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June 21, 2017

Q&A: limited support to the idea of a transfer of powers from EFRAG to ESMA

By Vincent Huck

The European Commission has released a feedback statement on the public consultation on the operations of the European Supervisory Authorities summarising the answers received to the 32 questions included in the consultation.

Of particular interest for accounting stakeholders were questions 14 and 15 which read:

“14. What improvements to the current organisation and operation of the various bodies do you see would contribute to enhance enforcement and supervisory convergence in the financial reporting area? How can synergies between the enforcement of accounting and audit standards be strengthened? Please elaborate.

15. How can the current endorsement process be made more effective and efficient? To what extent should ESMA's role be strengthened? Please elaborate.”

As reported by The Accountant, the majority if not all respondents were against a change to the current endorsement process or the role of the Financial Reporting Advisory Group (EFRAG). The Accountant spoke with French standard setter, ANC, president Patrick de Cambourg on the reasons for this opposition.

The Accountant: What is the role of ESMA in the European standard settings landscape?

Patrick de Cambourg: The role of ESMA at the moment is limited. In general, financial markets regulators at national level, and also at ESMA level (i.e. at EU level), are contributing to, but not in charge of the accounting standards mechanisms.

When EFRAG was re-founded following the Maystad report at the end of 2014, ESMA was offered a seat with voting rights together with the other contributors and stakeholders.

At that time, I was not there, but I understand that they declined, and today they have an observers’ position. The person in charge of accounting matters at ESMA, Roxana Damianov, is coming to our board meetings with speaking rights.

In France, in my board, the ANC board, I have someone from 'Autorité des marchés financiers (AMF), with voting rights. It’s one person out of 16. And I, as chair of ANC, sit on the board of AMF, with one vote. This is the way we have organised in France, and this was offered to a certain extend to ESMA: they were offered to be a full voting member of EFRAG, but they declined, and therefore they have an observer role only. That’s the current status, and quite frankly, as you have seen in our response to the consultation, we express reservations on the confusion between enforcer’s role, and standard setter’s role.

We’re talking about very different tasks, very different timetables, very different skills that are required. We are not convinced it would be a good move to have a part of the advisory role played today by EFRAG transferred to ESMA.

The Accountant: Do you know why they refused to be a member with voting rights?

De Cambourg: I don’t know. I can assume that they were considering that they didn’t want confusion between enforcement and standard setting. Which I feel is exactly the question that is considered today.

This is an assumption, but if this assumption is right, I think we need to be consistent on that basis.

I frankly think that we’re talking about different tasks and functions, and that to have a segregation of tasks is a better system.

One organisation is dedicating time and resources to thinking about the evolution of the standards, and is conducting impact analysis, debating on the concepts. Debating on the other options that could exist, why this option has been retained, this process takes years – that’s the standard setting mechanism.

But when you move to enforcement, that’s another story. You have, as an enforcer, to supervise the fact that financial information is derived properly from the existing accounting standards. Therefore, it’s a supervisory role on a case by case basis, encompassing, all the entities that are listed on a regulated market. Which is absolutely necessary.

But at standard setting level you only address generic matters, you don’t consider one by one the case of each and every company. You establish the standard that is then applied by the preparers, and once it is applied by the preparers then the financial markets regulators have a role to make sure that, together with the auditors, each implementation of the accounting standards has been conducted in an appropriate manner.

The Accountant: Looking at the French model that you described, would you be in favour of a similar model at the European level? Instead of a transfer of powers in terms of advisory, why doesn’t ESMA come as a member with a voting right within EFRAG?

De Cambourg: Why not.

The Accountant: Do you think it’s a satisfactory model in the French context?

De Cambourg: You might want to ask AMF but I think having discussed with my colleagues from AMF, the chairman Gerard Rameix, I think we consider it’s a good system, yes.

The Accountant: Patrick, where does this particular point in the consultation come from? It seems like everybody’s taken by surprise.

De Cambourg: I was going to ask you, because I do not know why.

It’s true that, to a certain extent, it came as a surprise, for a number of reasons.

Reason one, it’s a surprise because we’ve not heard about that before it was introduced in the consultation as a possibility.

Number two, we feel that the Commission and EU parliament, are, in general, positive about the way the new role of EFRAG has been fulfilled. It would be different if there had been criticism of EFRAG, but it is not the case. At the moment, nobody has mentioned that EFRAG was inefficient.

Surprise, also, because the parliament has just has given the green light to the EFRAG budget, until 2020.

The fourth reason is that, in itself, the system organises checks and balances.

The fifth, I think, that IASB  has to take a global approach. Based on the skills and wisdom of a small board of 14 people, coming from various backgrounds and various geographical origins. That’s fine, but there is of course a risk, which is the risk of being a little too far away from reality, what I would call the ivory tower syndrome.  I’m not saying this is the case, because they take great care to keep in touch with reality, but nevertheless, when you protect independence, and you structure a board the way it is structured, you, of course, are at risk a little bit, to be theoretical. The organisation of EFRAG is the opposite, and I think it’s a very good counterpart, because you have stakeholders and national standard setters around the same table.

I was attending the board this week, I can testify that the work is done very professionally. They are very lively debates, because they are coming from the field, in a mix of industry concerns and expectations, and national standard setters’ expectations and concerns. So it’s coming from the heart of the economy, and from the accounting bodies in charge in the major countries. I think, frankly, that’s rebalancing the IASB structure, and therefore helping get to a balanced view.

The sixth reason is that you shouldn’t organise the disconnect between accounting standards for listed companies. In the interest of the capital markets union, you want to have a level of continuity between what is being done on financial markets, in terms of financial information, and what is being done for non-listed companies, because it’s not a difference in nature. It’s a difference in size, or financing mode, being listed or not being listed. I’m a strong believer in a common inspiration. In order to avoid a disconnect, and the risk of losing ground with the potential issuers on markets.

So for those six reasons, we expressed reservation, and by the way, if you have read our response, you probably have read the response of other stakeholders in Europe, and there is very limited support to the idea of a transfer.

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