“The key to good governance is close and concerted interaction by all auditing and supervisory bodies,” remarked Peter Hofbauer, Spokesperson for the Board of the Audit Oversight Body of Austria (APAB; Abschlussprüferaufsichtsbehörde), and Michael Hysek, the Managing Director of Banking Supervision at the Austrian Financial Market Authority (FMA), in unison during a high level online conference about the dialogue initiative that they had established together in 2021. More than 350 supervisory board members of public interest entities[1] (PIEs) used the occasion to find out about the latest developments and challenges in corporate governance matters, the fitness and propriety of supervisory board members as well as the cooperation between the supervisor, statutory auditors and the audit committees of supervised entities. There was a particular focus on the management of sustainability risks referred to as ESG factors (Environment, Social and Governance), as well as the new auditing and reporting obligations about sustainability reporting in accordance with the EU Corporate Sustainability Reporting Directive (CSRD)[2], as well as the forthcoming EU Corporate Sustainability Due Diligence Directive (CSDDD)[3]. Hofbauer and Hysek believe that there are particular challenges for statutory auditors, financial market supervisory authorities, and supervisory boards – especially the latter’s audit committees.
Cooperation strengthens governance
In her keynote speech, Professor Anne D’Arcy from the Institute for Corporate Governance at Vienna University of Economics and Business (WU Wien) emphasised the particular responsibility of the audit committees of supervisory boards and encouraged them to “ask the right questions.” She referred to a three level model, under which the roles within the audit committee should be defined in accordance with the specific risks that the organisation is exposed to as well as the respective regulatory challenges. It would also be a better position to address new topics like ESG reporting. D’Arcy: “ESG reporting requires a new quality of information processing. In this case, it no longer relates to financial information, but also to external factors that cannot be directly influenced.” Furthermore, new regulations in the Corporate Sustainability Due Diligence Directive (CSDDD) require additional due diligence by supervisory board committees in relation to issues about the environment and human rights. D’Arcy: “The audit committee must ensure that there is a process that is able of effectively review the system.” To do so, the audit committee should not rely exclusively on the statements provided by the management board, but should also directly approach employees, as well as experts from outside the organisation. D’Arcy: “Take a really good look at the effectiveness of the internal governance! Ask questions and be inquisitive! Are they telling you what works and – above all – what doesn’t work? Are issues like climate change considered, and opportunities seen rather than just the risks? Is a possible change of business model being considered?“
Fit & Proper as the basis of functioning governance
Elisabeth Schadler-Liebl, a Head of Team in the FMA’s Insurance Supervision Department, and Daniela Jaros, Deputy Head of Division in the FMA’s Banking Supervision Department, then sketched out the FMA’s approaches to Governance and Fitness & Propriety. Schadler-Liebl addressed the problem of conflicts of interest in the the governance of insurance companies. “Although there is no legal definition, there is a working definition. Under that definition, the existence of conflicts of interest clearly needs to be checked, and action taken accordingly.” The options for action to detect and resolve the conflict of interest, or to mitigate it. Where the conflict cannot be overcome, then they must relinquish their position, remarked Schadler-Liebl quite unequivocally.
In this regard, the FMA also has clear expectations about how insurance companies are to go about this. “Conflicts of interest are often resolved in different areas. The FMA expects a holistic view in this regard. The supervisory board must also be subject to such rules. The Rules of Procedures are a good place for such rules”, the FMA expert explained. Regarding the composition of the supervisory board, Schadler-Liebl emphasised the significance of “collective suitability”, under which a balanced composition of the supervisory board in terms of expertise should exist in a holistic view. Specific requirements in terms of expertise should also be presented, although this should entail more than merely repeating the letter of the law verbatim. The supervisory board’s activities should be documented into order to be able to deduce “whether it has dealt with the issues at hand”.
FMA banking expert Daniela Jarosemphasised about the particular significance of fitness and propriety of key function holders. It was the basis for functioning governance. In March 2023 the FMA published an updated version of its FMA Circular, with the design, requirements and procedure of the Fit & Proper test being explained in a new chapter. In addition to a transparent presentation of the testing methodology, it also explicitly states that fitness and propriety is not only to be proven when assuming a position, but must also exist for the entire duration of the term of office. The FMA therefore conducts a random sample of re-checks in the case of an activity being performed for a long time, on an ad hoc basis, selected randomly or due to risk-based factors. The spectrum of risk addressed in the scope of Fit & Proper tests, now also covers sustainability and information and communication technology risks (ESG and ICT factors).
Disclosure of AOBA inspection reports for audit committees
Michael Komarek, AOBA’s Chairperson, reported about the material findings and recommendations from AOBA’s supervisory activities. In his contribution, he emphasised the importance of good communication by the audit committee with the statutory auditor. “The statutory auditor has deep insights into the company – make use of them!” remarked Komarek.
AOBA conducts quality checks about the work of statutory auditors in the course of its inspections. Komarek remarked, “Our inspections, in which the work of auditors is reviewed, served to ensure the continuing improvement of audit engagements. However, the findings of such inspections are not made public. Audit committees do not have access to our reports.” In light of this, Komarek is in favour that audit committees should at least be information about the material findings identified in the audit engagement conducted about their company.
Critical success factors in strengthening corporate governance
To conclude, AOBA Spokesperson Peter Hofbauer and the FMA’s Managing Director of Banking Supervision Michael Hysek, economist Anne D’Arcy, the auditor and supervisory board member Christine Catasta, and the auditor and supervisory board member Gerhard Schwartz discussed the critical success factors for strengthening corporate governance and cooperating with auditors from a practical perspective. Anne D’Arcy urged for governance to be viewed as a dynamic system that regularly needs to be adapted regularly towards the prevailing external conditions. “The company being audited is expected to be agile. Accordingly, agility must also be guaranteed in the governance function,” remarked D‘Arcy. In this regard, D’Arcy recommended in relation to the composition of supervisory boards and audit committees “to think less in terms of people, and more in terms of requirement-based profiles”. Christine Catasta and Gerhard Schwartz demanded good knowledge of the network of statutory auditors, whose expert and personal qualification, previous sectoral experience and interaction with other authors is of particular importance. In addition, Schwarz emphasised the importance of members of the audit committee having direct access to the management at the levels below the management board in order to be able to obtain a comprehensive picture from a full range of perspectives. Catasta urged the Chairpersons of Audit Committees to set aside sufficient time for dialogue with the respective heads of the internal audit, risk management and accounting units. Doing so, would permit good impressions to be obtained about how the company actually works.
Critical audit matters, also known as Key Audit Matters (KAMs), should be given particular attention and discussed in detail by the auditors and the audit committee. The (pre-)approval of non-audit-based services should ideally not occur on the basis of a threshold value, but in a manner that is staggered by service categories. In addition, it would also be desirable for there to be the opportunity to have a say in the new appointments to an entity’s bodies, which hardly appears to be the case in practice.
Enquiries should be addressed to:
AOBA/APAB
edith holzer communications
+43 (0)664 124 03 62
[email protected]
FMA
Klaus Grubelnik
+43 (0)1 249 59 – 6006
+43 (0)676 – 88 249 516
[email protected]
[1] Public interest entities (PIEs) are entities whose transferable securities are authorised for trading on a regulated market, and credit institutions, insurance companies as well as entities designated as such in a Federal Act irrespective of their legal form (Article 189a no. 1 of the Commercial Code (UGB)).
[2] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14. December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting
[3] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937