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Good afternoon. I actively participate in IOSCO Standing Committee No. 1, (SC 1) and it's Accounting Subcommittee for the SEC. But first let me refer to the statement about my comments and observations today and add that they do not necessarily reflect the views of the members of IOSCO, the International Organization of Securities Commissions.
The member agencies of IOSCO (about 120 ordinary and assoc members) currently assembled together, including the SEC, have resolved, through its permanent structures:
IOSCO Standing Committee No 1 on Multinational Disclosure and Accounting monitors the development and interpretation of International Financial Reporting and Auditing Standards and provides comments on Proposed Standards, Interpretations, discussion papers and other consultative documents. The Standing Committee is a committee of the IOSCO Technical Committee comprised of chairman and commissioner level individuals from the most developed capital markets.
I thought that I would give you a brief update on some of the recent activities and projects or current issues that are being addressed in some way by IOSCO, several of which are being conducted partly through or with the participation of SC1.
Current Issues and Projects Related to Financial Reporting
Periodic Disclosure
On the topic of Periodic Disclosure, IOSCO is playing a leadership role in developing non-financial statement disclosure standards for the evolving global markets. Through these standards, IOSCO is helping to break down barriers to cross-border capital flow by developing an international consensus on disclosure standards. The first non-financial statement disclosure standards that IOSCO endorsed were the 1998 International Disclosure Standards for Cross-Border Offerings and Initial Listings by Foreign Issuers for equity securities, which were aimed at facilitating cross-border public offerings and initial listings by multinational issuers. In 2002, IOSCO published Principles of Ongoing Disclosure and Material Development Reporting by Listed Entities (the "International Ongoing Disclosure Standards") to provide guidance to jurisdictions reviewing and/or developing an ongoing disclosure and material development reporting regime for listed entities. In February 2003, IOSCO published a report, "General Principles Regarding Disclosure of Management's Discussion and Analysis of Financial Condition and Results of Operations," that set forth principles to guide issuers in preparing, as well as regulators in reviewing, MD&A-type disclosures.
IOSCO has established useful guidance for cross-border public offerings and initial listings of equity and ongoing disclosure, but providing guidance for periodic disclosures made by issuers is equally important. Periodic disclosures include annual and quarterly reports, such as the 10-K and 10-Q here in the US, as well as special reports on material events and developments (the 8-K). Retail investors, who are most in need of the protections afforded by the securities laws, participate in the securities markets primarily through secondary market trading, rather than through initial public offerings. Periodic disclosures provide important ongoing information regardless of whether a jurisdiction has a continuous disclosure regime, in which emphasis is placed on ad hoc material event disclosures, or a periodic disclosure regime, in which emphasis is placed on requiring certain extensive disclosures at regular intervals. Periodic reports provide consistent information about a company over regular intervals so that investors can track the performance of the same company. In addition, these reports enable investors to compare the performance of several companies in the same industry over time.
IOSCO is developing principles for the disclosures that listed issuers provide in their periodic reports. The periodic disclosure project is a natural companion project to IOSCO's previous work on ongoing disclosure, and will enable IOSCO to facilitate an international consensus on minimum standards of disclosure for periodic reports, especially annual. These principles will provide more detailed guidance than the International Ongoing Disclosure Standards that were published by IOSCO. A draft is expected to be completed in 2008.
Audit Quality
Len Jui touched on some of the auditing matters during his speech on Monday.
The International Federation of Accountants and the International Auditing and Assurance Standards Board are engaged in a major project to clarify and improve International Standards on Auditing. IOSCO is closely monitoring this project.
IOSCO is of the view that the development of high quality internationally-accepted auditing standards is beneficial to the global capital markets. In order to encourage the development of a set of high quality global auditing standards, IOSCO has been actively monitoring the work of the IAASB and provides comments on the quality of proposed standards and the process for setting them, and also provides comments on the Board's agenda. On November 9, IOSCO issued a public statement on ISAs which says that IOSCO's review of proposed auditing standards focuses on whether the standards are likely to contribute to high quality audits.1
The statement also says that IOSCO is currently evaluating under what conditions IOSCO could endorse ISAs for use for cross border purposes and the form of such an endorsement. The IAASB's responses to public interest concerns in its standards setting will be relevant to such an endorsement. IOSCO recognizes and supports the work of the IAASB in developing and improving the ISAs and looks forward to additional progress in the future.
Among the comments made during the clarity project, SC 1 has commented that the revised ISAs should be objectives based and that the objectives for all ISAs should be identified and evaluated as a whole.
IOSCO is also exploring other issues related to audit quality, including the possible impact of audit firm concentration, auditor liability and other factors. IOSCO held roundtable discussions with its financial market stakeholders on topics related to the quality of audits in Paris in June 2007. IOSCO and its members are also coordinating with auditor oversight bodies to examine and address issues affecting audit quality.
Len Jui, in his speech on Monday, provided three examples from a long list of the ideas, suggestions, and possible follow-up action items identified at the roundtable. I would like to emphasize that the examples Len mentioned are just suggestions by the panelists at the roundtable. IOSCO is currently considering them, and has not concluded whether to formalize a work plan. It was apparently reported in the press that IOSCO has a work plan in place to look into the three examples in Len's remark on Monday.
The first roundtable panel discussed the purpose behind the statutory audit and recommendations to improve audit quality and financial reporting to investors, such as:
The second panel explored the implications of auditor liability and possibilities for reform. The panelists focused in part on introducing liability caps for auditors and whether adherence to transparency and corporate governance principles by audit firms should be a prerequisite to liability reform. Panelists also discussed the unavailability of insurance for catastrophic claims and the implications for audit firm sustainability.
