Enforcement of the IFRS in the EU (CESR-Fin) and in Austria

Enforcement of the IFRS in the EU (CESR-Fin)

and in Austria

Dr. Markus Pammer Austrian Financial Market Authority (FMA)

REPARIS Workshops on Accounting and Audit Regulation, Vienna, Thursday March 15, 2006

Austrian Financial Market AuthorityREPARIS Workshops on Accounting and Audit Regulation

2Vienna, Thursday March 15, 2006

Agenda for Introductory Remarks:

Regulatory Framework:– CESR Standard No.: 1

Situation in Austria– Enforcement-System: not implemented yet

Role of FMA– Continous Working Contributions to CESR-Fin and

Subcommittees– Chairmanship in Enforcement-Group of AFRAC to develop an

appropriate Enforcement-Concept in Austria Role of AFRAC (Austrian Financial Reporting and Auditing Committee)

Possible Enforcement Structures– Private, Public, Semi Private / Public Model;



Regulatory Framework:– CESR Standard No.: 1 (21 principles, published March 2003)

• This first standard on Enforcement of Standards on Financial Information in Europe has been developed by CESR-Fin through its Subcommittee on Enforcement (SCE).

• The standard is a principle based standard.

• Regulation (EC) no 1606/2002 of the European Parliament - Recital n. 16 of the regulation says:

(16) „A proper and rigorous enforcement regime is key tounderpinning investors' confidence in financial markets.Member States, by virtue of Article 10 of the Treaty, arerequired to take appropriate measures to ensure compliancewith international accounting standards. The Commission intends to liaise with Member States,notably through the Committee of European Securities Regulators (CESR), to develop a common approach to Enforcement“.



Regulatory Framework:– CESR Standard No.: 1 (21 principles, published March 2003) – (2)

• The Standard contains:

– DEFINITION OF ENFORCEMENT– DEFINITION OF ENFORCERS– ISSUERS AND DOCUMENTS– ACTIONS– COORDINATION IN ENFORCEMENT




• DEFINITION OF ENFORCEMENT:

• Principle 1

The purpose of enforcement of standards on financial information provided by the issuers mentioned by principle 9 is to protect investors and promote market confidence by contributing to the transparency of financial information relevant to the investors’ decision making process.

With regard to financial statements, the above implies that enforcement contributes to a consistent application of the IFRSs in the EU financial regulated markets.

• Principle 2

For the purpose of this standard enforcement may be defined as:» 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 includes the accounting and disclosure standards adopted by the EU.




• DEFINITION OF ENFORCERS:

• Principle 3 Competent independent administrative authorities set up

by member States should have the ultimate responsibility for enforcement of compliance of the financial information……

• Principle 6 Competent administrative authorities shall have adequate

independence from government, and market participants, possessing the necessary powers and having sufficient resources.

• Principle 8 The competent administrative authorities should be

responsible for:» the setting up of an appropriate due process of enforcement consistent

with the application of the principles hereby stated;» the implementation of that due process.




• ISSUERS AND DOCUMENTS

• Principle 9

The principles for enforcement here identified should apply to financial information provided by issuers:

» whose securities are admitted to trading on a regulated market;» that applied for admission to trading of their securities on a regulated

market.

• Principle 10

The principles for enforcement here identified should apply to financial information provided by all harmonized documents, including annual and interim financial statements and reports, prepared on individual and consolidated basis as well as prospectuses and equivalent documents.




• ACTIONS

• Principle 16

Where a „material misstatement“ in the financial information is detected enforcers should:

» take appropriate actions to achieve an appropriate disclosure and where relevant, public correction of misstatement ….

» Non-material departures from the reporting framework will not normally trigger public correction…..

• Principle 18

Actions should be effective, timely enacted and proportional to the impact of the detected infringement.



Situation in Austria– Enforcement-System: not implemented yet

• AFRAC (Austrian Financial Reporting and Auditing Committee)

– Set up a working group of Enforcment chaired by the FMA. » Members are issuers – banks, insurance companies and industry,

auditors, interest groups.

– A concept paper for an Austrian Enforcement Law has been developed.

» Final version by the end of February 2006; » Possibility for the Austrian legislator to transform it into law by

January 2007.

– Implementation in accordance with the Transparency Directive by January 2007 possible.



Role of FMA– Continous Working Contributions to CESR-Fin and

Subcommittees

• The FMA is member of CESR

Member status in CESR-Fin, and its Subcommittees:

» SCE (Subcommittee on Enforcement)

» EECS (European Enforcer Coordination Sessions)

» SISE (Subcommittee on International Standards Endorsement)



Role of FMA– Chairmanship in Enforcement-Group of AFRAC to develop

an appropriate Enforcement-Concept in Austria

• Chairmanship by the FMA

• 17 members

• Experts from universities, banks, insurance companies and industry, auditors, interest groups

• Major contents of the concept paper:

– Definition of enforcement– Basic principles of enforcement– Scope of enforcement– Structure of enforcement– Funding and litigation



Role of AFRAC (Austrian Financial Reporting and Auditing Committee)

• AFRAC (Austrian Financial Reporting and Auditing Committee) the operative organ of the association "Austrian Accounting Committee (Österreichisches Rechnungslegungskomitee)“.

– 18 members (18 alternate members)

• Tasks of AFRAC:– Continous development of national and contributions to

international financial accounting standards » to set up working groups dealing with financial accounting issues.

– Consultation of the government and ministeries in the legislation of financial accounting and auditing.

• Funding: by members



Possible Enforcement Structures

Private Model (e.g.: pure private model: UK – FRRP Review Panel)

• Private body of control• Civil legal proceedings

Public Model (e.g.: AMF, France; CONSOB, Italy)

• Independent and instruction free authority• Public legal proceedings

Semi Private / Public Model (e.g.: Germany: DPR / BAFIN)

• Private body of control • Independent and instruction free authority




The German „Bilanzkontrollgesetz“

– The BilKoG-E creates the legal basis for an enforcement-process by an independent body, monitoring the compliance of companies’ financial reporting.

– The two-stage enforcement-process proposed is based on the concept of self-regulation by the business community, with the state resorting to sovereign intervention only when necessary.

– Approved by the German cabinet on April 21, 2004.




1. Stage: DPR (Deutsche Prüfstelle für Rechnungslegung)

– A privately organised financial reporting control authority, handles the bulk of all cases.

– Monitors compliance of the annual accounts or consolidated financial statements of publicly-traded companies.

– Pro- and reactive. – Pre-clearance by DPR principles– Reactive checks for false accounting can be set in motion by, for example,

notifications from shareholders or creditors or by reports in the business press.

– Conduct random checks and take action at the request of the German Financial Supervisory Authority (BaFin).

– Companies cooperate with the Enforcement Panel on a voluntary basis, but are bound by § 370 paragraph 4 of the Securities Trading Act (WpHG-E) to provide correct and complete information.




2. Stage: BAFIN

– In the second stage of the process, BaFin will always come into play if:• a company does not cooperate with the DPR or • if the two sides fail to reach a consensual solution.

– The Financial Supervisory Authority can enforce an examination of the accounts under public law and have the company issue a notification should errors come to light.

And Austria is also on the road to a two-stage enforcement-system.



Thank you for your attention……

Documents

Enforcement of the IFRS in the EU (CESR-Fin) and in Austria