Disclosure of corporate information

The second core corporate governance feature for the review calls for requiring timely and reliable disclosure of corporate information in accordance with internationally recognised standards of accounting, auditing and non-financial reporting.

The regulatory framework covering disclosure

The Estonian self-assessment sees Principle V.A.2, which focuses on the disclosure of material information on companies’ commercial and non-commercial objectives, as only broadly implemented. As part of the legal framework, Estonian companies are required to report on significant environmental and social impacts resulting from their activities, but there is no specific requirement focused on disclosure of company objectives.

Principle V.A.3 regarding the disclosure of major share ownership and voting rights appears to be fully implemented in Estonia, as the Accounting Act stipulates the need for companies to disclose all significant shareholdings (including cross-shareholdings and intra-group holdings) as well as new significant investments. Changes in equity are one of the “principal statements” stipulated by the Accounting Act, and it is intended to make public share ownership in a company. Furthermore, listed companies also need to disclose among other elements related to voting rights: securities with special control rights of the owners and their description as well as any restrictions on voting rights of preferred shares and agreements in place, including restrictions on voting rights, deadlines for exercising voting rights etc. There are additional disclosure requirements for a company group’s consolidated report. Some of these requirements are for instance to list holders of shares who hold more than ten per cent of the votes, their addresses and personal identification code or registry code, the class and nominal value of the shares, and the serial numbers of the shares and the date of subscription and acquisition of the shares.

Principle V.A.4 calls for disclosure to include among other areas “remuneration policy for members of the board and key executives, and information about board members, including their qualifications, the selection process...”. Some of these elements are included in the management report, such as the disclosure of “the remuneration and other significant benefits ... for the members of the management and the highest supervisory body during the accounting year, and the contingent liabilities related to such members”. The voluntary CG code includes two more detailed clauses, one for the management board and the other one targeted at the supervisory board. It recommends the disclosure of basic wages, performance pay, severance packages and others for the management. Similarly it recommends that for the supervisory board, “the amount of remuneration ... be published”. It also recommends disclosure on bonus systems, share options, and other incentives schemes. Nevertheless, disclosure of individual remuneration of management is according to market observers one of the most contentious elements of the voluntary CG code, which no listed company complies with. Regarding supervisory board members, the level of disclosure at an individual level was a bit better (in 2006 ten of the then listed companies disclosed remuneration of supervisory board members at an individual level).

The Ministry of Finance has indicated that is currently working on a bill which would add some requirements for listed companies regarding disclosure of remuneration policy of management directors, particularly related to the variable components of remuneration. The draft law responds to the European Commission’s recommendation on the regime for the remuneration of management directors of listed companies. In this draft law the award of a variable component of remuneration should be subject to predetermined and measurable performance criteria, stemming from medium to long-term objectives of the company. The company could require partial or total repayment of this variable component if it is found to be based on erroneous data. In addition, the draft law stipulates that termination payments should not be disbursed if the termination is due to inadequate performance. Furthermore, it stipulates that the listed company should disclose the main principles of remuneration on its web page and in the annual report. The draft law would also require companies to be more explicit regarding their remuneration (including bonuses) policy for management board directors in listed companies. According to supplementary information received by the review team, this draft law was expected to be issued for public consultation in March 2010.

Nevertheless, there is no legal requirement to disclose other elements called for by this Principle such as “information about board members, including qualifications, the selection process, other company directorships and whether they are regarded as independent”. The Recommendations do include clauses which refer to board members having “sufficient knowledge and experience”, but the legal framework does not contain legal requirements for the disclosure of this information.

Principle V.A.5 calls for disclosure of related party transactions. These transactions are audited as any other information in annual reports. As mentioned for Principle III.C, which covers treatment of related party transactions more extensively, market observers have suggested that generally RPTs are not an issue of market concern in Estonia. Listed companies have the obligation to publish information about agreements with related parties immediately, while management board members who cause damage to the company by the violation of their obligations are jointly liable for compensation for the damage caused. The Accounting Act requires related party transactions to be stated in the annual report, as annual accounts are required to note all transactions with management and supervisory board and other related parties, including the description, amount of transactions and balances at the balance sheet date if they are significant

Principle V.A.7 focuses on disclosure of “issues regarding employees and other stakeholders”, the self-assessment for this element suggests that currently there are no requirements to disclose any information in this area.

Principle V.A.8 calls for the disclosure of “governance structures and policies, in particular, the content of any corporate governance code or policy and the process by which it is implemented”. As mentioned in the landscape section of this report, all listed companies are required (and others encouraged, although very few have done so) to report against the voluntary CG code. An FSA analysis of reports on the voluntary CG code concludes that “issuers ... applied varying degrees of diligence” when reporting on these. The conclusion reached by the FSA is there are three clauses that need to be “regulated legislatively”. Two clauses involve disclosure of remuneration (including performance and severance pay and other incentive schemes) for management and supervisory boards, while the third addresses the independence of board members. The FSA has sent a few letters to companies to draw attention to shortcomings in reporting, but there have been no penalties.

More generally, the EBRD report stated that “in general, the situation in Estonia concerning redress is better than for disclosure ... obtaining disclosure in Estonia might be a problem”. Although the EBRD report considers the level of disclosure to be quite good in Estonia, it states that “the law provides for no enforcement mechanism in case management does not implement the shareholder’s request” (Cigna, 2006). This issue is potentially acute, as the “management board may refuse to give information if there is a basis to presume that this may cause significant damage to the interests of the public limited company.”23

Principle V.B calls for information to “be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure.”

