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January 14, 2008

IOSCO to probe the role of accountants in subprime crisis

Reviewing the issues facing securities regulators following the recent volatility in the global credit markets is top of the agenda for the International Organization of Securities Commissions (IOSCO) during 2008, according to the chair of the organisation’s executive committee, Jane Diplock.

Jane Diplock, IOSCODiplock, who also chairs the New Zealand Securities Commission and is currently nearing the end of her second two-year term as IOSCO chair, told TA the technical committee of IOSCO has taken the subprime crisis “extremely seriously”. A dedicated subprime crisis task force established in November will report substantively to the IOSCO meeting in Paris this May.

“[The task force is] looking very carefully at issues of risk management, transparency, the valuation of assets and the accounting issues relating to [the subprime crisis],” Diplock said. “[We are also looking into the role of] rating agencies and obviously working with the joint forum and also with the financial stability forum because these are critical global issues.”

The IOSCO task force will investigate general issues facing global markets. It will develop guidance that domestic regulators may be able to look at to identify whether there are elements they need to address in their domestic legislation.

The task force is going to revisit a selection of accounting issues, particularly the accounting treatment of structured products. In particular, it will look at special purpose vehicles, whether they are an on or off balance sheet item and the implications in risk management and information, particularly for listed companies. “Accounting issues are integral to the infrastructure of capital markets generally, so whenever any of these issues occur there usually is an accounting component,” Diplock said.

The IOSCO chief said she cannot speculate as to whether the task force’s work will have any effect on the accounting profession. “I think we’d probably just have to see what comes out of all that before we know exactly how that will play out over time,” Diplock explained.

The group will also study the way credit agencies rate structured products and IOSCO’s current code of conduct for agencies. The transparency and accessibility of market data relating to structured financial products is another key issue that will be explored. Diplock said the task force will be examining what type of data investors – particularly mutual fund investors – consider when investing in these products. They will also look at whether regulators receive sufficient information about structured products.

On the transparency front, the establishment of international standards, such as IFRS, is seen by IOSCO as a positive step towards improving the transparency of financial data. Diplock said IOSCO is particularly adamant that countries sign up to the pure International Accounting Standards Board-issued IFRS, without carve-outs, so investors can make “sensible” comparisons between issuers in various jurisdictions around the world. Drawing on her experience as a national regulator, she said: “As we’ve discovered in New Zealand, we can move to IFRS as promulgated by the IASB. Once we get that global standard we need it to be implemented globally and it’s certainly the view of IOSCO that we want to encourage that.”

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