Guidelines on enforcement of financial information

23/11/2020 | ESMA32-50-218 Guidelines on enforcement of financial information

2 Contents I. Scope........................................................................................................................... 3 II. References to legislative acts, abbreviations and definitions ......................... 4 III. Objective ................................................................................................................................ 9 IV. Compliance obligations and reporting .........................................10 V. Guidelines on enforcement of standards................................................................11 Background .......................................................................................................................11 Objective of the enforcement of standards ........................................................................12 Concept of the enforcement of standards ......................................................................13 Scope of enforcement of standards................................................................................13 European enforcers............................................................................................14 Prior ruling ..................................................................................................................17 Sampling methods.............................................................................................................18 Verification procedures......................................................................................................19 Enforcement actions.............................................................................................................21 European coordination ...................................................................................................22 Emerging issues and solutions.............................................................................24 Reporting .............................................................................................................................26

3 I. Scope Who?

1. These guidelines apply to all competent authorities of Member States of the European Union (EU) that require financial information in accordance with the Transparency Directive. They should also apply to the competent authorities of countries from the European Economic Area (EEA) that are not EU Member States, insofar as the Transparency Directive applies in those countries. What?
2. These guidelines concern the enforcement of financial information standards under the Transparency Directive, to ensure that financial information in harmonised documents provided by issuers whose securities are admitted to trading on a regulated market meets the requirements arising from the Transparency Directive.
3. This includes financial information for issuers who already participate on a regulated market and are covered by the Transparency Directive, as required by this directive. Depending on the case, this may also include financial information from third-country issuers using financial reporting frameworks declared equivalent to IFRS in accordance with Commission Regulation (EC) No 1569/2007.
4. These guidelines do not concern the enforcement of non-financial statements under Articles 19a and 29a of the Accounting Directive.
5. Competent authorities and other relevant entities may decide to comply with these guidelines when they require financial information based on other requirements to which issuers must comply under national legislation. When?
6. These guidelines enter into force two months after their publication on the ESMA website in all official languages of the EU.
7. Unless the enforcing authorities decide to introduce the changes earlier, the revised guidelines 5, 6, 6a and 6b enter into force from 1 January 2022.

4 II. References to legislative acts, abbreviations and definitions Unless otherwise stated, terms used and defined in the Transparency Directive have the same meaning in these guidelines. Reference is made below to some of the terms defined in the Transparency Directive for ease of reference. In addition, the following definitions, legislative references and abbreviations apply: References to legislative acts Accounting Directive Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on annual financial statements, consolidated financial statements and related reports of certain types of undertakings and amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (amended by Directive 2014/95/EU). Directive on accounting records of banks and other financial institutions Council Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions ESMA Regulation Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (amended by Regulation (EU) 2019/2175) Regulation on international accounting standards (IAS) Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards Directive on annual accounting records of insurance companies Council Directive 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings

5 Markets in Financial Instruments Directive or MiFID II Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Transparency Directive Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (amended by Directive 2013/50/EU). Abbreviations CESR European Committee of Securities Regulators EEA European Economic Area EESCS European Enforcement Coordination Sessions ESMA European Securities and Markets Authority EU European Union GAAP Generally Accepted Accounting Principles IASB International Accounting Standards Board IFRS International Financial Reporting Standards ICFR International Financial Reporting Interpretations Committee

6 Definitions Accounting Directives The term "accounting directives" refers to Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on annual financial statements, Council Directive 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings, and Council Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions. Correction Note Issuance by an enforcing authority or issuer, at its own initiative or upon request by the enforcing authority, of a note publishing a material inaccuracy concerning specific element(s) included in previously disclosed financial information, and, if not practically impossible, the corrected information Enforcement of financial information standards Checking the compliance of financial information with the relevant financial reporting framework, taking appropriate measures upon discovery of violations during the enforcement process, in accordance with rules applicable under the Transparency Directive, and taking other measures suitable for the purpose of enforcement Enforcing authority / European enforcing authority Competent authorities or bodies acting on their behalf, in the EEA in accordance with rules applicable under the Transparency Directive Financial Report Annual and interim financial statements prepared in accordance with the relevant financial reporting framework, as defined below Harmonised Documents Documents whose publication is required by the Transparency Directive Home Member State The home Member State, as defined in Article 2(1)(i) of the Transparency Directive Host Member State The host Member State, as defined in Article 2(1)(j) of the Transparency Directive

