A commentary on issues relating to the enforcement of International Financial Reporting Standards in the EU

Abstract

The adoption of International Financial Reporting Standards (IFRS) is supported in many countries because it may improve the quality and international comparability of financial reporting. However, these goals are less likely to be achieved without regulatory oversight that promotes rigorous and consistent use of IFRS. Consequently the European Union (EU) is requiring all member states to introduce enforcement bodies by 2005, the date of IFRS adoption in the consolidated financial statements of all EU listed companies. We review ongoing activities in France, Germany, the Netherlands and the UK in setting up and modifying enforcement bodies before 2005. We test current developments against the Fédération des Experts Comptables Européens (FEE) (2002) recommendations and against the principles for effective enforcement proposed in CESR Standard No. 1 on Financial Information. We present the views of people involved in financial reporting standard setting and enforcement from these countries, as well as the IASB, FEE and EFRAG, about the challenges of achieving effective uniform enforcement. Our paper will be of interest to people developing or participating in enforcement bodies, and to capital market participants who will be subject to the various regulatory regimes.

Acknowledgements

The authors wish to express their sincere appreciation to the people who generously shared their time and expertise during the interviews on which this paper is based. In addition we would like to thank Chris Nobes for his assistance in the development of the paper, Begoña Giner and Bill Rees (the editors) and two anonymous referees for their many helpful comments and Bob Parker, Peter Standish and Stephen Zeff for feedback on earlier drafts.

Notes

¹Regulation (EC) No. 1606/2002 of the European Parliament and the Council, 19 July 2002.

²The USA's principal capital market regulator, the Securities and Exchange Commission (SEC), has expressed similar views about the role of oversight bodies. In its ‘Concept Release on International Accounting Standards’ the SEC argued that essential elements of a global financial framework include high quality accounting standard setters and active regulatory oversight (SEC, 2000).

³On 1 August 2003 the Financial Security Bill created a new regulatory body in France, the Autorité des Marchés Financiers (Financial Market Authority) from a merger of the COB, the Conseil des Marchés Financiers and the Conseil de Discipline de la Gestion Financière (AFM, 2004).

⁴International Accounting Standards Board; European Financial Reporting Advisory Group; Fédération des Experts Comptables Européens.

⁵ Conseil National de la Comptabilité; Accounting Standards Board; Council for Annual Reporting or Raad voor de Jaarverslaggeving (RJ); Deutsches Rechnungslegungs Standards Committee.

⁶In 1967, these were the Conseil National de la Comptabilité (CNC) (which controls the Plan Comptable) and the Compagnie Nationale des Commissaires aux Comptes (CNCC) (controlling audit).

⁷In 1990, the Accounting Standards Committee and then the Accounting Standards Board, which made standards that are generally more detailed than the law. Audit rules were controlled by the audit profession. Stock exchange listing rules were controlled by the London Stock Exchange, not by a regulator.

⁸Changes were being made to the procedures for auditor supervision under the Financial Security Bill, which created the Haut Conseil du Commissariat aux Comptes to safeguard auditor independence, discipline and authority (Ministry of the Economy, Finance and Industry [MINEFI], 2003).

⁹The practice of pre-clearance involves a request from a company to the COB for a ruling to indicate whether the company's proposed accounting treatment for a particular item is acceptable to the COB.

¹⁰The AFM was originally called the Stichting Toezicht Effectenverkeer, and was renamed in March 2002. The establishment of this body reflected a change in the long tradition of self-regulation to regulation by the public sector (Zeff et al., 2002).

¹¹Although some French firms have for many years referred to IAS in conjunction with national standards in the preparation of their financial statements (Tarca, 2004).

¹²The CNC is the French government agency responsible for standardisation of accounting across all sectors of the economy. Standish (2000, pp. 10–26) described its role and relationship with other French bodies, including the Accounting Regulation Committee (CRC) that was established to give regulatory effect to selected CNC standards.

¹³International Accounting Standards Board, the body that drafts IFRS; International Financial Reporting Interpretations Committee, the body that provides interpretations of matters in IFRS.

¹⁴The CGAA was commissioned by the DTI to review the regulatory regime of the accountancy profession in the UK following the collapse of Enron, WorldCom and Andersen in the USA (Co-ordination Group on Auditing and Accounting [CGAA], 2003).

¹⁵As calculated (with assistance from Wenqing Qi) from the information relating to each company on the website of the Deutsche Börse (http://deutsche-boerse.com).

¹⁶Professor Hoogendoorn, Ms Poole and Professor Van Helleman.

¹⁷The European Financial Reporting Advisory Group (EFRAG) was created by the main parties interested in financial reporting in Europe, namely the users, the preparers and the accountancy profession (supported by the national standard setters). Its aims are to make a proactive contribution to the work of IASB and to advise the EU's Accounting Regulatory Commission on the technical assessment of IASB standards and interpretations for application in Europe (FEE, 2001b).

¹⁸In addition the ability to influence international standard setting may be affected by the groups' country of origin. See Standish (2003).