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Accounting enforcement activity in Europe

Accounting enforcement activity in Europe

Accounting enforcement in Europe

The European Securities and Markets Authority (ESMA) recently published its 2017 annual report on the enforcement and regulatory activities of accounting enforcement agencies within the EU. It was another busy year in the ever-changing world of financial reporting and the ESMA’s report touches on many key regulatory issues. There is a lot of information packed into the 30-plus pages, which deals with a range of items including:

  • An overview of the activities of EU accounting enforcement agencies and the accounting enforcement regime across Europe;
  • A summary of the results of EU enforcers’ examinations of the financial information provided by listed entities in 2017;
  • An assessment of compliance with ESMA’s 2016 common enforcement priorities;
  • The priorities for ESMA in 2018;
  • An outline of some of the areas discussed at the European enforcers coordination sessions;
  • A summary of the results of ESMA’s peer review of the effectiveness of accounting enforcement agencies in certain jurisdictions; and
  • ESMA’s contribution to various international initiatives in the area of financial reporting.

While this short article cannot cover all aspects of the ESMA report, what follows is a summary of some of the aspects of particular relevance to an Irish audience.

Quantitative data on accounting enforcement activities in the EU and Ireland

Europe: European enforcers examined the interim and/or annual financial statements of 1,141 publicly listed entities, representing an average examination rate of 19% of all IFRS issuers with securities listed on regulated markets. These examinations resulted in actions being taken against 328 issuers in order to address material departures from IFRS. This represents an increase of 6% when compared to 2016. The main deficiencies identified are illustrated in Table 1.

As can be seen, the main deficiencies were identified in the areas of financial statements presentation, impairment of non-financial assets and accounting for financial instruments. These three areas represent more than 40% of all the issues covered by enforcement actions taken by European enforcers in 2017. It is remarkable that this was also the case in 2016 and 2015, and there is little change in these particular percentages in the past three years.

Ireland: the above statistics include those of the Irish accounting enforcement agency, the Irish Auditing and Accounting Supervisory Authority (IAASA). IAASA published a snapshot of its accounting enforcement activities during 2017 in January of this year. During 2017, IAASA examined 34 financial statements. However, this included 17 follow-up examinations, which would not normally be included in the 1,141 ESMA examination statistic quoted above. Corrective actions were taken against 13 of the issuers examined.

While the snapshot doesn’t outline the areas where actions were taken (this will be outlined in IAASA’s annual report), it does outline the main areas raised with Irish issuers. The top three in this regard were issues relating to fair value accounting (IFRS 13), financial statements presentation (IAS 1), and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors with emphasis on the implementation of the new IFRS standards.

Common enforcement priorities

ESMA believes that an important step in fostering supervisory convergence in Europe is establishing common enforcement priorities for financial reporting and communicating them to stakeholders in advance of the finalisation of annual financial statements. The ESMA report revisits the 2016 priorities and analyses the findings by European agencies in relation to 204 issuers, which led to 76 enforcement actions being taken against 56 issuers. The ESMA report also gives further background to the 2017 enforcement priorities, which encompass:

  • Disclosures related to the expected impact of the new standards (IFRS 9 and IFRS 15);
  • IFRS 3 Business Combinations; and
  • Specific issues relating to IAS 7 Statement of Cash Flows.

To read the full article, click the link below.

If you would like to discuss this further, please contact Michael Kavanagh.

This article originally appeared in the June 2018 edition of Accountancy Ireland and is reproduced here with their kind permission.