Slide 1
Russian Corporate Governance Roundtable meeting
Moscow, 11 November 2004
ENFORCEMENT OF IFRS IN the EU
Hans van Damme – Vice President FEE
FEE(Fédération des Experts Comptables Européens - European Federation of Accountants)
Slide 2
Outline of the Presentation
Background
Framework for High Quality Financial Reporting
Enforcement Bodies
Conclusion
Slide 3
Background FEE has extensively contributed to the thoughts on endorsement
and enforcement First FEE study goes back as far as 1999 Contribution to CESR’s considerations on the subjects in drafting
phase Commented on CESR standard No 1 and 2 FEE’s comments have had their influence
Situation in the EU: IFRS need to be enforced by 2005
Slide 4
Background - 2001 FEE StudyEnforcement Mechanisms in Europe
Oversight systems: differ widely Stock exchange Regulator Governmental department Review Panel
Most countries:• 2001 no enforcement of financial statements• 2003 changing• 2005 getting in place
Not much review of substance or systematic review
Foreign listings: usually relied on enforcement body in the home country
Slide 5
Background - FEE 2002 Discussion Paper on Enforcement: Key Messages
Effective enforcement to be in place by 2005
Enforcement to be built on effective national enforcement bodies: No enforcement body FRRP (review panel) EU Member States to review arrangements for enforcement
European coordination on enforcement involving all enforcement bodies (securities regulators and review panels)
Enforcement should not result in standard setting
Pre-clearance: only where cost effective, with full involvement of auditors and management (only where no IFRS or IFRIC interpretations exist)
Slide 6
Definitions of Enforcement
FEE Discussion Paper
Enforcement is a system to whenever possible prevent, and thereafter identify and correct, material errors or omissions in the application of IFRS in financial information and other regulatory statements issued to the public.
CESR
Monitoring compliance of the financial information with the applicable reporting framework
Taking appropriate measures in case of infringements discovered in the course of enforcement
The reporting framework mainly includes:
the International Financial Reporting Standards endorsed by the EU
The disclosure rules required by EU legislation
Slide 7
Background - FEE Discussion Paper on Enforcement – Scope
Consolidated financial statements
Regular reporting and adhoc reporting
Individual accounts
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Slide 8
Framework for High Quality Financial ReportingThe Corporate Reporting Supply Chain
Independent Auditors
Third-Party Analysts
Investors& OtherStakeholders
Standard Setters
Market Regulators
Internal Audit
Audit Committees
Company Executives
Board of Directiors
Slide 9
Framework For High Quality Financial Reporting
All parties in the Corporate Reporting Supply Chain have to assume their proper responsibilities and demonstrate ethical behaviour
Restoring confidence in capital markets should be the aim of all parties involved
Need for Framework for High Quality Financial Reporting (See: FEE Discussion on Enforcement of IFRS in Europe)
Slide 10
Framework for High Quality Financial Reporting Proper financial accounting standards
Preparation by an effective and well resourced internal company accounting function
Internal audit and informed review by directors, Audit Committees or Supervisory Boards
Proper approval procedures of financial information by the body responsible within the company
External audit and external review subject to appropriate quality assurance systems
Effective enforcement bodies
Stock Exchanges with supportive listing agreements
Sponsors, advisers and investment bankers committed to high quality financial reporting
Investors, analysts, rating agencies and the financial press: clear ethical obligations to raise issues of dubious financial reporting
Slide 11
Enforcement Bodies
1. Features of effective enforcement bodies
2. Choice of model
3. Coordination at European level
4. Consistency
5. Interpretation and implementation
6. Interaction between auditors and enforcement bodies
Slide 12
Enforcement Bodies 1. Features of Effective Enforcement Bodies
Support for high quality corporate governance and external audit
High quality, expert, globally-consistent decisions on important issues
Freedom from bias
Transparency and clear procedures
Confidentiality and speed of action
Avoidance of making detailed accounting rules
Focusing resources
Rectification of defective financial information
Sanctions
Relation with Corporate Governance – see FEE discussion paper September 2003
Slide 13Enforcement Bodies
2. Choice of Model Securities regulator or body constituted by stakeholders for the specific
purpose (review panel)
Delegated power – official government body
Listed companies vs all IFRS companies
Timeliness: effective enforcement by 2005 If no enforcement body exists: FEE recommends a review panel
approach
Both models can co-exist in Europe – mixed modelWhy to consider others as well?Why to consider others as well?