7 Issuer The issuer, as defined in Article 2(1)(g) of the Transparency Directive excluding "natural persons" Market Operator Market operator, as defined in Article 4(1)(18) of MiFID II Regulated Information Regulated information, as defined in the Transparency Directive, i.e. all information that the issuer or any other person applying for admission of securities to trading on a regulated market without the consent of the issuer must disclose in accordance with the Transparency Directive, according to Article 6 of Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) 1, or according to statutory, regulatory or administrative provisions of a Member State adopted under Article 3(1) of the Transparency Directive. Regulated Market Regulated market, as defined in Article 4(21) of MiFID II Relevant Financial Reporting Framework IFRS and financial reporting frameworks considered equivalent to IFRS based on Regulation (EC) No 1569/2007 2, as well as national generally accepted accounting principles (national GAAP) used in the EEA. This also includes management report requirements under the Directive on annual financial statements Types of review Targeted review of financial information based on available data Assessment of whether pre-defined questions/areas in the financial information included in one or more harmonised documents of the issuer are aligned with the relevant financial reporting framework. The targeted review of financial information based on available data does not include interaction between the enforcing authority and the issuer. Based on the verification procedures undertaken, the enforcing authority prepares a conclusion on whether there are signs of the existence of violations related to the pre-defined questions/areas analyzed. Full scope review of financial information based on available data Assessment of the entire content of the financial information included in one or more harmonised documents of the issuer, in order to identify questions/areas that, in the opinion of the enforcing authority, require additional analysis, and to assess whether the financial information regarding these questions/areas is aligned with the relevant financial reporting framework. The full scope review of financial information based on available data does not include interaction between the enforcing authority and the issuer. Based on the verification procedures undertaken, the enforcing authority prepares a conclusion on whether there are signs of the existence of violations in the analyzed financial information. Targeted review of financial information based on exchange Assessment of whether pre-defined questions/areas in the financial information included in one or more harmonised documents of the issuer are aligned with the relevant financial reporting framework. The targeted review of financial information based on exchange includes interaction between the enforcing authority and the issuer. Based on the verification procedures undertaken and the information provided by the issuer, the enforcing authority prepares a conclusion on whether violations have been identified related to the pre-defined questions/areas analyzed. Full scope review of financial information based on exchange Assessment of the entire content of the financial information included in one or more harmonised documents of the issuer, in order to identify questions/areas that, in the opinion of the enforcing authority, require additional analysis, and to assess whether the financial information regarding these questions/areas is aligned with the

8 relevant financial reporting framework. The full scope review of financial information based on exchange includes interaction between the enforcing authority and the issuer. Based on the verification procedures undertaken and the information provided by the issuer, the enforcing authority prepares a conclusion on whether violations have been identified related to the analyzed questions/areas. III. Objective 8. ESMA may issue guidelines pursuant to Article 16 of the ESMA Regulation in connection with the acts referred to in Article 1(2) of the ESMA Regulation, which includes the Transparency Directive, with the aim of imposing consistent, effective and efficient supervisory practices in relation to and ensuring overall, uniform and consistent application of such acts. Given in particular the objectives of the Transparency Directive to ensure effective and consistent application of standards, as well as provisions requiring competent authorities to check whether financial information published under the Transparency Directive is prepared in accordance with the relevant accounting framework, ESMA considers that these guidelines serve these purposes. 9. More specifically, the objective of these guidelines is to impose consistent, effective and efficient supervisory practices and to ensure overall, uniform and consistent application of Union law, by establishing a common approach, as noted in Recital 16 of the IAS Regulation, for the enforcement of financial information standards under the Transparency Directive with the aim of creating a suitable and strict regime for the enforcement of standards with a view to strengthening investor confidence in financial markets and avoiding regulatory arbitrage. These guidelines are based on principles and define the enforcement of financial information standards and its scope under the Transparency Directive, define what characteristics enforcing authorities should have, describe sampling techniques to be applied, and other aspects of enforcement methodology, describe the types of enforcement activities that should be used by enforcing authorities, and explain how enforcement activities are coordinated within ESMA. 10. In 2019, the definitions and guidelines 5, 6, 6a and 6b of the Guidelines on enforcement of financial information were revised to take into account recommendations arising from the peer review 3 conducted in 2017 in connection with the enforcement of the same guidelines. The amendments aim to strengthen convergence of supervisory practices in the field of enforcement of financial information standards, by further harmonizing 3 ESMA 42-111-4138 Peer Review Report — Peer Review of Guidelines on enforcement of financial information standards, 18 July 2017, ESMA, Paris

9 procedures undertaken by enforcing authorities when checking financial information disclosed by issuers in accordance with the Transparency Directive. 11. Finally, in accordance with Article 24(4)(a) of the Transparency Directive, competent authorities should possess all investigative powers necessary for the performance of their functions. These powers should be exercised in accordance with national legislation. IV. Compliance obligations and reporting Status of guidelines 12. This document contains guidelines issued pursuant to Article 16 of the ESMA Regulation and intended for competent authorities. In accordance with Article 16(3) of the ESMA Regulation, competent authorities make every effort to comply with them. 13. Competent authorities to which these guidelines apply should comply with them by integrating them into their supervisory practices. ESMA notes that enforcement responsibilities falling within the scope of these guidelines are performed by competent authorities designated in each Member State, or by entities that have been granted powers for this purpose. 4 Ultimate responsibility for compliance with the provisions of the Transparency Directive lies with the designated competent authority. Regardless of the entity performing enforcement in practice, competent authorities remain obliged to make every effort to comply with these guidelines. Reporting requirements 14. Competent authorities to which these guidelines apply notify ESMA whether they comply or intend to start complying with the guidelines, stating reasons for any non-compliance if they do not comply or do not intend to start complying with the guidelines, within two months from the date of publication of the guidelines on the ESMA website in all official languages of the EU, at corporate.reporting@esma.europa.eu. If no response is received within this period, the relevant competent authorities will be deemed not to comply with the guidelines and recommendations. A template for notifications can be found on the ESMA website. Any change in the state of implementation must also be reported to ESMA. 4 Article 24 of the Transparency Directive

