European companies will have to disclose their offshore activity and off-balance sheet items in tighter rules proposed today by the EU's executive.
The European Commission's four-pronged proposal, aimed at bolstering confidence in corporate financial reporting, would also ensure that board members are collectively responsible for financial statements and key non-financial information.
"Recent financial scandals show that investors and the public need more protection against cheats," the European Union's internal market commissioner, Mr Frits Bolkestein, said in a statement.
"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," he said.
The key proposal was that all companies - listed or not - should disclose all off-balance sheet arrangements, including their financial impact. These would include so-called special-purpose vehicles located offshore, where supervision is scarce.
The EU started work on the rules after accounting scandals at Enron in the United States and at Italy's Parmalat, which revealed a multi-billion-euro account held in the company's Bonlat unit in the Cayman Islands was fake.
In both cases, the existence of massive debts was concealed through items that normally do not appear on the balance sheet.
The proposals would now require all companies, and not just listed ones, to disclose significant transactions not carried out under normal commercial conditions with related parties such as family members and company managers.
The Commission also wants all listed EU companies to provide a corporate governance statement in their annual report. This statement would cover issues such as whether the company complies with a corporate governance code, information about shareholders' meetings and the composition and operation of the board and its committees.