work of supervisors could also increase accountability and trust.
[Supervision and enforcement]
So let me turn to the third pillar of high quality corporate reporting – supervision and enforcement.
Just last year ESMA published a report on the enforcement and
regulatory activities of European enforcers, which noted that
supervisors examined 17 percent of the financial reports of issuers in
2020.
In around 38 percent of the cases examined, enforcement action had to be taken.
What this shows is that from a relatively low percentage of companies
examined, quite a high percentage of problems were discovered.
In light of the cross-border nature of investments in listed
companies, the impact of supervision by national competent authorities
goes far beyond the borders of any single Member State.
Based on its experiences of the last few years and its Fast-Track
Peer Review on the Wirecard case, ESMA wrote to me in February with a
number of important recommendations to improve supervision and
enforcement.
There are three main recommendations:
- First, to enhance cooperation between authorities at the national and European level;
- Second, to strengthen the governance and independence of supervisors at national level;
- And finally, to harmonise the supervision of company information across the Europeans Union.
These recommendations provide a very good starting point for our own
assessment of the supervision and enforcement of corporate reporting.
And we should certainly not forget the role of the media in reporting
uncomfortable truths. In this respect, I also want to pay tribute to
investigative reporters that help uncover scandals.
And it suggests that as important as corporate reporting is – we also
need an ecosystem that is open to information, from whistle-blowers or
the press, that runs counter to received wisdom.
As regulators and supervisors, we have a responsibility to be
pro-active and question the stories that companies tell us in the
reports that they publish.
[Closing]
So these are just some of the issues and questions that will guide our work in the area of corporate reporting.
We will carry out a thorough assessment and consult widely.
In this respect I am very grateful for the work already carried out
by the European Parliament, especially the Economic and Monetary Affairs
Committee.
Corporate reporting is the basis for many investment decisions.
It is the basis for the advice that credit ratings agencies give and proxy advisors also give to investors.
And it is the basis for accountability to wider society.
It goes without saying that high-quality, reliable corporate reporting is vital for the Capital Markets Union.
If we want to create an attractive Capital Markets Union, including
for retail investors, we need to ensure a high level of protection for
investors.
Ensuring the quality of corporate reporting and its enforcement is a key pillar for that.
And it is for these reasons that I aim to have a proposal ready by
the end of 2022 to tackle the problems and to strengthen the quality of
public reporting and its enforcement.
I said earlier that ‘there is no smoke without fire’. I might add that if it looks too good to be true – it usually is.
European Commission
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