10 V. Guidelines on enforcement of standards Background 15. Recital 16 of the IAS Regulation states: "Key to strengthening investor confidence in financial markets is a suitable and strict regime for the enforcement of standards. Under Article 10 of the Treaty, Member States are required to take the necessary measures to ensure consistency with international accounting standards. The Commission intends to engage with Member States exclusively through the European Committee of Securities Regulators (CESR) to develop a common approach for the enforcement of standards." 16. For this purpose, CESR, the predecessor of ESMA, created the European Enforcement Coordination Sessions (EESCS) — a forum where national enforcement authorities exchange views and discuss their experience in connection with the enforcement of financial reporting requirements. EESCS is a standing working group that reports to the Corporate Standing Committee on Reporting (CRSC) of ESMA. 17. As stated in its mandate, which was revised in 2013, the main activities of EESCS are as follows:

• discussion of emerging issues raised by European enforcing authorities or by ESMA;
• discussion of solutions and actions taken by European enforcing authorities and entered into the EESCS database;
• preparation of important issues for referral to standard-setting or interpretation bodies, such as the IASB and ICFR, when it is indicated that they fall outside the scope of financial reporting standards or are subject to conflicting interpretations;
• exchange and comparison of practical experience in the field of enforcement, including sampling, risk assessment, evaluation methodology, contacts with issuers and auditors;
• selection and preparation of disclosure of common enforcement priorities;
• providing advice on enforcement issues and preparing statements, opinions and guidelines for ESMA;
• assisting ESMA in conducting studies or reviews of the practical application of IFRS;
• consulting ESMA on the publication of selected solutions;
• organizing training sessions for enforcing authorities.

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18. CESR developed Standards No. 1 and No. 2 on the application of financial information standards in Europe, in April 2003 and April 2004 respectively (CESR/03-073 and CESR/03-317c). These standards ensured a common approach by establishing principles defining the application, its scope, the characteristics of the enforcing authority, selection techniques, and other applicable methods of application, actions, and coordination of enforcement activities.

19. The use of the standards and discussions in CESR regarding enforcement decisions and other experience in this activity led to the creation of a group within CRSC to conduct studies to establish facts regarding the actions taken. This led to a decision taken by CRSC in June 2010 to review CESR's enforcement standards, taking into account the experience gathered from the use of the standards since 2005.

20. In 2017, ESMA carried out a peer review of the enforcement of these guidelines. As a result of the conclusions and findings of the peer review, Guidelines 5 and 6 were revised, and Guidelines 6a and 6b were also added.

21. These guidelines are the result of this work. They represent principles, where the main principles are in black text, and explanatory, clarifying, and illustrative paragraphs are in grey text. To comply with these guidelines, the enforcing authority must comply with them as a whole — both the black text and the grey text.

Purpose of enforcing the standards

22. The purpose of enforcing the financial information standards included in harmonized documents is to contribute to the consistent application of the relevant financial reporting framework and thereby to the transparency of financial information, which is important for the decision-making process of investors and other users of harmonized documents. By applying financial information rules, enforcing authorities contribute to the protection of investors and the promotion of market confidence, as well as to the avoidance of regulatory arbitrage.

23. For investors and other users of harmonized documents to be able to compare financial information from different issuers, it is important that this information be based on the consistent application of the relevant financial reporting framework, in the sense that if facts and circumstances are similar, recognition, presentation, measurement, and/or disclosures will be similar, insofar as required by that financial reporting framework.

24. To ensure that the enforcement of financial information standards is carried out in a similar manner throughout the EEA, enforcing authorities should share a common understanding of the principles set out in these guidelines and respond consistently if deviations from the relevant financial reporting framework are identified.

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25. The aim of all this is not only to encourage the consistent application of the relevant financial reporting framework, to contribute to the effective functioning of the internal market, which is also important for financial stability, but also to avoid regulatory arbitrage.

Concept of enforcing the standards

26. For the purposes of these guidelines, the enforcement of financial information standards is defined as the verification of the compliance of financial information with the relevant financial reporting framework, taking appropriate measures upon the discovery of violations during the enforcement process in accordance with the rules applicable under the Transparency Directive, and taking other measures appropriate for the purpose of enforcing the standards.

27. The enforcement of financial information standards involves checking financial information to assess whether it is consistent with the relevant financial reporting framework. For the enforcement of financial information standards to be effective, enforcing authorities should take appropriate measures in accordance with these guidelines when deviations from the relevant financial reporting framework are identified, to ensure that, if necessary, market participants are provided with accurate information that is consistent with the relevant financial reporting framework.