The third panel explored the causes, extent and effects of audit firm concentration on audit quality from a variety of perspectives. Panelists recommended measures to prevent further concentration and loosen the current concentration among firms capable of auditing the largest listed companies.
Some of the suggestions from the Roundtable included instituting an enhanced audit committee report, re-evaluating the effects of restrictions on audit services and joint auditor requirements, ensuring that there is not undue influence of the audit profession on standard-setters, and publicizing good performance by non-Big Four firms. The panelists also discussed the need for improvements in auditor education and difficulties in attracting and retaining quality auditors. More information on the outcome of the Roundtable is available on the IOSCO website, including a written transcript and video.2
Accounting Frameworks
IOSCO closely monitors the developments in International Financial Reporting Standards, comments on proposed changes and routinely discusses standard-setting work with representatives of the IASB. IOSCO encourages a reduction in the complexity of accounting standards and in the number of exceptions to principles. As the use of IFRS around the world has grown, some countries have announced the use of IFRS as their official accounting standards, but have elected to make modifications in IFRS for their local use. Other countries have created processes for review and endorsement of IFRS before they are accepted for official use, leading in some cases to a potential delay in the standards. As a result, it is possible that individual issuers may at times be using a modified version of IFRS or a combination of IFRS and some other standards for the preparation of their financial statements Actions such as these have the potential to cause confusion on the part of financial statement users, who may believe they are looking at IFRS financial statements when an issuer asserts that the standards have been used, although the statements in question contain material differences from results that would be obtained using full IFRS as issued by the IASB. IOSCO believes that there is a need to inform investors as to the accounting framework used and is currently considering what it might do encourage this.
Market Turmoil
On November 8 IOSCO announced the creation of a task force to address recent market events, including the subprime mortgage crisis, to develop thorough analyses of the causes; Identify the weakness and recommend action needed to enhance market discipline and institutional resilience.3
The Task Force will conduct a preliminary review of the issues raised by these events in order to identify any implications for securities regulators which could be addressed through current and future IOSCO work. The review will complement the work being undertaken by other regulatory and governmental bodies in assessing how markets have reacted to the recent events in the credit markets. One of the objectives of the Task Force is to ensure that the implications for securities regulation are reviewed in a systematic manner.
Over the past ten months, a sharp rise in foreclosures in the subprime home mortgage market in the United States and elsewhere has led to instability in global credit markets. By mid-August 2007, this instability led to a liquidity crisis in some domestic markets. While the trigger to this crisis may have originated in a single financial sector in the US, the crisis itself has spread across borders and across different types of financial institutions via the securitized structured debt markets.
The IOSCO work will concentrate on these areas:
1. Risk Management--Broker/dealer firms were involved in the trading of structured products and an in-depth analysis of their risk assessment and concentration is necessary to assess whether their current models of risk management are sufficiently robust.
2. Transparency -- The recent turmoil has revealed a possible lack of transparency about structured products and their markets both from the point of view of market participants and that of regulators. Considering the importance of disclosure and transparency for the fair and efficient functioning of the market, the Task Force will analyse:
3. Valuation of assets -- The valuation of some structured products has played a critical role during the recent turmoil. In this regard, it appears that many investors relied primarily on the ratings provided by credit rating agencies as not only an assessment of the probability of default, but also as an assessment of the product's liquidity - an interpretation that goes beyond the rating's original meaning. Consequently, the Task Force will assess whether alternative models of valuation are needed and whether global markets might benefit were IOSCO to develop valuation principles or best practices in this area.
In the same line, certain accounting issues will be revisited by the Task Force in order to evaluate potential problems raised by the accounting treatment of structured products. The IOSCO Task Force will also consider the merits of revisiting the report on special purpose entities or SPVs published in April 2007 in order to better analyse the mechanisms whereby SPVs are reflected on or off the balance sheet and the possible implications in terms of risk measurement and information to investors where listed companies are involved.4
4. Credit Rating Agencies (CRAs) -- The Subprime Task Force will coordinate with the CRA Task Force to analyse the questions raised by the recent events concerning the role of CRAs and how they relate to the subprime crisis and whether the IOSCO CRA Code of Conduct adequately addresses any conflicts of interest that may be relevant.
Industry Consultation
Since its creation in 1983, IOSCO has rapidly developed into the most important global cooperative body and standard setter in the field of securities regulation. As part of continuing to be able to publish timely and clear guidelines, recommendations and standards for the regulatory community and the securities industry, the IOSCO Technical Committee sought comments through a consultation report on its work program for the next few years.5 In this consultation report an overview is given of the committee's current and planned work. interested parties were invited to provide input on:
The comments received on this consultation paper are currently being considered and will be used to assist IOSCO in evaluating its priorities and in considering if it needs to undertake additional work on certain issues.
Private Equity
On November 29, the IOSCO Task Force on Private Equity published its consultation report.6 The mandate of the Task Force was to conduct a preliminary review of private equity markets. The consultation paper has two objectives. The first objective was to identify those issues generated by the activity of the private equity industry which potentially create risks that impact on IOSCO's objectives and principles. Having identified these relevant issues, the second objective is, to set out the next potential steps to be taken by IOSCO. With regard to the IOSCO Objectives and Principles of Securities Regulation there are 30 principles of securities regulation, which are based upon three objectives:
SC1 will be evaluating any accounting, auditing and disclosure related issues that affect public capital markets. The consultation paper is on the IOSCO website. Comments may be submitted by February 20, 2008.
This concludes my remarks, thank you for your attention.