EU Proposes New Rules to Prevent Corporate Scandals

Under a new proposal by the European Union, a company's board of directors would be held collectively responsible for the numbers published in financial reports.

The commission said EU member states should implement such a rule because lawyers in the Enron case, for example, had a hard time determining where to lay the blame, Dow Jones Newswires reported.

Following a long string of corporate scandals in the United States, and the massive fraud discovered at the European dairy giant Parmalat, the EU has proposed a package of reforms to prevent repeats.

"Recent financial scandals show that investors and the public need more protection against cheats," said EU Internal Markets Commissioner Frits Bolkestein in a statement.

Another proposal calls for all companies to report all offshore activity and off-balance sheet arrangements. Offshore special-purpose vehicles have been used to keep debt off the books in other accounting scandals. The European Accountants' Federation opposes the idea, saying that it would overwhelm companies with unneeded, irrelevant accounting tasks.

The EU also proposed that all listed companies provide a corporate governance statement in their annual report.

Illegal insider trading was another target. The EU proposed extending to unlisted companies a listed company rule that requires clear information on significant transactions carried out by people closely related to a company, such as the family members of an executive, according to Dow Jones Newswires

"We want to kill four birds with one stone, by ensuring that company boards are responsible for what they tell the markets, that transactions with related parties are explained, that accounts reflect off-balance sheet arrangements and that markets know how companies are governed," Bolkestein said.

Bolkestein said the new rules may be adopted by the European paliament next summer. If so, they will be added to existing corporate governance rules that the EU put in place in May 2003.


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