28. Enforcing authorities may also make efforts to promote compliance by issuing warnings and publishing other information to assist issuers in preparing their financial reports, consistent with the relevant financial reporting framework.

Scope of enforcement of the standards

29. These guidelines apply to the enforcement of financial information standards in harmonized documents provided by issuers. They may also be followed in the enforcement of financial information standards based on other requirements that issuers are obliged to comply with under national legislation.

30. As stated in the introduction to these guidelines, they may apply to any relevant financial reporting framework used by EEA-registered issuers, as the need to protect investors does not depend on which financial reporting framework the issuer uses. IFRS is mandatory for all issuers whose registered office is in the EEA when preparing their consolidated accounts, while Member States may permit or require the use of local GAAP for individual financial statements.

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31. At the same time, the guidelines do not apply to the enforcement of non-financial statement standards under Article 19a and Article 29a of the Accounting Directive.

32. Guideline 1: When enforcing financial information standards provided by issuers whose registered office is outside the EEA (third-country issuers), in accordance with the provisions applicable under the Transparency Directive, European enforcing authorities should ensure access to appropriately qualified sources or, otherwise, coordinate the enforcement of financial information standards with ESMA and other European enforcing authorities, to ensure that they have appropriate resources and competencies.

European enforcing authorities should coordinate the enforcement of financial information standards with ESMA to ensure consistency in the treatment of financial information of such issuers.

33. In accordance with the Transparency Directive, the financial information of third-country issuers is subject to enforcement by the enforcing authority of the home Member State within the EEA. In such cases, the issuer's financial information may be prepared using other generally accepted accounting principles (GAAP) declared equivalent in accordance with Regulation (EC) No 1569/2007, instead of IFRS approved by the EU. These guidelines also apply to the enforcement of financial information standards for issuers established in third countries that use financial reporting frameworks declared equivalent to IFRS in accordance with the aforementioned regulation and its subsequent amendments.

34. In such cases, if a European enforcing authority decides that it is not efficient or possible to carry out the enforcement of financial information standards itself, it may transfer the task of verifying compliance with the relevant financial reporting framework by agreement with another enforcing authority or to a central team organized by ESMA at the request of the enforcing authorities. However, the responsibility for the decision regarding the enforcement of standards always lies with the enforcing authority of the home Member State within the EEA.

35. In accordance with the Transparency Directive, Member States may conclude cooperation agreements providing for the exchange of information with competent authorities or bodies of third countries, tasked by their respective legislation to carry out the tasks assigned by the directive.

European enforcing authorities

36. Under the Transparency Directive, the obligations to enforce the standards are fulfilled by the competent authorities designated in each Member State and/or in some cases by other entities that have been granted powers for this purpose.

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37. According to the Transparency Directive, each Member State designates one central competent administrative authority to perform the obligations provided for in the directive and to ensure the application of provisions adopted in accordance with the directive. However, when it comes to checking whether the information referred to in the Transparency Directive is prepared in accordance with the relevant accounting framework and taking adequate measures upon the discovery of violations, Member States may designate a competent authority different from the central competent authority.

38. Member States may also allow their central competent authority to delegate tasks. The designated competent authority is responsible for the enforcement of the standards, whether it carries out this activity itself or has delegated it to another entity. Supervision should be exercised over each entity that has been assigned such a task by the delegating authority, which is responsible for its execution. The ultimate responsibility for supervising compliance with the provisions of the Transparency Directive, including the responsibility for creating and maintaining an adequate process for enforcing standards, always lies with the designated competent authorities in the respective Member States.

39. In accordance with the Transparency Directive, the powers held by the enforcing authority for the enforcement of financial information standards include at least the following:

a) the power to check the consistency of financial information in harmonized documents with the relevant financial reporting framework;

b) the right to require any information and documentation from issuers and their auditors;

c) the ability to carry out on-site inspections; and

d) the power to ensure that investors are notified of identified serious violations and have received timely corrected information.

40. To ensure that all relevant information can be obtained as part of the enforcement process, in performing their functions, enforcing authorities have, in accordance with the Transparency Directive, the power to require information from shareholders or other persons with voting rights regarding the issuer or persons who control or are controlled by them.

41. In performing their functions, enforcing authorities should require the necessary information, regardless of whether there is evidence of inconsistency between the financial information and the applicable financial reporting framework.

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42. Guideline 2: Enforcing authorities should ensure the effectiveness of the enforcement of financial information standards. To this end, they should have sufficient human and financial resources to carry out their activities efficiently. The workforce must have professional skills, experience with the relevant financial reporting frameworks, and be sufficient in number relative to the number of issuers falling within the scope of financial information standards enforcement, their characteristics, the complexity of their financial statements, and their ability to apply the relevant financial reporting framework.

43. To ensure effective enforcement of financial information standards, enforcing authorities should have sufficient resources. Given the need for a large workforce, the number of issuers falling within the scope of enforcement, the complexity of the financial information, and the ability of those preparing the financial information and auditors to apply the relevant financial reporting framework play an important role. The probability of being selected for inspection and the degree of inspection carried out should be such that this activity is not limited due to lack of resources, thereby creating conditions for regulatory arbitrage.

