Russian Corporate Governance Roundtable meeting Moscow, 11 November 2004 ENFORCEMENT OF IFRS IN the

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Russian Corporate Governance Roundtable
meetingMoscow, 11 November 2004 ENFORCEMENT
OF IFRS IN the EUHans van Damme Vice
President FEE
FEE (Fédération des Experts Comptables Européens
- European Federation of Accountants)
2
Outline of the Presentation

• Background
• Framework for High Quality Financial Reporting
• Enforcement Bodies
• Conclusion

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Background

• FEE has extensively contributed to the thoughts
  on endorsement and enforcement
• First FEE study goes back as far as 1999
• Contribution to CESRs considerations on the
  subjects in drafting phase
• Commented on CESR standard No 1 and 2
• FEEs comments have had their influence
• Situation in the EU IFRS need to be enforced by
  2005

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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

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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)

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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

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Background - FEE Discussion Paper on Enforcement
Scope
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Framework for High Quality Financial
ReportingThe Corporate Reporting Supply Chain
Independent Auditors
Third-Party Analysts

Internal Audit
Audit Committees
Company Executives
Board of Directiors
Investors Other Stakeholders
Standard Setters
Market Regulators
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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)

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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

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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

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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
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Enforcement 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 model
• 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

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Enforcement Bodies 3. European Enforcement
Coordination (EEC)
National Level European Level
National Securities Regulators
CESR Enforcement Subcommittee
National Government
National Review Panels And other enforcement
bodies
European Enforcement Coordination
(EEC) (Partnership)
National Stakeholders (including reporting entity)
Consultative Forum Consultation with Stakeholders
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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

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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 shouldnt reduce existing
  flexibility contained in IFRS
• Court interpretations of accounting standards
• Clear distinction enforcement and standard setting

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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

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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

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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 

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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

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Russian Corporate Governance Roundtable
meetingMoscow, 11 November 2004 ENFORCEMENT
OF IFRS IN the EUHans van Damme Vice
President FEE
FEE (Fédération des Experts Comptables Européens
- European Federation of Accountants)
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Background

• May 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