The European Commission should not overestimate the role that shareholders can play in corporate governance improvement, according to a body that represents big pension funds.

A recent Commission green paper on governance reform said institutional shareholders were partly to blame for the financial crisis because they hadn’t performed their ownership role properly. It also said too many of them weren’t interested in corporate governance.

But the European Federation for Retirement Provision (EFRP), which speaks for national pension industry associations, has rejected that analysis.

“In our view most pension funds take responsible investing and active ownership very seriously,” it said in its formal response to the Commission paper. “However, it must be recognized that there are certain limitations to what such efforts can achieve.”

The Commission’s belief that shareholders have an important role in overseeing corporate governance and strategy of companies “is probably not the general view in large parts of Europe,” EFRP said.

Many of the European Union’s 27 member states have deliberately limited the ability of shareholders to influence boards, because they want executives to act in the interests of stakeholders more widely, it argued.

Investors have little direct say through the general meeting on the nomination or dismissal of individual board members, remuneration policy, or governance issues. “This means that investors will have to resort to ‘voting with their feet’ by buying and selling shares.”

Big investors can talk to management about strategy, EFRP said, “However, this also requires a recognition by company board members of being accountable and a willingness to enter into an open dialogue with shareholders, which is frequently lacking.”

U.K. regulator the Financial Services Authority has hit Zurich Insurance with a record fine for failing to keep confidential customer information safe.

Zurich lost the personal details of 46,000 customers, including in some cases their bank and credit card information.

The regulator found that the company did not have adequate systems and controls in place to prevent the data loss and fined it £2.275m ($3.51 million). The firm earned a 30 percent discount because it settled early: The fine would have been £3.25m ($5.02 million) otherwise.

The insurance company’s U.K. arm had outsourced the processing of some of its customer data to its South African business, Zurich SA, which lost an unencrypted back-up tape during a routine transfer to a data storage center.

The U.K. business did not learn about the loss until a year later because there were no proper reporting lines in place.

“Zurich U.K. let its customers down badly,” said Margaret Cole, the FSA’s director of enforcement and financial crime. “It failed to oversee the outsourcing arrangement effectively and did not have full control over the data being processed.”

The company’s U.K. chief executive, Stephen Lewis, said Zurich has improved its data security systems and procedures, including appointing a dedicated information security officer to provide ongoing assurance. “We are doing everything we can to keep [customer] data secure and protected,” he said.

Barclays Bank PLC, a United Kingdom corporation headquartered in London, has agreed to forfeit $298 million to the United States and to the New York County District Attorney’s Office in connection with violations of the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA), both of which make it a crime to willfully violate (or attempt to violate) any regulation issued under the Acts.

The violations, announced in an Aug. 18 press release issued by the U.S. Department of Justice, relate to transactions Barclays illegally conducted on behalf of customers from Cuba, Iran, Sudan, and other countries sanctioned in programs administered by the Office of Foreign Assets Control (OFAC). A criminal information was filed Aug. 16 in the U.S. District Court for the District of Columbia charging Barclays with one count of violating the IEEPA and one count of violating the TWEA.

Barclays waived indictment, agreed to the filing of the information, and has accepted and acknowledged responsibility for its criminal conduct. Barclays agreed to forfeit the funds as part of the deferred prosecution agreements reached with the DoJ and the New York County District Attorney’s Office. U.S. District Court Judge Emmet Sullivan approved the deferred prosecution agreement Aug. 18.

“Banks like Barclays will not be permitted to disregard sanctions put in place by the U.S. government,” warned Assistant Attorney General Lanny Breuer of the Criminal Division. “Not just once, but numerous times over more than a decade, Barclays stripped vital information out of payment messages that would have alerted U.S. financial institutions about the true origins of the funds.”

Continued Breuer: “As I’ve said repeatedly, when corporations self-disclose their criminal wrongdoing to us, as Barclays did, they will not get a pass, but we will take their disclosure, cooperation, and remedial efforts into consideration.”

OFAC Director Adam Szubin agreed. “The substantial economic benefit to sanctioned parties and the systemic nature of the apparent violations could have resulted in a much more onerous OFAC fine had Barclays not voluntarily self-disclosed and had it not cooperated with OFAC throughout the investigation.” He noted that this is the first settlement of this magnitude where OFAC determined that all of the apparent violations were voluntarily self-disclosed by the bank.

Background

According to court documents, from as early as the mid-1990s until September 2006, Barclays knowingly and willfully moved, or permitted to be moved, hundreds of millions of dollars through the U.S. financial system on behalf of banks from Cuba, Iran, Libya, Sudan, and Burma, and persons listed as parties or jurisdictions sanctioned by OFAC in violation of U.S. economic sanctions.