44. There must be sufficient financial resources to ensure the availability of the necessary workforce and required services in the enforcement of financial information standards. Financial resources must also be sufficient to ensure that the workforce is professionally skilled and experienced.

45. Guideline 3: Enforcing authorities should ensure sufficient independence from the government, issuers, auditors, other market participants, and regulated market operators. Independence from the government means that the government cannot unduly influence the decisions taken by enforcing authorities. Independence from issuers and auditors should be achieved, among other things, through ethical codes and through the composition of the enforcing authority's board.

46. To ensure adequate protection of investors and to avoid regulatory arbitrage, it is important that undue influence is not exerted on the enforcing authority by members of the political system or by issuers and their auditors. Enforcement responsibilities should not be delegated to market operators, as this would create conflict of interest problems, since issuers subject to enforcement are simultaneously clients of market operators.

47. Undue influence should not be exerted on enforcing authorities by the government when they make decisions as part of the enforcement process, whether in connection with ex-ante or ex-post enforcement of financial information standards. Furthermore, there should be no possibility of changes in the composition of the board or other decision-making bodies of the enforcing authority through government intervention before the end of the term for which their members were appointed, except in extraordinary circumstances necessitating such measures, as this could make the enforcement process less independent.

48. In relation to independence from issuers and auditors, enforcing authorities should take necessary actions to ensure real independence, including, but not limited to: creating ethical codes for participants in the enforcement process, cooling-off periods, and requiring guarantees that employees participating in the enforcement of financial information standards do not violate independence requirements due to connections with the relevant issuer or audit firm.

Representatives of issuers and auditors should not have the ability, jointly or separately, to hold a majority of votes in the decision-making bodies of enforcing authorities.

Prior Decision

49. Guideline 4: When the issuance of a prior decision is permitted, it should be part of a formal process and given only after the issuer and its auditor have a final position regarding the relevant accounting treatment.

50. The enforcement of financial information standards generally begins with published financial information. Therefore, it is inherently an ex-post activity carried out according to the verification procedures specified in these guidelines and applied to financial information selected based on criteria defined in the selection methods described in these guidelines.

51. However, some enforcing authorities have a well-developed system for making prior decisions when issuers are able to obtain an ex-ante decision regarding enforcement, i.e., before publishing the relevant financial information. These guidelines provide that certain conditions must be met when enforcing authorities use the possibility of a prior decision. In particular, the issuer and its auditor should have determined the accounting treatment to be applied based on all specific facts and circumstances, as this will allow the prior decision to be based on the same level of information as the ex-post decision. This avoids the danger that prior decisions become general interpretations.

52. The prior decision should be part of a formal process, which means that the enforcing authority makes a proper decision in a manner very similar to how ex-post decisions are made. This implies that the enforcing authority will not be able to change its position after the financial information is published, unless the facts and circumstances have changed between the date on which the enforcing authority stated its position and the date on which the financial information was issued, or there are other substantial grounds to do so. This does not exclude the possibility of other discussions between enforcing authorities and issuers and their auditors on accounting issues, provided that the result of such discussions does not constitute a decision.

Selection Methods

53. Guideline 5: Selection is usually applied in the enforcement of standards. The selection model should be based on a mixed model, where a risk-based approach is combined with a sampling and rotation approach. In the risk-based approach, the risk of misstatement is considered, as well as the impact of misstatements on financial markets. The selection model should ensure that every issuer is checked at least once during a period determined by the enforcing authority.

54. Selection should be based on a combination of a risk-based approach, random sampling, and rotation. A pure risk-based approach means that issuers that do not meet the risk criteria defined by the enforcing authority are not subject to enforcement at all. There must always be the possibility for an issuer to be selected for inspection. A purely random system could mean that high-risk issuers are not selected in a timely manner. This also applies to a purely rotational system, as it would also allow the issuer to determine when there is a likelihood that its financial statements will be selected.

55. Risk determination should be based on a combination of the probability of violations and the potential impact of the violation on financial markets. The complexity of financial statements should be taken into account. Characteristics such as the issuer's risk profile and management's ethical standards and experience, management's ability or willingness to correctly apply the relevant financial reporting framework, and the experience of the issuer's auditors with the relevant financial reporting framework should be taken into account as much as possible. While larger issuers generally face more complex accounting issues, smaller and/or new issuers more often encounter problems with insufficient resources and less experience in applying accounting standards. It is evident that important factors are not only the number but also the characteristics of the issuers.

56. Data from auditors regarding misstatements, whether in their reports or otherwise, generally lead to the selection of the relevant financial information for inspection. Data on misstatements provided by auditors or regulatory authorities, as well as justified complaints, should be considered for enforcement inspections. On the other hand, unqualified opinions from auditors should not be considered as evidence of a lack of risk of misstatement. Inspections of standard enforcement should be considered when, after an initial investigation, the received complaint appears credible and relevant for a potential enforcement inspection.

