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 Study
Enforcement 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
ai
nt
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om
C
Individual accounts
Other companies
using IFRS
pa
ni
es
Regular reporting and adhoc reporting
Public interest companies
Consolidated financial statements
Listed companies
(c
om
R
ea
c
tiv
e
tiv
Pr
oa
c
Financial Information based on IFRS
e
Orientation
Slide 8
Framework for High Quality Financial Reporting
The Corporate Reporting Supply Chain
Company
Executives
Board of
Directiors
Audit
Committees
Internal
Audit
Standard Setters
Market Regulators
Investors
Independent Third-Party
& Other
Auditors
Analysts
Stakeholders
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
Enforcement Bodies
Slide 13
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
Slide 14
Enforcement Bodies
3. European Enforcement Coordination (EEC)
National Level
European Level
National Securities
Regulators
CESR
Enforcement Subcommittee
National Review Panels
And other enforcement
bodies
European Enforcement
Coordination (EEC)
(Partnership)
National Stakeholders
(including reporting entity)
Consultative Forum
Consultation with Stakeholders
National
Government
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
Enforcement Bodies
Slide 18
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
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