Speech by John Tiner to the Institute of Chartered Accountants in England and Wales, Brussels, 4th April.

Introduction

  1. I am delighted to be here today amongst such a panel of distinguished speakers. Even though I am a member of the Institute Chartered of Accountants and CEO of the UKs Financial Services Authority, which has a strong interest in accounting and auditing matters, I am here today in my capacity as Chairman of CESR-Fin. CESR-fin is the Committee of European Securities Regulators (CESR) permanent group of experts in the field of financial reporting.

Period of Change and Unique Opportunity

  1. We are now in the midst of the most radical and important change in financial reporting for a generation. From January 2005 we have had International Accounting Standards (IFRS) for all EU listed groups - the biggest change in financial accounting since the introduction of the 4th and 7th Company Law Directives. The next two years – 2005 and 2006 – will be crucial as IFRS are applied by nearly 8,000 listed group companies across the EU. Yet this is only part of the challenge we face and the possibilities opening up before us.

  2. I would like to commend the way in which the International Accounting Standards Board (IASB) has been working closely with other standard setters around the world to find high quality solutions to important accounting issues. Under the Norwalk agreement in 2002, the Financial Accounting Standards Board (FASB) and the IASB pledged to use their best efforts to make their existing financial reporting standards fully compatible as soon as is practicable. Recently, the IASB and the Accounting Standards Board of Japan (ASBJ) have announced that they will launch a joint project to reduce differences between IFRSs and Japanese accounting standards.

  3. At CESR-Fin we are working on assessing the equivalence of US, Canadian and Japanese GAAP with IFRS for companies reporting under these three GAAPs who are listing within the European Union and we look forward to the day when IFRS can be used by companies for listing and ongoing reporting obligations in the US market.

  4. With such global co-operation, there is now the real opportunity to take a major step towards our long term goal of having global financial reporting standards, consistently interpreted, applied and enforced, across all the major capital markets. As economies and markets around the world continue to become evermore related to one another, it is incumbent upon regulators and accounting standards setters to facilitate the easy flow of capital and access to new and wider investor markets. Of course, this must be done carefully and with a close eye on confidence and investor protection in domestic markets, but I believe the momentum is with us. Convergence of accounting between the three major capital markets of the world: EU, US and Japan is clearly heading in the right direction and this should lead to companies in one marketplace being able to access investors in other markets without incurring the costly exercise of performing reconciliations to the local GAAP.

  5. This is an opportunity we must not let slip. With sufficient vision, determination and co-operation amongst all concerned, it should be possible to both build the technical arguments for open access and deliver the political case for reciprocity of access across the major financial markets. There may be hurdles to overcome such as the lack of full endorsement of IAS 39 within the EU. However, with goodwill on the part of all those involved in the negotiations, and a willingness to work together to resolve differences, these obstacles can be overcome. For example, we welcome the way in which the IASB has recently worked with the banking industry and prudential regulators to redraft the fair value option to meet their concerns, without compromising investor needs. Crucial to maintaining the momentum I have referred to, will be the effective and consistent application of IFRS across the EU and the development of a roadmap by the US authorities leading to the removal of the requirement to reconcile IFRS to US GAAP, by a date to be targeted in the roadmap. These would represent tangible evidence that the project to liberalise global capital markets is a serious one and is on track to deliver for the benefit of both issuers and investors.

  6. Of course, CESR-fins concerns is to see clean, orderly and fair securities markets in the European Union and so it is in this context that I would like to cover three issues:

    1. EU transition to IFRS;
    2. The global context including our work on the equivalence of US, Japanese and Canadian GAAP with IFRS; and,
    3. Enforcement of IFRS

 

Transition to IFRS

  1. It is imperative that the transition to IFRS within the EU be handled properly to ensure market confidence is maintained and the vision of common financial reporting standards, interpreted, applied, and enforced in a consistent manner across the EU, is realised. This will encourage development of a single European capital market.

  2. CESR has been very active in preparing for this transition. We are acutely aware in this critical period of the dangers to market confidence if, with this wholesale move to IFRS, there is a loss of faith in the financial reporting of EU-listed entities.

  3. An example of this preparation is CESR's Recommendations on the transition to IFRS (Recommendation), which was published at the end of 2003. By following this Recommendation, and communicating with the market, companies ease the impact on the market of the transition to IFRS. Thus, in the first half of 2005, many listed companies are now presenting to the market their 2004 local GAAP numbers restated to IFRS to enable investors to understand the implications of the move to IFRS for the financial reporting results.