Enforcement of non-listed companies using IFRS
Not all enforcement bodies member of CESR
Review panel initiatives in a number of countries
Involvement other stakeholders
BUT, central role of CESR
Slide 14
National Review PanelsAnd other enforcement
bodies
Enforcement Bodies 3. European Enforcement Coordination (EEC)
National Securities Regulators
CESREnforcement Subcommittee
European Enforcement Coordination (EEC)
(Partnership)
NationalGovernment
National Stakeholders (including reporting entity)
Consultative ForumConsultation with Stakeholders
National Level European Level
Slide 15
Enforcement Bodies 4. Consistency
Difficult issues: Need to avoid system of case-by-base interpretations Achieving global consistency Consultation with IASB/IFRIC Agree on decisions with other enforcement bodies Making other preparers and auditors immediately aware Formal status of the views expressed Risk of different view from IASB/IFRIC
Slide 16
Enforcement Bodies 5. Interpretation and Implementation
Avoid making separate European rules
Enforcing existing standards
Consultation arrangements with the IASB, IFRIC, EFRAG, SEC and other
enforcement bodies
Status of enforcement decisions
CESR Standard n° 1
CESR proposed recommendations on transition to IFRS
IASB/IFRIC subsequent interpretation may differ from interim guidance
Enforcement bodies shouldn’t reduce existing flexibility contained in IFRS
Court interpretations of accounting standards
Clear distinction enforcement and standard setting
Slide 17
Enforcement Bodies 5. Interpretation and Implementation (2)
Is there a need for European interpretations ?Advantages: Addressing specific European and national circumstances Temporary addressing topical issues Avoiding risk of different decisions (auditor and company) Assist IFRIC in forming interpretations
Disadvantages: Risk of creating European IFRS Risk of stimulating other parts in the world to issue own interpretations Taking away responsibility companies and auditors Not possible to have interpretations for all situations Risk of worldwide inconsistency
Slide 18
Enforcement Bodies 5. Interpretation and Implementation - Pre-clearance
Only when cost effective
Full involvement Board of Directors and auditors Limited to issues where IFRS or IFRIC interpretations are not available Framework of common European principles, established by EEC Not all enforcement bodies need pre-clearance mechanisms
Comparison with expost system
CESR Level 3 Consultation Paper
Slide 19
Enforcement Bodies 6. Interaction Auditors and Enforcement Bodies
Good corporate governance Auditors are not the first line of defence: it is the responsibility of directors
and management to prepare proper financial reporting information Directors and management are also responsible for additional and more
detailed information to the enforcement bodies If requested, the auditor can prepare a special report Complaints to the audit regulator no « double jeopardy »
Slide 20
FEE Discussion Paper on Enforcement Key Messages
Effective enforcement to be in place by 2005
Enforcement to be built on effective national enforcement bodies: No enforcement body FRRP (review panel) EU Member States to review arrangements for enforcement
European coordination on enforcement involving all enforcement bodies (securities regulators and review panels)
Enforcement should not result in standard setting
Slide 21
Russian Corporate Governance Roundtable meeting
Moscow, 11 November 2004
ENFORCEMENT OF IFRS IN the EU
Hans van Damme – Vice President FEE
FEE(Fédération des Experts Comptables Européens - European Federation of Accountants)
Slide 22
BackgroundMay 2001 FEE Study – Enforcement Mechanisms in Europe
April 2002 FEE Discussion Paper on Enforcement of IFRS in Europe
June 2002 IAS Regulation – Central role of the Commission, CESR and Member States
October 2002 CESR - Proposed SOP – Principles of Enforcement of Accounting Standards in Europe
March 2003 CESR Standard n° 1: Enforcement of Standards on Financial Information in Europe
10 Oct. 2003 FEE Round table on Enforcement
Nov. 2003 FEE Discussion Paper European Enforcement Coordination - Coordination at Europeal Level of National Enforcement Mechanisms
April 2004 CESR Standard n° 2: Coordination and Enforcement
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