According to court documents, Barclays followed instructions, principally from banks in Cuba, Iran, Libya, Sudan, and Burma, not to mention their names in U.S. dollar payment messages sent to Barclays’ branch in New York and to other financial institutions located in the United States. Barclays routed U.S. dollar payments through an internal Barclays account to hide the payments’ connection to OFAC-sanctioned entities and amended and reformatted the U.S dollar payment messages to remove information identifying the sanctioned entities. Barclays also deliberately used a less transparent method of payment messages, known as cover payments, as another way of hiding the sanctioned entities’ identifying information.

Barclay’s forfeiture of $149 million to the United States and $149 million to the New York County District Attorney’s Office will settle forfeiture claims by the DoJ and the state of New York.  In light of the bank’s remedial actions to date and its willingness to acknowledge responsibility for its actions, the department will recommend the dismissal of the information in two years, provided Barclays fully cooperates with, and abides by, the terms of the deferred prosecution agreement.

OFAC has also entered into a settlement agreement with Barclays for IEEPA violations that will require Barclays to pay $176 million, which is concurrent with the forfeiture paid as a result of the deferred prosecution agreements.

In a separate action, the Federal Reserve Board and the New York State Banking Department announced the issuance of a consent Order to Cease and Desist against Barclays. This order requires Barclays to improve its program for compliance with U.S. economic sanctions requirements on a global basis.

The United Kingdom’s Financial Services Authority, the home country supervisor of Barclays, has agreed to assist the Federal Reserve in the implementation and supervision of the order.

The International Accounting Standards Board (IASB) has thrown its weight behind a plan to develop a globally accepted framework for sustainability accounting.

The involvement of the IASB in the project means that the framework could become an integral part of the reporting standards that companies in hundreds of countries—but not yet the U.S.—are required to follow, rather than an optional bolt-on.

The newly formed International Integrated Reporting Committee (IIRC), which is going to create the framework, has the backing of leading global governance organizations.

Its members include the South African governance guru and chair of the Global Reporting Initiative, Mervyn King, and the head of International Federation of Accountants, Ian Ball.

The IIRC said its framework will bring together financial, environmental, social, and governance information “in a clear, concise, consistent, and comparable format.”

Its aim is to “help with the development of more comprehensive and comprehensible information about an organization’s total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model.”

Sir David Tweedie, chairman of IASB and now a member of the new IIRC, said: “The case for globally consistent financial reporting standards is well understood and accepted. It is appropriate to apply the same global approach to other aspects of corporate reporting. This initiative represents an important step on that journey.”

The creation of the IIRC represented a “turning point in the development of corporate reporting,” said Jane Diplock, chair of the Executive Committee of the International Organization of Securities Commissions.

The body that sets U.K. external audit standards has issued a consultation paper aimed at finding ways of making audit firms more skeptical.

The move follows criticism that auditors have been too soft on their clients, especially in the run up to the financial crisis, and were signing off their accounts without challenging management judgments. Last month the Audit Inspection Unit, which regulates audit quality, said too many U.K. listed company audits were not good enough.

A new paper from the Auditing Practices Board, “Auditor Skepticism: Raising the Bar,” argues that the application of an appropriate degree of professional skepticism is “a crucial skill for auditors.”

It adds: “Unless auditors are prepared to challenge management’s assertions they will not act as a deterrence to fraud nor be able to confirm, with confidence, that a company’s financial statements give a true and fair view.”

But it also warns that skepticism can go too far, stating: “challenging everything in a well-run company will slow down the publication of its financial statements and risk unnecessary costs.”

The paper argues that audit firms need to recruit and train people so that they develop the skills needed to apply skepticism and a sense of when to challenge management.

It also encourages audit firms to “nurture” skeptical behavior. Firms should challenge their clients “despite possible incentives to do otherwise”, it says, and should not fear the sack if they do.

Clients also have a responsibility “for ensuring that the corporate culture and environment is one which encourages open dialogue with their auditors at all levels,” the paper argues.

The total damages awarded against Japanese companies for errors in their financial statements increased four-fold to a record 45.9bn yen last year, according to a new report.

Economics consultancy Nera, which published the analysis, said the 2009 damages dwarfed the level recorded for 2008 – 9.9bn yen – and represented more than the total amount of securities litigation for the whole previous decade.

Damages were particularly high last year because a few particularly big cases were settled, which involved unusually large payouts. Nera said there was little change in the number of cases settled in 2009 compared to 2008.

However, the report does highlight an underlying trend: the number of securities law cases has been increasing since 2004, when the rules requiring a plaintiff to prove the extent of damages were eased and the powers of the market regulator –the Securities and Exchange Surveillance Commission – were increased.

The International Accounting Standards Board this week launched a draft new standard on insurance accounting, which it said would put an end to a mish-mash of national rules that produced “impenetrable” financial reports.

But the draft led to immediate warnings of heavy compliance costs and a fundamental shift in accounting practices that could particularly disadvantage European companies.

