Audit committee oversight to intensify as government intervention and regulatory risks increase
London, 2 March 2010: Evolving tax changes, intensifying competition-law enforcement and fraud-related risk management are all key issues set to move up the audit committee agenda over the coming few years, as authorities move to implement measures agreed at the influential G20 meeting in September 2009.
Government interventions across Europe mean that businesses are reacting to new regulation and change brought about to restore trust in the financial system. While evolving capital market dynamics mean that businesses are being challenged to survive, the audit committee has a very important function in addressing the other issues needed to ensure businesses avoid emergent compliance risks. But according to new research for Ernst & Young, the respondents in the latest Tapestry Networks Insights for European Audit Committees believe that audit committees are not well prepared for the magnitude of these new risks.
Pascal Macioce, Ernst & Young’s Assurance leader in Europe, Middle East, India and Africa, comments: “At a macro level, the G20 has initiated wholesale changes to a broad range of policy areas, not just the financial system, which means that there are many changes to the ways that companies do business not only within their countries, but also increasingly important across borders.
“The latest Insights research shows that audit chairs greatly underestimate the breadth and intensity of regulatory and compliance risks facing European companies, particularly those operating across borders. Currently, audit chairs are being too narrow in determining the extent of the ‘regulatory risks’ facing their companies. Audit committees must think more broadly about the way that government interventions – both nationally and at G20 level – has significantly increased existing compliance risks. These risks will continue to increase until such time that new regulations bed down on both a national and global level.”
Businesses will need to have closer relationships with local tax authorities, regulators and standard setters to keep on top of important changes and must pay closer attention to European Commission announcements, say respondents.
Tax crack downs…
Tax authorities across Europe have become more aggressive in tax rule enforcement as they try to recoup taxes paid out on bail-outs and absorb the impact of lower tax receipts due to unemployment and reduced corporation tax receipts as a result of the financial crisis. These crackdowns go well beyond tax fraud, to include disputes about the levels of actual taxes owed under existing tax laws. Respondents in the research expect more and quicker tax audits, larger fines and greater scrutiny on transfer pricing arrangements meaning that audit committees will need greater oversight of tax strategies and tax risks.
…as investigations, litigation and compliance risks increase
Respondents expect competition law-enforcement in Europe and the US to intensify over the next few years and agreed that audit committees should make oversight of corporate compliance efforts a priority. 2009 was a year for record fines with the European Commission fining Intel a record €1.1bn in an antitrust case in May. Respondents expect fines to escalate, and, over time, that the costs of private litigation will grow significantly in Europe.
Macioce says: “Companies cannot afford to be complacent. Audit committees should ensure that compliance processes are strengthened along with their relationships with regulators. Some smart steps are to implement a robust compliance system, test that system and engage in open, proactive communication with regulators.”
For businesses operating in emerging markets, or thinking about it, there are risk compliance challenges to be mindful of, particularly as the G20 placed anti-bribery rules under the spotlight. Macioce explains: “Audit chairs are well aware that cultural differences in the ways of doing business in emerging markets can make companies inadvertently fall foul of anti-bribery laws.”
For this reason, research participants suggest that audit committees should:
- Ensure strong relationships between the business and regulators and other authorities; consider including board or committee members from people within the emerging market country;
- Highlight to the chief financial officer, internal audit team and other channels the importance of robust communication, especially that from whistleblower hotlines;
- Consider ‘deep dive’ approaches and overviews to certain controls; and
- Seek the advice of external parties to test robustness.
Macioce concludes: “Simply saying you were not aware is not good enough. Over the next few years, audit committee members will be challenged to adapt their agenda sufficiently to oversee the risks attributed to this new broad-scale government intervention and particularly the zeal for enforcement. ”
About the report
This paper is part of the InSights series for European audit committee members produced by Tapestry Networks and draws highlights from interviews conducted with a wide-ranging group of European financial stakeholders and leading audit committee chairs. The latest research is based on face to face interviews were held with 15 European and US
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