57. To ensure convergence of European supervisory practices, when applying relevant selection criteria, enforcing authorities should take into account the common enforcement priorities defined by enforcing authorities jointly with ESMA.

58. Selection models should correspond to the information on selection provided by ESMA. These criteria are not public, specifically regarding the fact that issuers can determine the time when they are subject to inspection. Enforcing authorities should report to ESMA on the factors used as part of their national selection method and any subsequent changes. ESMA will ensure the confidentiality of such information in accordance with the provisions of the ESMA Regulation. This information will serve as a basis for any future developments that may be expected in connection with the criteria used for selection methods.

Verification Procedures

59. Guideline 6: As part of the enforcement process, enforcing authorities should determine the most effective way to enforce financial information standards. As part of ex-post activities related to the enforcement of financial information standards for issuers selected for inspection, enforcing authorities may carry out:

a) full-scope reviews based on exchange,

b) targeted reviews based on exchange,

c) full-scope reviews based on available data, and

d) targeted reviews based on available data.

In principle, full-scope reviews based on exchange should constitute at least 33% of all inspections carried out within a given year, or cover at least 10% of the total number of issuers under the supervision of the enforcing authority at the beginning of the year.

60. Reviews based on exchange include the exchange of information between the issuer and the enforcing authority regarding the financial information being inspected. Interaction between the issuer and the enforcing authority can take various forms, for example, the enforcing authority asks questions to the issuer, requires supporting documents, or conducts on-site inspections.

61. Reviews based on exchange should be the main procedure used for enforcing financial information standards; in this sense, the carrying out of reviews based on available data should be limited. Furthermore, carrying out only a targeted review based on...

20 it is not considered sufficient for the purposes of enforcing standards. 62. If the enforcing authority does not meet any of the thresholds set out in point 59 within a given year, it must be able to explain why it was unable to achieve these thresholds. 63. Guideline 6a: The model used by the enforcing authority for enforcing standards should aim to assess whether the financial information provided by issuers is consistent with the principles of recognition, measurement, presentation, and disclosure under the relevant financial reporting framework. Furthermore, enforcing authorities should verify whether the financial information contained in the management report is consistent with the information included in the financial statements and whether the relevant financial reporting framework has been complied with. 64. When assessing whether financial information is consistent with the relevant financial reporting framework, enforcing authorities are not required to give a positive opinion on whether the financial information complies with the relevant financial reporting framework. At the same time, if during the review the enforcing authority concludes that there is a material misstatement or an immaterial deviation, as defined in point 70 of Guideline 7, it must take the enforcement actions set out in point 69 of Guideline 7. 65. The conclusions of the enforcing authority from the review can be made in one of the following forms: a) a decision that no further review is needed; b) a decision by which the enforcing authority accepts that a given accounting treatment complies with the relevant financial reporting framework and that no enforcement action is required; c) a decision by which the enforcing authority establishes that a given accounting treatment is not consistent with the relevant financial reporting framework, whether it constitutes a material misstatement or an immaterial deviation, and whether enforcement action is required. 66. Enforcing authorities must ensure that the review procedures undertaken are sufficient to achieve efficiency in the standard enforcement process and that the review and its conclusions are appropriately documented. 67. Guideline 6b: In order to ensure that the review procedures applied and the related conclusions are reliable, enforcing authorities should conduct quality reviews of the reviews performed.

21 68. Quality reviews must be conducted by persons with appropriate experience and knowledge of the relevant financial reporting framework or in the field of the accounting issues under investigation. Enforcement Actions 69. Guideline 7: The enforcing authority should take the following actions on its own initiative. When a material misstatement is identified, the enforcing authority should promptly take at least one of the following actions in accordance with the considerations described in point 73: a) request a restatement of the financial statements, b) request a corrective note, or c) request a correction in future financial statements with recalculation of comparative information, where appropriate. 70. When an immaterial deviation from the financial reporting framework is intentionally left uncorrected, in order to achieve a certain presentation of the issuer's financial position, financial results, or cash flows, the enforcing authority should take the appropriate action as if it were a material misstatement. 71. When an immaterial deviation from the financial reporting framework is identified, but there is a significant risk that it may become material in the future, the enforcing authority should notify the issuer of the deviation. 72. Similar actions should be taken when similar breaches are identified, after assessing their materiality. 73. When deciding what kind of action to take, enforcing authorities must take into account the following considerations: a) Within the powers given to the enforcing authority, when deciding whether to request a restatement of the financial statements or a corrective note, the ultimate goal is to provide investors with the best possible information, so it should be assessed whether the initial financial statements with a corrective note will give users sufficient clarity needed for decision-making, or whether restating the financial statements is the best solution; b) When deciding whether to request a correction in future financial statements, or to publish a corrective note, or to restate the financial statements beforehand, various factors must be taken into account, namely: ▪ when the decision is made: for example, when the decision is very close to the date of publication of the financial statements, it may be appropriate to request a correction in future financial statements;

