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The EU, similar Canada with its ten provinces and three territories, is a union made up of distinct jurisdictions with their own identities, legal structures and traditions – although the EU far outstrips Canada in its number of official languages with 23. In order to achieve European integration, the EU made extensive use until recently of minimum harmonisation, that is to say that legislation is developed as a threshold that Member States should meet whilst allowing them to go further than the EU approach.
Whilst financial institutions expanded their activities massively in other countries (within but also outside the EU), a lot of reliance was put on the judgements and decisions of the home country supervisors without sufficient cooperation or dialogue.
It is clear that the lack of a single rulebook and supervisory convergence forms a dangerous cocktail if certain Member States were to decide to adopt a less strict approach to financial regulation and less stringent supervision to attract business. If such a gamble turns out badly and leads to bailouts of financial institutions, which in turn obliges governments to seek help from other EU Member States, it should not surprise anyone that these bailouts became highly contested, not least by taxpayers.
Therefore the EC tasked a high-level Group chaired by Jacques de Larosière (former IMF Managing Director and Governor of the Banque de France) to formulate recommendations on how to strengthen the European supervisory system. In its final report, the high-level Group, suggested reforms to the structure of financial supervision in the EU and consistent implementation of harmonised rules. Since then the set up and processes of financial regulation and supervision have changed significantly in the EU with the creation of:
(i) an ESRB responsible for the macro-prudential oversight of the financial system within the Union;
(ii) three European Supervisory Authorities: the EBA, the EIOPA and the ESMA becoming central pillars for maximum harmonisation and moving away from the principles of minimum harmonisation;
(iii) certain aspects of the supervision of cross-border entities such as credit rating agencies, trade repositories, or market infrastructures have shifted to European supervision or supervisory colleges.
In regard to financial reporting, Mr Maijoor was disappointed by the lack of an American timetable for a decision and clear support for IFRS is slowing down the IASB's technical agenda. It is necessary to finalise the post-crisis agenda with projects like impairment of financial assets and insurance contracts. Convergence can no longer drive so vividly the IASB's agenda and it is time that the Foundation and the IASB now focus their resources on setting high quality accounting standards and the important challenges it faces to achieve consistent application of IFRS.
Consistent application and enforcement of IFRS is essential to market integrity. Ensuring such consistency enables fair and efficient functioning markets and high quality information for investors. While the correct application of IFRS is the prime responsibility of issuers and their auditors, securities regulators can intervene when there are violations of IFRS in published financial statements.
ESMA coordinates the activities of national IFRS enforcers in Europe. Earlier this month ESMA issued for the first time common European IFRS enforcement priorities. This is the first time all European enforcers have agreed on common enforcement priorities highlighting the areas on which all EU enforcers will focus when reviewing 2012's financial statements. ESMA´s priorities relate mainly to the areas of:
a) financial instruments;
b) impairment of non-financial assets;
c) defined benefit obligations; and
d) provisions that fall within the scope of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.
ESMA thinks that the IASB should set objective-based IFRSs (such as is currently the case with IFRS 7 – Financial Instruments) allowing a company’s management to align it as best as possible to its own situation. However, a principles-based environment can only survive if clear and entity-specific disclosures, re-assessed at the end of each reporting period, bring useful decision-making information to investors. If not, detailed prescriptive requirements would need to be developed. The only way to avoid this is for issuers to stop providing boilerplate information directly mimicking the standards.
Mr Maijoor concluded his speech with audit issues and audit supervision. There are areas where auditors should further improve. The audit report could for example be made more relevant for the investor than the current one-sentence-approach saying that the financial statements reflect a true and fair view of the financial positions and performance of the company. ESMA believes that auditors should continue to do so but that it should be supplemented by clearly communicating the auditor’s view on specific items in the financial statements as well as the audit process undertaken when the opinion is qualified or when there is an emphasis of matter. As touched upon earlier when discussing common enforcement priorities, IFRSs are principles based standards and rely significantly on management’s judgment. ESMA believes that the auditor should assess and report its views on management’s key assumptions such as on goodwill impairment or valuations of financial instruments.