The new standard will replace IFRS 4, “Insurance Contracts”, which the IASB created as an interim measure in 2004. IFRS 4 did little to harmonize national practices; the IASB wants to scrap it in favor of a new standard that all insurers, in all jurisdictions, can apply to all insurance contracts.

Announcing the draft, IASB chairman Sir David Tweedie, said: “A fundamental review of insurance accounting was long overdue, with current practice resulting in financial information that is impenetrable to all but the most expert of users.”

The new standard would “better reflect the economics of insurance contracts, and would result in more relevant, understandable and comparable information being available to investors,” he added.

David Law, global leader of the insurance practice at accountants PricewaterhouseCoopers, said the proposed standard will “fundamentally change” the way insurers produce their accounts. It is “one of the biggest challenges to hit the industry in recent years,” he said.

“The impact will be felt across the sector and will require insurers to conduct a complete overhaul of their systems and performance reporting,” said Law. The change would be particularly hard for European insurance companies, which need to comply with new European solvency regulations by 2012. “These proposals will hit industry resources hard, at a time when they are already scarce,” said Law.

James Dean, Ernst & Young’s Global IFRS Insurance Leader, said insurance companies were likely to experience some short term pain but would benefit in the long run.

“Implementing the new IFRS standard is likely to be a complex process for insurers,” he said. “However, the benefits to the industry and the wider financial community cannot be underestimated. Insurers will have greater certainty about how their organization is viewed and evaluated by investors, regulators and other key stakeholders, reducing the cost of capital.”

The IASB exposure draft, “Insurance Contracts”, is open for comment until 30 November 2010.

The U.K. government is planning to create a new super-regulator to set and enforce financial reporting rules, corporate governance standards, and securities regulations for listed companies.

This work is currently shared between the Financial Reporting Council and the Financial Services Authority. But the government has already announced a commitment to scrap the FSA; now it looks as though the FRC’s days are numbered too.

The proposal was revealed in a government consultation document issued this week titled “A new approach to financial regulation: judgment, focus and stability.”

The paper argued: “There is a strong case for a powerful companies regulator established with responsibilities for regulating corporate governance, corporate information and its disclosure, and the stewardship of companies by institutional shareholders.”

The government has not yet decided whether the new regulator would form part of the Consumer Protection and Markets Authority, which will be created from the wreckage of a dismantled FSA with a brief to supervise financial marker behavior, or whether it would sit within the government department responsible for business. The consultation document said more detailed proposals would be released “in due course.”

The FRC said the proposal was a “vote of confidence” in its approach to regulation.

Companies listed on New Zealand’s stock exchange need to improve their corporate governance disclosures on ethics, risk, executive pay, and shareholder relations, according to the national securities regulator’s latest review of corporate governance reporting.

A review by the country’s Securities Commission found that the most-ignored corporate governance rule was one that requires companies to “consider and respect” stakeholder interests. Some 60 percent of companies disclosed nothing about how they complied with that regulation.

Companies are also supposed to reveal how they build constructive relationships with shareholders, but 50 percent said nothing. And 30 percent revealed nothing about how they met a requirement to “observe and foster” high ethical standards.

The Commission said the worst offenders were listed companies whose shares were held by relatively few investors. Disclosures by closely held finance companies were especially poor—a fact the Commission has warned about in the past.

“Correct and thorough disclosure of corporate governance policies and procedures should be the first thing a company does to demonstrate the strength of its corporate governance,” said Securities Commission Chairman Jane Diplock.

The review assessed how well the annual reports and Website disclosures of 68 companies met the Commission’s nine principles of good corporate governance.

Too many audits of U.K.-listed companies are simply not good enough, according to the country’s independent regulator of audit quality.

The Audit Inspection Unit, part of the Financial Reporting Council, said that 11 percent—eight in total—of the audits it looked at in its 2009/10 review needed “significant improvement,” a proportion it said was “too high.”

Two of the poor-quality audits that the regulator discovered related to companies in the FTSE 100.

There were two main reason why audits were judged to be unsatisfactory: There wasn’t enough evidence to support key audit judgments, and the audit firm signed off its report before all the audit work had been finished.

There was one major firm in particular that was signing off its reports too soon, the regulator said. It did not name the firm involved.

The regulator said a disproportionate number of the audits it looked at from smaller accounting firms needed significant improvement (six out of 11), causing it to conclude: “Certain firms are undertaking listed or other public interest audits without having the necessary resources and expertise.”

It suggested that there should be a new “competency test” applied to firms that want to audit listed companies.

Echoing the comments made recently by FRC Chief Executive Stephen Haddrill, the inspection unit said auditors needed to be more skeptical in their work, especially reviewing management judgments on fair values, cash flow, and the impairment of goodwill and other intangibles.