The Many Interpreters of IFRS

After the International Accounting Standards Board hands off its rules to companies, who ensures the consistency of their application?

However, while CESR provides input to IASB, before and sometimes after standards are issued, as well as to the European Commission, it does not have any authority to mandate the use of IFRS, nor can it directly influence the independent standard-setter, notes Paul Koster, chairman of the CESR-Fin, which coordinates the enforcement and endorsement of Europe’s financial reporting standards.

In addition, 24-year-old IOSCO acts with similar intent but on a much larger scale than CESR by including the securities regulators of the United States, European countries and others.

SEC chairman Christopher Cox has credited IOSCO with helping to build a “seamless global market.” However, the group of regulators is unable to take on the role of an international regulator, he said. “Market regulation will remain a national affair for the foreseeable future — if for no other reason than that our legislative mandates require as much,” he said during a speech at an IOSCO conference earlier this month. IOSCO serves as a “think tank” for reaching “international consensus on regulatory ideas and philosophies,” he added.

According to former SEC commissioner and Cooley Godward Kronish partner Roel Campos, the European Commission would like a global European regulator to be formed, “but that’s not going to happen soon.” It’s unlikely the sovereign nations that make up the European Union, for instance, would ever agree to give up their historical authority over their securities markets, he told CFO.com.

In the meantime, “the European Commission doesn’t have a specific enforcement tool other than the bully pulpit,” he says. In other words, the EC instead uses its authority to share its views with regulators through a third-tier group, such as CESR.

Agreeing with Campos’ view is Nigel Sleigh-Johnson, head of financial reporting at the Institute of Chartered Accountants in England & Wales. “I don’t see any sign that a single pan-European securities regulator is on anyone’s agenda or is very likely to become a reality,” he told CFO.com. He says he doesn’t expect the regulatory landscape to change significantly and expects that the collaboration of regulators through IOSCO and CESR will continue to “ensure that enforcement decisions on IFRS are broadly consistent across jurisdictions.”

Mixed Messages

As it stands now, European companies don’t always experience that lofty goal of consistency from regulators. They’ve been dealing with discrepant interpretations of their financial statements from the SEC and their own countries’ regulatory bodies. For that reason, international law firm Cleary Gottlieb Steen & Hamilton worried whether the SEC’s recent decision to lift its GAAP-reconciliation requirement for foreign filers that use IFRS was wise considering the standards’ lack of coordinated regulatory oversight.

If the SEC and European Commission disagree on a future standard passed by the IASB, “a European company would not be able to apply the standard or interpretation in its home-country financial statements, but would effectively be required to do so in its Exchange Act reports, despite the fact that the [European] Commission disagrees with it,” the law firm wrote in its comment letter for the SEC proposal, which passed unanimously earlier this month.

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