  4. In the transition period, given IFRS is a principles-based system, open, to some extent, to interpretation and subject to cultural differences in the transition from country-specific accounting standards to a common financial reporting system, there is scope for significant differences in interpretation. One of the challenges of this period is distinguishing between those differences that flow from the strength of principles-based standards (which is the ability to cope with a myriad of economic circumstances and allow for slightly different accounting policies in detail) and those that flow from differing interpretations of the principles themselves. Such differences of interpretation do need to be addressed where they involve departures from economic substance.

  5. We support the IASB's objective of setting standards, based on principles that do not seek to provide detailed answers for every accounting problem. As I have already said, strength of principles-based standards is that they can deal with the financial reporting for many different economic situations. These standards rely on the experience and judgement of preparers, auditors and users to be able to apply them to their particular circumstances. However, the speed and breadth of the move to IFRS within Europe means that such experience is limited. Therefore, there may be issues where a consistent interpretation is necessary across jurisdictions, but not yet available. The boundary between an inappropriate and an appropriate interpretation of an IFRS, i.e. what is an issue for enforcement and what is not, may not always be clear initially. There is no easy answer about how to deal with this, and for it all to work well we need to cooperate, rather than compete, as preparers, auditors, regulators and standard setters. The major audit firms, which have practices across the EU and to audit the vast majority of the EU's 8000 listed companies, have a particularly key role in securing consistent interpretation across their EU listed clients.

  6. Over the next two years, there is a need to be more proactive in identifying which issues concerning interpretation of IFRS are of such substance and general concern that they need to be referred to IFRIC, and which issues could be dealt with through agreed interpretation amongst enforcers. In addition, we need to collaborate with and draw upon the expertise and practical experience of the profession in these areas.

  7. Therefore at CESR-Fin we have taken the initiative in bringing together the key players (CESR, EFRAG, Big 4 firms, FEE and IFRIC) to set up an EU forum. This EU Forum will operate under the aegis of EFRAG. It will involve different European actors interested in financial reporting and will act as an advisory group for the following areas:

    • Identifying which issues of IFRS interpretation need to be referred to IFRIC

    • Providing advice to regulators and enforcers on other aspects of IFRS.

  8. The aim is that the Forum will be able to deal with such issues quickly. Its organisation and operational norms are currently being developed and we should be in a position to say more about this in two or three months' time.

 

The Global context

  1. Much of our focus within CESR has been on the implementation of common financial reporting standards within the EU. However, as we all know we operate in a world where securities markets are global, but securities regulators are national. It is therefore essential that CESR has good links at an international level both through the International Organisation for Securities Commissions (IOSCO) and, more specifically, with the SEC. In June last year CESR and the SEC agreed terms of reference for enhanced co-operation and collaboration regarding market risks and regulatory projects.

  2. As securities regulators, we all have the same interest in maintaining market confidence and investor protection; therefore we have much to gain by sharing our experiences. Such cooperation will afford the opportunity to discuss, at an early stage, issues of regulatory concern in the US and the EU securities market. We also intend to share experiences relating to enforcement matters involving multinational market participants active in both the US and EU. We must ensure that we think as global securities regulators, even though we may be acting as national, European regulators within one of the largest securities markets in the world.

  3. Two aspects of the Global context which has occupied much of CESR-fin's time over the past year have been the IASB Foundation constitutional review and the equivalence of third country GAAP with IFRS.

  4. CESR-fin's sub committee on international standards endorsement (SISE) has recently submitted written comments to the IASC Foundation on its current constitutional review. CESR-fin comments focused on four key principles which we believe are fundamental to the IASC Foundation’s structure and processes. Those principles are:

    1. It is important to protect the independence of the IASB

    2. The needs of investors should be paramount in IFRS

    3. Board members should be chosen based on their knowledge and qualifications

    4. A credible, authoritative standard setter needs transparent and effective due process.

     

  5. I believe that all securities regulators would subscribe to these principles. There has been much debate about the detail of how the third principle – that board members should be chosen based on their knowledge and qualifications - might be applied in practice, but I would like to emphasise that all four principles work together to reinforce each other as a coherent whole. For example, though certain jurisdictions might feel they are not adequately represented on the IASB itself, as long as there is proper, transparent and effective due process such that their views have been considered and acted on, as part of the due process, by an independent IASB, which is qualified for the task, then as securities regulators we should be satisfied.

