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Wednesday, 24th April 2024 |
| The role of CESR in enforcing accounting standards |
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| The new IFRS accounting standards must be in use by 2005 but some companies have paid little attention so far to their implementation while many others are in the early stages of planning for transition. Brendan Sheridan looks at the key role of the Committee of European Securities Regulators in ensuring that throughout Europe enforcement processes are in place to ensure IFRS standards are appropriately implemented in 2005. |
The implementation of the requirement for seven thousand European listed entities to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) from January 2005 onwards will require a comprehensive approach to enforcement of the standards across twenty-five EU member states.
The European Commission (EC) has recognised the need for due attention to be paid to the enforcement of its regulations in relation to financial reporting. In 2001 it established the Committee of European Securities Regulators – CESR.
CESR – what is its role?
CESR is composed of high-level representatives of the national public authorities in the field of securities regulation, with the Irish representative on the main committee being the head of the Irish Financial Services Regulatory Authority (IFSRA).
As an independent committee of European securities regulators, the role it has to play is to:
• Improve co-ordination among securities regulators
• Act as an advisory group to assist the EU Commission, in particular in its preparation of draft measures to implement regulation
• Work to ensure more consistent and timely day to day implementation of community legislation in the member states
So, what has CESR been doing in order to fulfil this key role in the overall implementation and co-ordination of international standards in Europe and the associated regulations. Three areas in which CESR has become involved are:
• Enforcement of standards on financial information in Europe
• Communicating the impact of transition to IFRS in 2005 to stakeholders; and
• Equivalence of certain third country GAAP.
Each of these areas is of significance to many Irish companies.
Enforcement of standards on financial information in Europe
In April 2003 CESR published its first standard – Enforcement of Standards on Financial Information in Europe. The standard sets out 21 high level principles.
The first principle of the standard highlights the need for enforcement in stating:
‘The purpose of enforcement of standards on financial information provided by the issuers is to protect investors and promote market confidence by contributing to the transparency of financial information relevant to the investors’ decision making process.’
In April 2004, CESR published its second standard – Co-ordination of Enforcement Activities. The proposals in this standard are directed towards achieving the necessary co-ordination and convergence of enforcement activities carried out in EU Member States. It proposes that the relevant bodies in each Member State should take into account decisions taken in other Member States with the creation of a database of enforcement decisions and a forum for discussion of such decisions and experiences.
Guidance is currently being developed about how such processes can be put in place. This guidance gives some indication of the information to be shared between regulators which would include details of material misstatement identified and instances where decisions made by regulators may assist by providing additional guidance in areas where standards may be difficult to interpret.
Communicating to stakeholders the impact of transition to IFRS in 2005
In December 2003, CESR issued recommendations on how companies should communicate the impact of transition to IFRS in 2005. CESR recommended that this process should take place commencing with the December 2003 annual report, continuing in 2004 and concluding in 2005 with the first financial statements prepared in accordance with IFRS.
Few companies gave more than limited attention, if any, to the recommended disclosures in their 2003 annual reports. Investors and analysts will be hoping that more attention is given to this by companies in their 2004 annual report. CESR recommends that companies should disclose the main adjustments from current standards to IFRS, reconciliations of equity and profit and the impact on profit and loss account and balance sheet.
Equivalence of certain third country GAAP
In October 2004, the European Commission mandated CESR to advise on equivalence of GAAP in three countries (U.S., Canada and Japan) with IFRS, together with the mechanisms existing in those countries for the enforcement of standards on financial information.
CESR has indicated that their approach to the mandate will be on the basis that the investor’s decision should be unaffected by the use of different accounting standards when assessing whether or not to invest in any company. The objective of the review is therefore to compare the respective standards with regard to the underlying principles of financial reporting.
The immediate concern of the EC in carrying out this comparison is the implementation of the Prospectus Directive and the Transparency Directive. Both Directives require that financial information filed by third country issuers whose securities are admitted to trading on an EU regulated market must be prepared on the basis of IFRS or on the basis of the third country’s national accounting standards if these standards are equivalent. The EC is required to make the decision on equivalency prior to implementing the Directives in 2006 and 2007. The decision made will have a potential impact on Irish subsidiaries of third country companies with a listing on an EU regulated market, who may possibly find themselves with additional group reporting requirements if the EU is not satisfied regarding equivalence of reporting.
A uniform approach by all twenty five EU member states to the adoption of IFRS in 2005 is essential to its successful implementation. CESR has a key role to fulfil in ensuring an appropriate enforcement process is in place to achieve the objective of consistent financial reporting by Europe’s seven thousand listed entities. |
Brendan Sheridan is director of financial reporting services with Deloitte.
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| Article appeared in the November 2004 issue.
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