REPARIS Workshop Vienna 15 March 2006 Enforcement of IFRS in listed companies: The Implications for the Accountancy Profession Erich Kandler Chairman FEE Company Law and Corporate Governance Working Party Member of FEE Financial Reporting Policy Group

FEE 44 Member Bodies of professional accountants From 32 countries With over 500.000 members Website: www.fee.be

Background October 1999 FEE Discussion Paper on a Financial Reporting Strategy within Europe 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

Background 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 7 October 2003 Draft Standard n° 2: Coordination of Enforcement Activities 10 October 2003 FEE Round Table on Enforcement

Background November 2003 FEE Discussion Paper European Enforcement Coordination - Coordination at European Level of National Enforcement Mechanisms and how an interpretation mechanism should work post 2005 December 2003 CESR Recommendation of Additional Guidance Regarding the Transition to IFRS

Background February 2004 Call of CESR on accountancy profession in relation to 2003 year-end audit 22 April 2004 Standard No. 2: Coordination of Enforcement Activities 28 October 2004 CESR Paper: The Role of CESR at “Level 3” under the Lamfalussy Process

Background December 2005 FEE Communication to Member Bodies: Reference to the Financial Reporting Framework in the EU in Accounting Policies and in the Audit Report and Applicability of Endorsed IFRS (after FEE Discussion Paper and Analysis of Responses earlier in 2005) January 2006 CESR Public Statement on clear and transparent disclosure when making use of any options

What was the picture back in 2001? 2001 FEE Study Enforcement Mechanisms in Europe Oversight systems differ widely: Stock exchange Regulator Governmental department Review Panel Most countries: No enforcement of financial statements Not much review of substance or systematic review Foreign listings: usually relied on enforcements body in the home country

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

Framework for High Quality Financial Reporting 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 Auditors that can cope with the challenge to enforce principles

FEE Discussion Paper European Enforcement Coordination 2003: Views on interpretation and implementation Avoid making separate European rules Enforcing existing standards Consultation arrangements with IASB, IFRIC, EFRAG, SEC and other enforcement bodies Enforcement bodies should not reduce existing flexibility contained in IFRS No court interpretations of accounting standards Clear distinction between enforcement and standard setting

Consistency “… consistent application does not mean identical application; it means acceptable by reference to the standards…” FEE Position Paper

Consistency Consistent Application of IFRS: critical importance Effective implementation of IFRS in practice: SEC condition for elimination of reconciliation requirement EC/SEC Roadmap – confirmation February 2006 Second half 2006 SEC staff analysis financial statements foreign issuers

Consistency Consistent Application of IFRS – An Auditor´s Challenge First year of implementation of IFRS in real life Little industry peer comparison is available but Capital markets will get better information than they did in the past More comparability It must be expected that it will take some time to achieve and demonstrate success in consistent application (and audits)

Consistency Consistent Application of IFRS Essential to recognise that IFRS principle-based standards should respect reasonable judgments by both preparers and auditors – not necessarily identical decisions Co-ordination within EU and beyond essential among market participants and regulators especially IFRIC’s role as the only authoritative interpreter of IFRS

Consistency Consistent Application of IFRS Each of the parties involved in the financial reporting chain has to fulfil its role in achieving consistent application of IFRS The accountancy profession is ready to assume its fair share by Ensuring high quality audits through training and Maintaining independence in fact and appearance as well as Raising awareness at the board level

Initiatives by the Accountancy Profession July 2005 EFRAG Supervisory Board “Discussion Paper on Achieving Consistent Application of IFRS in the EU” September 2005 EFRAG Advisory Forum EC Informal Roundtable

Initiatives by the Accountancy Profession FEE Position Paper Financial Reporting: Convergence, Equivalence and Mutual Recognition March 2006 FEE Seminar 1 December 2005 “IFRS Convergence and Consistency”

Some good news… FEE has always supported global, principle-based standards IFRS is a major step forward Capital markets will get better information than they did in the past

REPARIS Workshop Vienna 15 March 2006 Enforcement of IFRS in listed companies: The Implications for the Accountancy Profession Erich Kandler Chairman FEE Company Law and Corporate Governance Working Party Member of FEE Financial Reporting Policy Group