Topic 6 Flashcards
(15 cards)
What are the key characteristics of the US SEC enforcement model?
The SEC is an independent federal regulatory agency with strong enforcement powers. Key features include: 1) Proactive review cycle every 3 years, 2) Comprehensive staff reviewing filings, 3) Significant penalties, 4) Advance clearance on accounting treatments, 5) Extremely detailed guidance. Creates strong deterrent but high compliance costs.
How does the UK enforcement model differ from the US approach?
The UK Financial Reporting Review Panel represents a private-sector approach. Key features include: 1) Initially reactive then more proactive, 2) ‘Name and shame’ approach, 3) Court action as last resort, 4) No advance clearance, 5) Focus on material issues. More cost-effective but potentially less comprehensive than SEC.
What characterizes Continental European enforcement approaches?
Continental models show diversity: France’s AMF provides advance clearance and less public disclosure. Germany uses a dual system (FREP/BaFin) with private-sector first review. Both have significant powers but smaller penalties than US, reflecting different legal traditions.
How do enforcement approaches in Asian markets compare?
Japan’s Financial Services Agency resembles the US SEC with comprehensive powers. China’s Securities Regulatory Commission has wide monitoring and enforcement powers. Both reflect strong regulatory approaches. Australia’s ASIC conducts proactive surveillance every 4 years.
What research evidence exists on enforcement effectiveness?
Hope (2003) developed an enforcement index showing highest enforcement in US, followed by UK, Canada, Nordic countries, with Mediterranean countries scoring lowest. Brown et al. (2014) found enforcement quality correlates with analyst forecast accuracy. High-profile failures occurred despite strong enforcement.
How do enforcement differences affect IFRS implementation?
Enforcement differences create ‘national versions’ of IFRS practice, leading to systematic national differences in areas requiring judgment. This undermines true comparability despite formal harmonization.
What international mechanisms exist for coordinating enforcement?
The European Securities and Markets Authority (ESMA) coordinates EU enforcers, while national bodies retain primary authority. Other mechanisms include the International Forum of Independent Audit Regulators (IFIAR) and IOSCO, but enforcement remains fundamentally national.
What is the relationship between rule-making, monitoring, and enforcement?
Rule-making is separate from monitoring and enforcement. While rule-making has become international through the IASB, monitoring and enforcement are national functions, leading to potential inconsistencies in IFRS application.
How did the Sarbanes-Oxley Act change global enforcement?
SOX introduced global enforcement changes including CEO/CFO certification of financial reports, prohibition of many non-audit services, mandatory audit partner rotation, audit committee independence requirements, and internal control effectiveness reporting.
What is the debate about public vs. private sector enforcement?
Public enforcement bodies provide stronger deterrence but at higher cost, while private sector models may be more cost-effective but less consistent. Effectiveness depends more on resources, expertise, and independence than public/private status.
How did auditing develop internationally?
Auditing internationalized alongside MNEs after WWII. As companies expanded globally, they needed consistent audit of foreign subsidiaries, driving international expansion of audit firms. Big 8 firms consolidated to Big 4 after Arthur Andersen’s collapse in 2002. Simultaneously, International Standards on Auditing developed through the International Auditing and Assurance Standards Board, now adopted by over 100 countries.
What is the relationship between corporate governance and financial reporting quality?
Corporate governance provides the framework ensuring reliable financial reporting. Key governance elements affecting reporting include board composition, audit committees, internal control systems, whistleblower mechanisms, and executive compensation alignment. Research shows stronger governance correlates with higher financial reporting quality and fewer restatements.
How do audit committees contribute to enforcement?
Audit committees serve as the first line of defense by reviewing significant accounting judgments, overseeing internal audit functions, managing external auditor relationships, and investigating whistleblower allegations. Their effectiveness depends on independence, financial expertise, and authority.
How does the enforcement-harmonization relationship create challenges for IFRS?
The IASB’s principles-based approach assumes consistent application through professional judgment. However, different enforcement creates diverse interpretations, undermining comparability and creating pressure for more detailed guidance.
What factors determine enforcement effectiveness across jurisdictions?
Effective enforcement combines independence, adequate resources and expertise, credible sanctioning powers, transparency, prevention mechanisms, and a focus on material issues. The balance of these factors varies significantly across jurisdictions.