22 ▪ the nature of the decision and the accompanying circumstances: o when the market is sufficiently informed at the time the decision is made, the enforcing authority may prefer a correction in future financial statements; o when the decision relates only to the manner in which information is presented in the financial statements, and not to its substance (e.g., the information is clearly presented in the notes, while the relevant reporting framework requires its presentation in the main body of the financial statements), the enforcing authority may also prefer a correction in future financial statements. The basis for publishing future financial statements must be clearly stated in the decision. 74. Guideline 8: When determining materiality for the purposes of enforcing financial information standards, this must be done in accordance with the relevant financial reporting framework used to prepare the financial information at the date of its reporting. 75. Guideline 9: Enforcing authorities should ensure that issuers against whom actions have been taken have responded adequately to the actions taken. 76. Since material misstatements can by definition impact the decisions of investors and other users of harmonized documents, it is important that they are not only notified of the misstatement but also provided with the corrected information in a timely manner, unless this is practically impossible. Therefore, when the actions specified in letters a) or b) of Guideline 7 are taken, the relevant financial information and the action taken should be provided to market participants directly by the issuer and/or by the enforcing authority, unless this is practically impossible. European Coordination 77. Guideline 10: In order to achieve a high degree of harmonization in the enforcement of standards, European enforcing authorities should discuss and exchange experience regarding the enforcement of standards of the relevant financial reporting framework, primarily IFRS, during joint meetings with the EECS. Furthermore, European enforcing authorities should, in coordination with ESMA, determine annually the common priorities for the enforcement of standards. 78. In order to achieve a high degree of harmonization in the enforcement of standards, ESMA organizes regular sessions of the EECS, at which all European enforcing authorities are presented and should participate.

23 79. With a view to promoting the convergence of supervisory practices, enforcing authorities should, in coordination with ESMA, determine common accounting issues related to the enforcement of financial information standards in the EEA, which should be published sufficiently before the end of the reporting period. Most areas should be common, but some may not be relevant to all countries or may be characteristic only of certain sectors. The determination of areas should be carried out sufficiently in advance to allow enforcing authorities to include them in their enforcement program as areas subject to review. 80. Guideline 11: Although the responsibility for enforcing standards lies with national enforcing authorities, with a view to promoting the harmonization of enforcement practices and ensuring a consistent approach common to all enforcing authorities, in the enforcement of the relevant financial reporting framework, the coordination of ex-ante and ex-post decisions should be carried out in the EECS. European enforcing authorities should, in coordination with ESMA, also determine accounting issues and provide technical consultation for the preparation of ESMA's statements and/or opinions. 81. Although actions are taken at the national level, the creation of a single securities market presupposes the existence of similar investor protection in all Member States. Consistent enforcement of financial information standards in the EEA requires coordination and a high degree of harmonization of actions between enforcing authorities. To ensure a suitable and strict regime for the enforcement of financial information standards and to avoid regulatory arbitrage, ESMA will encourage the harmonization of enforcement approaches by coordinating the ex-ante and ex-post decisions taken by enforcing authorities. 82. The issuance of accounting standards and interpretations of their application is the task of standard-setting bodies. Therefore, ESMA and enforcing authorities do not issue common guidelines for the enforcement of IFRS intended for issuers. However, as part of their standard enforcement activities, enforcing authorities use their judgment to determine whether accounting practices are considered to fall within the scope permitted by the relevant financial reporting frameworks. 83. When applying IFRS, significant disputed accounting issues, as well as ambiguities and potential lack of specific guidance identified during the standard enforcement process, will be transmitted by ESMA to the bodies responsible for setting standards and their interpretation (namely the IASB and the IFRS IC). This is also the case for all other problems identified that create obstacles to the standard enforcement process.

24 Emerging Issues and Solutions 84. Guideline 12: The EECS may hold discussions on cases that are both ex-ante (emerging issues) and ex-post (solutions). Except in cases of rare circumstances where the deadline imposed on the enforcing authority makes it impossible for it to prepare, present, and discuss them with the EECS before a decision is taken, potential accounting issues should be presented as emerging issues in the following situations:

• when no prior decision has been taken by the enforcing authority or when there was no prior decision on a given accounting issue. This does not apply to issues of minor technical significance or when the accounting standard is clear and when the breach is obvious;
• when financial reporting issues are characterized by European enforcing authorities or ESMA as having significant importance for the internal market;
• when the enforcing authority expresses disagreement with a previous decision on the same accounting issue; or
• when the enforcing authority identifies a risk of significantly different treatment by individual enforcing authorities in Europe. Decisions on the enforcement of standards taken on an emerging issue should be consistent with the outcome of the discussion in the EECS.

