Internal audit key to 'transparency and trust' for EU business

Written by Julie Levy-Abegnoli on 1 April 2015 in News
News

A Parliament Magazine event on non-financial reporting and building trust with internal audit gave speakers the chance to discuss the commission's new directive on the topic.

The event was organised in cooperation with the European confederation of institutes of internal
auditing (ECIIA).

Kicking off the roundtable discussion, host Igor Šoltes, a Slovenian MEP and former president of his country's court of audit, told those in attendance, "you have the means, and above all, the knowledge to raise awareness on building trust with internal audit, and the first task is to help various publics to understand its importance".

He explained that, "non-financial reporting is essential for public stakeholders to evaluate how well companies are performing in these areas as they introduce accountability in firms, drive sustainability improvement and contribute to the development of better corporate practice".

Highlighting the benefits of non-financial reporting, the MEP underlined that it is "a source of opportunity and competitive advantage for companies. Non-financial reporting demonstrates responsible corporate behaviour, which can contribute to long-term business sustainability, promote a brand and please stakeholders".

Non-financial reporting is set to become increasingly important for businesses, as a new directive on the topic was adopted last year and is in the process of being implemented in the member states. 

"Non-financial reporting is essential for public stakeholders to evaluate how well companies are performing in these areas as they introduce accountability in firms, drive sustainability improvement and contribute to the development of better corporate practice" - Igor Šoltes

Šoltes warned, "the benefits of this reform in terms of greater transparency, trust and long-term performance will depend on the quality of the reports issued. There is a need to define accountability and determine a clear mechanism for oversight assurance in respect of the reporting of this information in order to meet the objectives of greater transparency and better corporate governance".

He added, "internal audit will only be effective and efficient if given all existing documentation. Hiding information or limiting access to the relevant documentation may result in negative surprises, which lead to diminished or even ruined public trust. And trust is something we have been working on for many years, yet it can be lost overnight".

 

The commission's view

Antoine Begasse, policy and case officer for corporate transparency at the commission's DG financial stability, financial services and capital markets union, laid out the non-financial reporting directive's key characteristics. 

He explained that it is currently in its implementation phase, and the first reports are expected in 2018.

The directive "only covers large public entities with more than 500 employees, approximately 6000 companies". Small and medium-sized enterprises are not within its scope.

Businesses will be required to disclose material information concerning "environmental issues, social and employee matters, respect of human rights, corruption and bribery matters and diversity in the board of directors".

"The directive only covers large public entities with more than 500 employees, approximately 6000 companies" - Antoine Begasse

Begasse added that the directive "is not prescriptive - we are leaving significant flexibility to companies to disclose the information in a way they find most useful".

 

A word from ECIIA

Silvio de Girolamo, chief audit and sustainability executive for Autogrill group and an ECIIA board member, explained that "an internal auditor is like a critical friend [who] can support and help you better manage a situation and can help a company take care of risks".

He acknowledged that the profession "has changed a lot in recent years", and that it is now moving towards prevention. 

"There is no benefit for the company in just identifying what is wrong", he said, "the benefit for the company is to prevent the fire before it happens, and we are in the best position to do so because we are inside the company - we don't just manage the figures, we also manage the process and the risk in order to see what the best solution is".

He added that companies must "appreciate not just economic aspects, but also social and environmental ones", because this is the type of information that prospective investors are starting to care more and more about.

Girolamo explained that "there are two words to focus on - integration and assurance. Results can be limited, even within a company, so we need integration, and integration is needed to increase confidence and transparency about the company's work and management".

Commenting on the commission's new directive, he said, "we need to reinforce it with international law and harmonise with different geographical dimensions, giving greater transparency and trust to stakeholders who have the long-term performance of a company in mind".

"There are two words to focus on - integration and assurance. Results can be limited, even within a company, so we need integration, and integration is needed to increase confidence and transparency about the company's work and management" - Silvio de Girolamo

He pointed out that the sector needs to "take the opportunity to have better integration between external and internal auditing; integrated assurance can contribute to a better vision and understanding of a company".

He concluded by promising that ECIIA is "ready to contribute to this new trend and would like to take part and provide services to public stakeholders and governance bodies".

 

An evolution in 'the concept of value'

The final speaker on the panel was Jonathan Labrey, international integrated reporting council (IIRC) chief strategy officer, who underlined that "at the heart of integrated reporting is the idea that the concept of value has changed, as has the way in which businesses communicate value".

He told the audience that companies that only take into account their financial performance "are really losing out and exposing themselves to greater risk and not exploiting opportunities that cannot be found in balance sheets".

Labrey shared that "the role of the internal audit function has an increasingly strategic nature", and the position is "developing a role as a trusted advisor for boards on all matters pertinent to the activities of an organisation".

He said there were three main concepts to bear in mind - lines of sight, trust and breaking down silos.

He explained that, "insight is critical for integrated reporting because when seeking to attract financial capital, the key is to find tomorrow' reasons to invest today", adding that "the profession is moving into the area of foresight".

In terms of trust, he commented, "while disclosure and reporting and internal audits are very important to enhancing trust and accountability, we also need to stand back as professionals and policymakers and think about the rules of the capitals markets system we operate in".

"At the heart of integrated reporting is the idea that the concept of value has changed, as has the way in which businesses communicate value" - Jonathan Labrey

And on the topic of silos, he pointed out that, "when talking about financial performance, it is critical we think about interconnections between different resources and how they create value". 

He also said that according to the world economic forum, "risks can no longer be isolated - they are interconnected".

Concluding the discussion, Igor Šoltes warned that governments "should not use a 'copy and paste' approach when implementing the directive", and called on the EU to "focus [its] energy on simplifying legislation and making it more user-friendly".

 

About the author

Julie Levy-Abegnoli is a journalist and editorial assistant for the Parliament Magazine

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