18 February 2003

 

Mr. Fabrice Demarigny
Secretary General
The Committee of European Securities Regulators
17 Place de la Bourse
75082 Paris Cedex 02
France

 

Re: CESR's "Proposed Statement of Principles of Enforcement of Accounting Standards in Europe" (Ref. CESR/02.188b)

 

Dear Mr. Demarigny:

 

The European Advocacy Committee ("EAC" or the "Committee") of the Association for Investment Management and Research ("AIMR")¹ is pleased to comment on The Committee of European Securities Regulators' ("CESR") consultative paper, Proposed Statement of Principles of Enforcement of Accounting Standards in Europe (collectively referred to as the "Proposal" and in isolation as the "Principle" or the "Principles"). The EAC is a standing committee of AIMR charged with reviewing and responding to major new regulatory, legislative, and other developments that may affect investors, the investment profession, and the efficiency and integrity of European financial markets.

 

General Comments

 

In general, the Committee supports CESR's Proposed Principles. In particular, the Committee believes CESR has taken significant efforts to ensure the competent independent administrative authorities of the member States (the "Competent Authorities") apply and enforce accounting standards consistently and fairly, specifically through inclusion of Principles, 3, 9 and 20.

The manner in which these Principles are written should ensure that enforcement of applicable accounting standards will not vary regardless of the location of the issuer. Ultimately, this will enhance the stature of EU markets among institutional and retail investors throughout the world.

 

Finally, the Committee recognizes that the existing legal systems in some Member States already achieve or exceed the enforcement goals envisioned by the Proposal. With this in mind, the Committee urges CESR to carefully consider the legal structures within each Member State when suggesting measures for implementing these principles.

 

Specific Comments

 

While the Committee is generally supportive of CESR's efforts, it is concerned about two of the Principles. In particular, the Committee believes Principles 13 and 17, respectively, could inhibit detection of companies not abiding by International Financial Reporting Standards ("IFRSs") and impair the ability of Competent Authorities to remedy such infringements.

 

Principle 13
The Committee supports CESR's suggestion in Principle 13 that the preferred selection process for enforcement efforts is a mixed model that combines a risk-based approach with either a rotation or sampling process. The Committee also supports CESR's view that one of these methods should be the risk-based method because of its focus on companies most likely to harm market credibility and investor confidence.

 

However, the Committee strongly disagrees with the proposal that would permit Competent Authorities to rely solely on a risk-based selection model and is concerned the Principle could cause problems for those markets where the Competent Authorities adopts this approach.

 

First, we believe the proposal as worded may lead some jurisdictions to adopt the single method approach without considering the benefits of a mixed-approach model. Moreover, some jurisdictions may see relying on a single approach as a way to reduce the costs of enforcement.

 

Second, relying solely on a risk-based selection approach for enforcement raises questions about how Competent Authorities will determine which companies warrant review. Limiting the scope of review to only those companies already known to pose significant risks to market confidence will likely overlook companies whose behavior and financial reporting are equally worthy of examination. In the long run, this strategy could result in Competent Authorities reacting to problems only after they have reached crisis proportions, rather than identifying problems before they escalate to such a level.

 

Finally, reliance on a risk-based approach may send unintended messages to issuers not included on the review list. Those companies may see their exclusion as tacit approval for their reporting models, even if they fail to adhere to IFRSs. It also may lead management of excluded companies to conclude they can limit the quality, timeliness and completeness of their financial information without fear of review by their Competent Authority.

 

With these concerns in mind, the Committee strongly urges CESR to require Competent Authorities to use a mixed-model approach that includes a risk-based model for selecting companies for enforcement purposes. By doing so, it is more likely that Competent Authorities will not only monitor firms already identified as high-risk, but also recognize and respond to companies that could cause future threats to market confidence.

 

Principle 17
The Committee is concerned that short of delisting a company, this Principle does not provide Competent Authorities with mechanisms to require companies to comply with enforcement actions. Indeed, if delisting is the only way to require compliance, then this Principle may put authorities in conflict with Principle 18, which requires actions to be "proportional to the impact of the detected infringement."

 

The Committee bases its view on the Principles as currently written, together with the supporting information contained in the Proposal. In the supporting information CESR implies that a Competent Authority's only recourse in a case where a company refuses a requested action is to seek delisting. The Committee is concerned about this for two reasons:

 

• such an action may exceed the impact of the infringement
  
• without the ability to impose sanctions short of delisting the Competent Authorities may be reluctant to take steps to enforce compliance with IFRSs, resulting in inconsistent information for EU investors.
  

To alleviate such concerns, the Committee urges CESR to propose granting limited sanctioning powers to the Competent Authorities. The ability to impose fines and suspensions for lesser infringements while leaving delisting as a worst-case alternative for the most-serious offenses would ensure the Competent Authorities have the ability to require adherence to IFRSs throughout the EU. Furthermore, the sanctions should ensure that the costs of defying the Competent Authorities on these principles should outweigh the benefits.

 

Closing Remarks

 

The EAC appreciates the opportunity to comment on the CESR consultative paper on the Proposed Statement of Principles of Enforcement of Accounting Standards in Europe. If you or your staff have questions or seek amplification of our views, please feel free to contact James C. Allen, CFA, by phone at 1.434.951.5558 or by e-mail at james.allen@cfainstitute.org.

 

Sincerely,

 

Luigi Gubitosi, CFA Chair European Advocacy Committee

James C. Allen, CFA Associate AIMR Professional Standards & Advocacy

 

¹ The Association for Investment Management and Research is a global, non-profit organization of over 60,000 investment professionals from more than 111 countries. Through its headquarters in the U.S. and 117 Member Societies and Member Chapters worldwide, AIMR provides global leadership in investment education, professional standards, and advocacy programs.