Topic 6: Accountability and Enforcement Flashcards
(44 cards)
What is the conceptual difference between governance, monitoring, and enforcement?
Governance refers to the structures and processes by which companies are controlled and directed (e.g., board composition, committees). Monitoring involves reviewing financial statements for compliance with standards without direct authority to impose changes. Enforcement involves the ability to require corrections and impose penalties for non-compliance.
What is corporate governance and how does it relate to financial reporting?
Corporate governance refers to the system by which companies are directed and controlled. It includes board structure, committees, and accountability mechanisms. Good governance strengthens financial reporting reliability.
What are the key components of the ‘corporate governance triumvirate’?
The triumvirate consists of: 1) Shareholders who own the company and appoint directors, 2) Directors who oversee management and are accountable to shareholders, and 3) Auditors who provide independent verification of financial statements.
How do audit committees contribute to financial reporting governance?
Audit committees typically consist of independent directors with financial expertise who: 1) oversee the financial reporting process, 2) review significant accounting judgments, 3) monitor internal controls, 4) oversee the external audit relationship including auditor appointment and fees, and 5) provide a channel for whistleblowing.
How has the development of corporate governance codes varied internationally?
The UK pioneered governance codes with the Cadbury Report (1992) following corporate scandals, using a ‘comply or explain’ approach. The US developed more prescriptive rules through the Sarbanes-Oxley Act (2002) after Enron/WorldCom.
What key governance reforms followed major corporate scandals?
After Enron/WorldCom, reforms included: mandatory audit partner rotation, restrictions on non-audit services, required CEO/CFO certification of financial statements, enhanced audit committee requirements, stronger internal control reporting, and whistleblower protection.
How did auditing develop internationally?
Auditing internationalized alongside multinational enterprises after WWII. As MNEs expanded globally, they needed consistent audit of foreign subsidiaries, driving international expansion of audit firms. Originally national firms merged to create international networks. Big 8 firms consolidated to Big 5, then Big 4 after Arthur Andersen’s collapse in 2002. This created global audit methodologies and quality control.
What is IFAC and what role does it play in international auditing?
The International Federation of Accountants (IFAC, founded 1977) is a global organization of 150+ national accounting bodies. Its International Auditing and Assurance Standards Board (IAASB) develops International Standards on Auditing (ISAs). IFAC is overseen by the Public Interest Oversight Board, appointed by regulators like IOSCO. Over 100 countries have adopted ISAs.
How do International Standards on Auditing (ISAs) contribute to financial reporting quality?
ISAs promote consistent, high-quality audits globally by establishing: risk assessment procedures, evidence gathering standards, documentation requirements, reporting formats, and quality control systems. By standardizing audit processes internationally, ISAs enhance financial statement reliability and comparability across borders even when accounting standards differ.
What is the relationship between rule-making, monitoring, and enforcement?
Rule-making (developing accounting standards) is conceptually separate from monitoring (reviewing compliance) and enforcement (requiring corrections). While rule-making has become increasingly international through the IASB, monitoring and enforcement remain primarily national functions embedded in local legal and regulatory systems, creating potential inconsistency in IFRS application.
How do stock exchanges contribute to financial reporting enforcement?
Stock exchanges often establish listing requirements that include financial reporting standards and may monitor compliance as part of listing obligations. Some exchanges (Norway, Sweden, Switzerland) directly review financial statements of listed companies. Exchanges can enforce through delisting threats, though this extreme measure is rarely applied for accounting violations.
What different national approaches exist for financial reporting enforcement?
Approaches include: 1) Securities regulators with direct authority (US SEC, France AMF, Japan FSA), 2) Government departments or specialized agencies (Denmark, Czech Republic), 3) Private sector bodies (UK FRRP), and 4) Stock exchanges (Norway, Sweden). These reflect different legal traditions and market development histories.
What is the SEC?
The Securities & Exchange Commission (established 1934) is an independent federal regulatory agency with strong enforcement powers.
How does the SEC enforce financial reporting in the US?
The SEC reviews registration documents of new companies in detail and other companies on a three-year cycle. It can levy fines, de-register companies, bring civil charges, and give advance clearance.
What was the UK Financial Reporting Review Panel (FRRP)?
The FRRP (established 1991) was a private-sector body that investigated companies brought to its attention, achieving compliance primarily through persuasion rather than penalties.
How did the FRRP operate?
From 2005, it gained greater powers, becoming more proactive and examining difficult sectors. It used ‘name and shame’ rather than fines, with court action as a last resort.
How does financial reporting enforcement work in France?
The Autorité des Marchés Financiers (AMF) examines documents of listed companies and audit quality both proactively and reactively.
What is a key difference between the AMF and the UK’s FRRP?
Unlike the UK’s FRRP, the AMF doesn’t issue press releases naming companies with deficiencies.
What notable action did the AMF take in the 2008 Société Générale case?
The AMF provided advance clearance, allowing losses from rogue trading to be charged to a prior period despite apparent conflict with IAS standards.
How does financial reporting enforcement work in Germany?
Germany’s dual enforcement system involves the private-sector Financial Reporting Enforcement Panel (FREP) and the federal financial regulatory authority (BaFin).
What role does FREP play in Germany’s enforcement system?
FREP examines financial statements for compliance, with BaFin stepping in only if companies don’t cooperate with FREP.
How does Germany’s enforcement approach compare to the US and UK?
It represents a compromise between US (heavy) and UK (lighter touch) approaches, with relatively small fines compared to the US.
How does enforcement in Asian markets compare to Western approaches?
Japan’s Financial Services Agency resembles the US SEC with comprehensive powers, while China’s Securities Regulatory Commission has wide monitoring and enforcement powers.
What is Australia’s ASIC’s approach to enforcement?
Australia’s ASIC conducts proactive surveillance reviewing each listed company every 4 years and takes companies to court when necessary.