The Accounting Act requires companies to prepare and disclose financial and operating data in accordance with internationally recognised accounting standards. Since 2003, all listed companies, banks and financial institutions are required to follow IFRS reporting. Around 100 to 200 companies in Estonia currently report according to this internationally recognised standard. For smaller non-listed companies, Estonian GAAP is often the preferred reporting standard. The current version of the Estonian GAAP (effective since 2003) is basically a simplified summary of IFRS, primarily meant for small and medium-size entities, cross-referenced to corresponding paragraphs in IAS/IFRS standards, and focusing on areas which are more relevant for the Estonian companies. The recognition and measurement rules are based on IFRS, but the disclosure requirements are less demanding. Therefore, net profit and equity are the same under either standard, according to Estonia’s Guide to Doing Business and Investing in Estonia (PWC, 2009), regardless of whether the accounts are prepared in accordance with IFRS or Estonian GAAP (but Estonian GAAP accounts are usually shorter and do not include as much disclosure as IFRS accounts).

At the end of the financial year, the management board is required to prepare the annual accounts and activity report as described by the Accounting Act. The supervisory board needs to approve the annual report. The Market Supervision Department at the Financial Supervision Authority (FSA) monitors financial statements, checking for compliance of listed companies with the disclosure of price-sensitive information.

Principle V.C focuses on the need for an annual audit to “be conducted by an independent, competent and qualified auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects”.

The basis for the professional activities of auditors in the Auditing Act states that auditors “shall be independent and impartial in the professional activities of the auditor and shall operate solely pursuant to law, the auditing rules, the requirements of professional ethics, and the resolutions and recommendations of the bodies of the Board of Auditors”. The self assessment states that while the auditing rules include requirements for auditing and professional ethics based on International Auditing and Assurance Standards Board (IAASB) standards, they are a broad simplification of IAASB standards. The auditing rules state that the auditor should maintain complete independence in relation to the client. It points out significant circumstances when the auditor should not be considered independent: financial interest in the client or with the client, recent employment with the client, close business or family relationships with the client and services or goods purchased from the client on unequal terms.

As mentioned in the landscape section, the Auditing Act, which was approved by Parliament in January 2010, will bring the auditing rules more in line with international standards by ensuring that all auditors follow IAASB’s international standards of auditing (ISA) and the Code of Ethics for Professional Accountants. Furthermore, the main principles concerning independence and its threats have also been included in the Act, which also requires an auditor to document all significant threats to the auditor’s independence and safeguards implemented.

The previous auditing standards were developed by the Estonian Board of Auditors (EBA) and implemented by the Ministry of Finance. The auditing rules came into force in 2002 and since then only a few minor changes had been incorporated into the rules. As for the interpretation of local regulations and international standards, the EBA has established a methodology committee to develop best practices. The methodology committee’s interpretations and instructions are available for public consultation.

The Estonian Board of Auditors is a self-governing professional association of auditors, which organises the professional activities of auditors and protects their rights. Prior to the enactment of the 2010 Auditing Act, the Estonian Board of Auditors comprised a general meeting, a management board and an audit committee. With thisAct, a new independent Auditing Activities Oversight Board (AAOB) is being added to the existing bodies of the Board of Auditors. The new system of public oversight will be three tiered - Board of Auditors’ management board, AAOB and Ministry of Finance. While oversight activities are divided between those three institutions, the ultimate responsibility for oversight is with the AAOB and the Ministry of Finance. The AAOB will consist of seven to nine members, of whom only two can be auditors. Furthermore, the head of AAOB cannot be an auditor. According to Estonian supplementary information, the Auditing Act reflects all of IOSCO’s Principles of Auditor Oversight. Regarding current auditors’ oversight, the EBA has established procedures for quality control over the professional activities and compliance with the requirements of professional ethics. Quality assurance procedures are carried out by the management board and other selected members of the EBA. If an auditor fails to comply or complies inadequately with the Auditing Act, other legislation regulating the activities of auditors, or the resolutions, the EBA has the right to bring various disciplinary proceedings against the auditor. In situations concerning the suspension, resumption or termination of the professional activities of an auditor, the EBA has to receive consent from the auditors’ professional qualification committee, as the committee has issued the professional licenses to auditors in the first place.

Table 2.5. Oversight carried out by the Board of Auditors

Disciplinary proceedings



Disciplinary proceedings started, including:



unfinished disciplinary proceedings:



finished disciplinary proceedings, including:



- diciplinary proceeding ended



- discipline with remark



- discipline with reprimand



- discipline with pecuniary penalty



- discipline with suspension of professional activities



- discipline with termination of professional activities



The public oversight is implemented through the auditors’ professional qualification committee that consists of experts in the field of audit but also by supervision of Ministry of Finance over the activities of the EBA. If a resolution of a body of the Board is in conflict with law, the Minister of Finance is required to file a protest to that effect with an administrative court.

The new clarified ISAs issued by IAASB became effective as of 15 December 2009; therefore, they will be applied in Estonia to the 2010 audits of annual accounts. Auditors can currently conduct an audit according to ISA or the Auditing Rules. All listed companies already follow ISA standards. All big four audit firms, who are also responsible for the audits of listed companies, conduct their audits according to ISAs already.

Since 2005, the Securities Market Act states that sufficient rotation of auditors is required for auditors of issuers of securities traded on the market. The Estonian FSA’s guidelines recommend a five-year rotation cycle of auditors for listed companies. As mentioned above, the 2010 Auditing Act requires rotation of an auditor every seven years for public interest entities. The first seven-year cycle will end in 2012.

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