The Parmalat affair, like Enron, Tyco and WorldCom has sent a shudder through the world of international finance and raised a myriad of questions about corporate governance, regulation and supervision.
The response of the European Commission to the Parmalat fraud has certainly not been a “knee-jerk” reaction. Many of the measures – Directives and Regulations – now receiving the most urgent scrutiny have been in the pipeline for a long time.
Parmalat’s international dimension
Some of the issues surrounding Parmalat are specific to the family-owned status of the company, to Italy’s banking system and its regulation of listed companies and the securities market. Others, given the large numbers of international banks, investment houses and rating agencies involved in its affairs, are clearly of a pan-European and international nature - over 40% of Parmalat’s bond placements were conducted by US investment banks.
Many of the regulatory issues discussed by commentators in the wake of Parmalat have been recognised by the Commission a long time back. Many, and the most important, are in the process of being tackled through a series of proposals for EU Directives ranging from statutory audit, to market abuse, company law and corporate governance.
As the Commission and many national ministers pointed out post-Enron, the warning signs have been there for a long time. Parmalat was perhaps just a scandal waiting to happen.
Regulation as a last resort
Commissioner Bolkestein stated clearly to the European Parliament in February that if industry leaders are not prepared to take matters in hand and ‘sort out the crooks’, then regulators will have to do much more than perhaps they or we would like. “If that is the result, then industry leaders cannot complain about regulation from Brussels. They will have brought it upon themselves,” he stated.
“It is the task of politicians and regulators to ensure that the right framework legislation and policies are in place. As you know, the Commission was already working on this,” said Commissioner Bolkestein.
There are already a range of policies in hand which will go some way to improving matters in the future.
The Financial Services Action Plan contains important measures such as the Market Abuse Directive and Prospectus Directives - which are in the implementation stage.
There are also measures close to adoption such as the new Investment Services Directive which would give investment firms an effective “single passport” allowing them to operate across the EU. It would make sure investors enjoy a high level of protection when employing investment firms, wherever they are located in Europe
IAS and financial reporting
In the accounting field the Commission has promoted a principles-based approach to financial reporting, designed to reflect economic reality and give a true and fair view of the financial position and the performance of a company.
At the heart of the strategy is the application, from 1 January 2005, of IAS – the new International Accounting Standards (see related article pp xx) - which will enhance disclosure, along with the Transparency Directive.
All these measures will enhance the powers of the relevant authorities to act and also to cooperate much more across borders.
Moreover, the EU’s commitment to IAS is helping to achieve global convergence on financial reporting, in particular between IAS and the United States’ GAAP approach.
Cooperation with foreign regulators is essential – in particular the United States’ Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB). Capital markets, today, are global. Regulatory cooperation must be global too to match them.
The impact of scandals such as Enron and Parmalat on auditors and accountants has, without doubt, been significant. One accounting firm has disappeared. Controls on auditors have been tightened. Only four major firms remain and they audit over 95% of the FTSE 300.
In the light of recent events the Commission has fine-tuned its corporate governance and statutory audit strategies. The first proposal on statutory audit was made on March 16 (see related article).
The proposals update existing EU arrangements and set out to strengthen controls over the audit profession in the EU. They will push for independent oversight, strengthened inspection, stronger ethical and educational principles, and high quality audit standards.
Work is also being accelerated in three other areas of Corporate Governance/Company Law to have proposals ready, where possible, later this year. They are :
- The role of non-executive directors;
- Directors’ responsibility for company accounts;
- Full disclosure in the company accounts of offshore Special Purpose Vehicles.
The issue of conflicts of interest of financial analysts is being looked at (see related article p.20) as well as the behaviour of credit rating agencies.
On the issue of the regulatory control of offshore centres, the third Money Laundering Directive, which will be tabled in June, will play a significant role.
The Commission has a great deal of work already in progress. The absent partner in all this, as Commissioner Bolkestein has stressed, has been strong industry leadership – and an appropriate dose of ethics - though there are signs that this is now changing.
Company law and corporate governance
In May 2003, the Commission presented an Action Plan on “Modernising Company Law and Enhancing Corporate Governance in the EU”.
Its aims are the strengthening of shareholders’ rights, reinforcing protection for employees and creditors, and increasing the efficiency and competitiveness of business.
It is based on a comprehensive and prioritised set of proposals for action, covering several years and devotes special attention to a series of corporate governance initiatives aiming at boosting confidence on capital markets.
Erik Van Der Plaats
TEL: +32 (0) 2.296 61 21
FAX: +32 (0) 2.299 30 81
Further details at: http://ec.europa.eu/internal_market/company/index_en.htm