Views on improving the integrity of global capital markets
21 November 2013

Need for Greater Transparency in Financial Reporting by European Financial Institutions

Posted In: Financial Reporting

A new report from the European Securities and Markets Authority (ESMA) on the accounting practices of financial institutions begins by noting the importance of transparency in financial information. In light of the 2008 financial crisis, which demonstrated the insufficiency of financial disclosures, the report avows the need to enhance transparency to increase investor confidence in financial reporting and normalize markets:

“Transparent financial information plays a key role in maintaining market confidence, improving markets’ efficiency by allowing investors to identify risks in a timely manner, contributing to financial stability and is a pre-requisite in creating premises for sound economic growth. As an effect of market turbulences resulting from the financial crisis, transparency and comparability of the financial statements of financial institutions have gained increased importance for market participants.”

The ESMA report, Review of Accounting Practices: Comparability of IFRS Financial Statements of Financial Institutions in Europe, is based on reviews of the 2012 financial statements of 39 major European financial institutions.

Similarly, a recent CFA Institute publication, Financial Reporting Disclosures: Investor Perspectives on Transparency, Trust, and Volume, considers the effectiveness of financial disclosures from an investor perspective and urges policymakers to address the insufficiency of disclosures made during and in the aftermath of the 2008 financial crisis.

Findings of the ESMA Report

Given this context, the ESMA report evaluates the level of comparability and quality of information in the financial statements of the institutions reviewed. Key findings include:

  • Variability in Quality: A wide variability in the quality of information provided.
  • Insufficient Information: Cases where information provided was not sufficient.
  • Lack of Comparability: Cases of insufficient structuring of information to allow comparability among financial institutions.
  • Insufficient Disclosures: Cases where disclosures were not specific enough; lacked links between quantitative and narrative information; and could not be reconciled to the primary financial statements.
  • Insufficient Referencing: Need for better linkage between information provided in different sections of the financial report.

Accordingly, the ESMA report provides recommendations to enhance disclosures.

Consistent Theme: Lack of Transparency

These findings are consistent with those of two previous ESMA reports issued in 2012. The 2012 ESMA reports highlight the lack of transparency by European insti­tutions, particularly with respect to the risks and uncertainties they face. The Activity Report on IFRS Enforcement in the European Economic Area in 2011 states:

“Companies have continued to face risks to their businesses as a result of the continuing generally unfavorable economic climate. Within this context, the disclosure of the possible impact of risks and uncertainties faced by the issuers regarding judgments and estimates used in the preparation of financial information has gained even more importance. Nevertheless, there are still issuers that have not achieved a satisfactory level of transparency, mainly because of their continued use of boiler-plate disclosures rather than attempting to accurately describe facts specific to the issuer and/or transaction.”

The second report summarizes its review of 42 European financial institutions with significant exposures to Greek government bonds. The Review of Greek Government Bonds (GGB) Accounting Practices in the IFRS Financial Statements for the Year Ended 31 December 2011 found that issuers fell short of meeting IFRS disclosure requirements, particularly in relation to transpar­ency of gross exposure, maturities, valuation methodologies, and fair value levels used as well as the impact of impairment on profit or loss.

Greater Transparency Needed to Normalize Markets

We cite the 2012 ESMA reports in the CFA Institute report on financial reporting disclosures to illustrate the lack of transparency from an investor perspective. When it occurs among financial institutions, this lack of transparency has implications for inves­tors’ trust and willingness to invest. And without trust in financial institutions, investment can lag in the broader economy. Policy makers, therefore, need to consider how to improve financial reporting effectiveness in an effort to normalize financial markets and invest­ing.


Photo credit: iStockphoto.com/georgeclerk

About the Author(s)
Mohini Singh, ACA

Mohini Singh was director of financial reporting policy at CFA Institute. She represented membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

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