85. An accounting issue may be presented as emerging when the enforcing authority seeks additional guidance from other enforcing authorities due to the complexity of the accounting issue, or when the enforcing authority seeks additional guidance because the issue may create obstacles to the enforcement of standards.
86. Accounting issues identified by an enforcing authority, other than the case where the standard is clear, the breach is obvious, and no decision has yet been taken on it, should be brought to the knowledge of ESMA and discussed in the EECS to ensure a consistent approach to the enforcement of standards. For this purpose, enforcing authorities should present such issues for discussion before taking a decision to be consistent with the outcome of the discussion in the EECS. This outcome must also be taken into account by other enforcing authorities. ESMA may also place emerging issues before the EECS if the financial reporting issues are of significant importance for the internal market.
87. Guideline 13: A decision should be submitted to the EECS if it meets one or more of the following criteria:

• the decision relates to accounting issues of technical significance;

25

• the decision was discussed as an emerging issue, unless something else was decided during the EECS session discussion;
• the decision will be of interest for other reasons to other European enforcing authorities (this assessment will most likely be made as a result of EECS discussions);
• the decision is a sign to the enforcing authority that there is a risk of significantly different accounting treatments by issuers;
• there is a likelihood that the decision will have a significant impact on other issuers;
• the decision is taken based on a provision that does not fall within the scope of a specific accounting standard;
• the decision is rejected by an appellate commission or by a court; or
• the decision is in obvious contradiction with a previous decision on the same or similar accounting issue.

88. Emerging issues and solutions discussed in the EECS generally relate to IFRS financial statements, but may also relate, for example, to a financial statement prepared under GAAP accepted as equivalent to IFRS and approved by the EU.
89. In order to ensure the efficiency and effectiveness of discussions, emerging issues and solutions should be clear and concise, but also include all relevant facts, the issuer's considerations, the enforcing authority's basis for justification, and the conclusion.
90. Guideline 14: Decisions on the enforcement of standards taken by enforcing authorities should take into account previous decisions on the same accounting issue when it comes to similar facts and circumstances. Decisions on the enforcement of standards include both ex-ante and ex-post decisions, as well as the results of EECS discussions on whether an accounting treatment complies with the relevant financial reporting framework and the related action. Regardless of the outcome of the discussion in the EECS, the final decision is taken by the national enforcing authority.
91. To ensure a consistent standard enforcement regime throughout the EEA, enforcing authorities should, before taking an enforcement decision, review decisions taken by other European enforcing authorities from the EECS database and take them into account, as well as take into account their own previous decisions by the enforcing authority on the same accounting issue. This is the case regardless of whether the decision was taken as a prior decision or based on published financial statements.
92. If the enforcing authority intends to take a decision that is obviously not consistent with a previous decision or with the outcome of the discussion of an emerging issue on the same or similar accounting issue, the enforcing authority should present it as an emerging issue. This is to determine whether differences in facts and circumstances justify a decision that differs from the previous one.

26 Reporting 93. Guideline 15: All emerging issues that meet at least one of the submission criteria specified in Guideline 12 should be submitted to ESMA with the relevant details generally no later than two weeks before the EECS session at which the relevant issue will be discussed. 94. Guideline 16: All decisions on the enforcement of standards that meet at least one of the submission criteria specified in Guideline 13 should be submitted to ESMA with the relevant details generally no later than three months after the decision was taken. 95. Coordination in the EECS should be supported by the existence of a database. The purpose of the database is to be a platform for continuous information exchange. The submission deadlines are set so that there are very few cases where decisions already taken, which should be taken into account in relation to later decisions, are not known to other enforcing authorities. ESMA checks all submitted documents for internal consistency, sufficiency of information, and use of correct terminology, and may request resubmission or provision of additional information. After completing the check, ESMA registers the standard enforcement decision in the database. 96. The EECS database contains the results of the discussion held during the session. Data management takes measures to move decisions that have become outdated due to changes in accounting standards to a separate section, as well as decisions that are considered to have no technical solution. ESMA is responsible for maintaining the database. 97. Guideline 17: To encourage consistency in the enforcement of IFRS, European enforcing authorities within ESMA should decide which decisions included in the database can be published anonymously. 98. The selection of IFRS enforcement decisions to be published should be made by enforcing authorities, coordinated with ESMA. Selected decisions for publication should meet one or more of the following criteria:

• the decision relates to a complex accounting issue or to an issue that may lead to different application of IFRS; or
• the decision is related to a relatively common problem at issuers or in a certain type of business, as it may be of interest to other enforcing authorities or third parties; or
• the decision concerns an issue on which there is no experience or on which enforcing authorities have partial experience; or
• the decision is taken based on a provision that does not fall within the scope of a specific accounting standard.

99. Guideline 18: European enforcing authorities should periodically report on standard enforcement activities at the national level and provide ESMA with the necessary information on reporting activities and coordination of standard enforcement activities carried out at the European level.
100. Enforcing authorities should periodically report to the general public on policies adopted in the field of standard enforcement and decisions taken in individual cases, including on accounting issues and disclosure issues. It is the right of the enforcing authority to decide whether to report anonymously or non-anonymously on these issues.
101. European enforcing authorities should report to ESMA on findings and decisions in the field of standard enforcement in relation to the common priorities for standard enforcement, as specified in accordance with Guideline 10. These and other activities related to European-level coordination are published by ESMA in the Authority's activity report in the field of standard enforcement.