 

Equivalence of other GAAP with IFRS

  1. I should like to briefly update you on the work that CESR is doing on assessing equivalency of other GAAP with IFRS. In this area, CESR-Fin is fulfilling the mandate it received from the European Commission for technical advice on the equivalence between third countries GAAP (specifically the US, Japan and Canada) and IFRS.
  2. CESR-Fin has already published, consulted on and then agreed the methodology for assessing equivalence – the concept paper. We are now assessing equivalence applying the principles laid out in the concept paper. There has been much debate about what is meant by the term equivalence and I will just spend a moment explaining the basic principles of the concept paper.


Concept paper

  1. CESR-Fin is of the view that "equivalent" should not be defined as meaning ‘identical’. In CESR's view a third country’s GAAP can be declared as equivalent when financial statements, prepared under such GAAP, enable investors to take similar decisions in terms of whether to invest, hold or divest, as they would using financial statements prepared on the basis of IAS/IFRS. Differences of detail between a third country’s GAAP and IAS/IFRS which would not give rise to differing investment decisions are not relevant in defining equivalence. Of course, this makes the rather heroic, although in the circumstances we think reasonable, assumptions that investors act rationally based on the information they have been provided with.
  2. The concept paper develops equivalence around three fundamental elements:
  1. A review of general principles and adequacy of the third country GAAP for financial reporting in EU. CESR will consider the primary objectives of the GAAP, their conceptual frameworks and their relevant general characteristics.
  2. A technical assessment of the significant differences between accounting standards. Significant differences are regarded as those commonly found in practice or known to be significant as such by the financial and audit community in Europe and in third countries. A convergence programme in the third country may provide helpful input to this assessment.
  3. The need to consider appropriate remedies to meet investors’ needs in case of non-equivalence. These remedies should be designed to achieve the objective of allowing investors to make the same judgement. They may be in the form of additional disclosures, statements of reconciliation or supplementary statements.
  1. We have received considerable input and assistance from our colleagues in the US, Japan and Canada – for which many thanks – and our analysis and evaluation is well advanced. We will shortly consult with the expert group of preparers, auditors and users formed to advise us in this work and then, having discussed the paper first both within CESR-fin and CESR, we will launch a final consultation and host a second open meeting before concluding on CESR's advice to the Commission.

 

Subcommittee on Enforcement (SCE)

  1. Finally, a few words on enforcement. Accounting standards may be of a high quality but without effective and consistent enforcement there can be no confidence that the standards are being consistently or correctly applied – and this, itself, can undermine market confidence. Enforcement of accounting standards is at national level and therefore it was important that CESR developed a common framework for use by its members for ensuring consistent enforcement of compliance with IFRS.

Standards on enforcement

  1. In the last 18 months, CESR-Fin, through its sub committee on enforcement, has published standards on the enforcement of accounting standards and the co-ordination of enforcement activities on accounting standards. CESR-Fin is clear that enforcement should not lead to a body of detailed rules of acceptable application of IFRS, which would contradict the principles-based approach, nor should it close options where different accounting treatments are allowed under the standards themselves. We already have a standard-setting body - the IASB - and issuance of general interpretations is the responsibility of bodies such as IFRIC. Enforcers may contribute to the standard-setting process by providing their experience to the interpretation debate but should not attempt to create a parallel body of interpretations. Coordination is a key principle here. If we are to achieve a consistent approach to enforcement then enforcers from different jurisdictions must expect to talk to one another and take similar decisions in similar circumstances. I am hopeful that the European Enforcers Co-ordination Sessions and the database of relevant material about interpretation and enforcement decisions, will facilitate a consistent approach across the EU.

 

International co-operation on enforcement

  1. Finally on collaboration and co-operation, building on the experience of CESR-Fin, Standing Committee No. 1 of IOSCO (on which my fellow regulators are represented) has started a project similar to that developed by CESR-Fin for the co-ordination, at a global level, of the enforcement of financial information, with a particular interest for multi-national enterprises reporting under IFRS.

 

Conclusion

  1. I would like to conclude by saying that we are in a period where major changes are expected in the financial reporting framework, in many cases over a relatively short time frame. CESR-Fin has a key role to play in ensuring that these changes are successfully implemented within the EU. Through the work of our endorsement subcommittee we are seeking to ensure that standards are robust and meet investor protection needs. Through our enforcement subcommittee we are helping to achieve a coordinated and harmonised approach to enforcement. We are also working to deal with the coordination of issues of interpretation. And at the same time we are co-operating, and not competing, in all these areas with our fellow securities regulators whether through IOSCO, or on a bilateral basis.

  2. Ladies & Gentlemen, we have an opportunity to take a major step towards our long term goal of global reporting standards, consistently interpreted, applied and enforced.

  3. We must not fail to seize this opportunity.

  4. Thank you.