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