Page |1        International Association of Risk and Compliance                     Professionals (IARCP)    1200 G Street...
Page |2Since zombie managers are unable to raise new capital, their incentivesmay shift from maintaining good relations wi...
Page |3From ideas to implementationRemarks by Mr Stefan Ingves, Governor of theSveriges Riksbank and Chairman of the Basel...
Page |4Recent policy developments forstrengthening the resilience of the financialsectorWelcoming remarks by H E Sultan Bi...
Page |5Private Equity Enforcement ConcernsBy Bruce Karpati, Chief, SEC EnforcementDivisions Asset Management Unit, U.S.Sec...
Page |6FSA statement on Basel III rules on capitalrequirements for exposures to CCPsIn July 2012 the Basel Committee on Ba...
Page |7From ideas to implementationRemarks by Mr Stefan Ingves, Governor of the SverigesRiksbank and Chairman of the Basel...
Page |8Many banks have learnt this as a painful lesson in recent years: whentimes were good, potential operational, risk m...
Page |9• require banks to maintain substantially higher levels of capital, with theminimum common equity requirement incre...
P a g e | 10Of course, there are plenty of other big ideas being floated on how thebanking industry should be restructured...
P a g e | 11So even though the LCR is “only 30 days of cash”, its significance shouldnot be underestimated.As you would be...
P a g e | 12• As in the case of the capital conservation buffer, the standards nowmake very clear that liquidity is to be ...
P a g e | 13perception that the Committee had granted carte blanche to thesecuritisation sector is well wide of the mark.A...
P a g e | 14It is, as I said, a deceptively simple idea, but its implications are big andfar-reaching.Unsurprisingly, ther...
P a g e | 15Nevertheless, let me be clear: the question being discussed is when thereforms will be implemented, not if.Any...
P a g e | 16The regular progress reports are simply one part of this programme,which assesses domestic regulations’ compli...
P a g e | 17However, we have now taken that step, since if we are serious aboutfixing the problems of the past, then we ne...
P a g e | 18In this way, we believe we will establish the appropriate incentives forlocal rulemakers to apply the global s...
P a g e | 19I will not pre-release the detailed results today, but the headline messagesare that:• there is a material var...
P a g e | 20At the same time, excessive variation in risk measurement is clearlyundesirable.Finding the right balance is t...
P a g e | 21I am confident that it will generate additional insights in the modelling ofrisk-weighted assets and to explai...
P a g e | 22Much of the Basel Committee’s work on big “ideas” that respond to theshortcomings in the regulatory framework ...
P a g e | 23Protecting Investors by Seizing theOpportunity to Strengthen Audit QualityJeanette M. Franzel, PCAOB Member Am...
P a g e | 24Each of you, too — as educators of students entering the accountingprofession and as researchers on the issues...
P a g e | 25Inspection Findings: enhancing the PCAOBs processes and systems torefine the analysis of PCAOB inspection find...
P a g e | 26In pursuing our core mission of protecting investors through auditoversight, the Board has a number of initiat...
P a g e | 27This has persisted for decades, and also causes a divergence in definitionsof what constitutes an audit failur...
P a g e | 28The results of this process will also provide us with information forreviewing, adding context to, or clarifyi...
P a g e | 29This issue has been of such prevalence that we have identified theapparent failure to appropriately apply prof...
P a g e | 30The Practice Alert also identifies possible impediments to the applicationof professional skepticism, includin...
P a g e | 31It is often difficult to determine if a lack of skepticism is the primarycause of audit deficiencies, and if s...
P a g e | 32As you know, the largest PCAOB-registered public accounting firms —those auditing more than 100 issuers — are ...
P a g e | 33Firms are given 12 months from the date of the inspection report toremediate any deficiencies noted in their q...
P a g e | 34inspections, and firms quality control processes related to specificaspects of auditing, such as testing and e...
P a g e | 35In our current strategic plan, we included a new strategy for standardsetting for audits of emerging growth co...
P a g e | 36We have a 2013 project entitled, "Reorganization of PCAOB AuditingStandards."This project involves developing ...
P a g e | 37The timing of two other potential 2013 standard-setting projects isdependent on third parties:Audits of broker...
P a g e | 38ConclusionAs you can see, the Boards 2013 agenda is brimming with opportunitiesto make needed improvements in ...
P a g e | 39After nearly 10 years on the job, the PCAOB is working hard to make sureaudit firms remember to focus on the f...
P a g e | 40EIOPAMulti-Annual Work Programme2012-20141. IntroductionEIOPA is an independent European Supervisory Authority...
P a g e | 412. Regulatory TasksEIOPA’s regulatory powers in the insurance, reinsurance andoccupational pensions sectors in...
P a g e | 42- Advice to the European Commission on review of EU legislation foroccupational pensions- Quantitative impact ...
P a g e | 43With Solvency II coming into force group supervision and thecooperation amongst supervisors through colleges o...
P a g e | 444. Consumer Protection and Financial InnovationUnder Article 9 of the EIOPA Regulation, EIOPA is already takin...
P a g e | 45- Adopt guidelines and recommendations with a view to promote safety  and soundness of financial markets and c...
P a g e | 46- Establish and conduct EIOPA Conferences and joint trainings for  supervisors and industry representatives to...
P a g e | 47Strategic directions 2012-2014- Issue financial stability reports and report outcomes of financial  stability ...
P a g e | 48Strategic directions 2012-2014- Promote vigilance on the part of insurance and pensions supervisory  authoriti...
P a g e | 49Europe:o work with the European Commission through its consultationprocess to ensure that any new legislation ...
P a g e | 50Strategic directions 2012-2014- Provide a platform for EIOPA, EIOPA Members, EU Institutions and  third countr...
P a g e | 51The Authority will grow into a modern, efficient and adaptiveorganisation, well equipped to meet the various a...
P a g e | 52- extend administrative supporting systems- ensure efficient budgetary, financial and internal control  arrang...
P a g e | 53 _____________________________________________________________International Association of Risk and Compliance...
P a g e | 54 _____________________________________________________________International Association of Risk and Compliance...
P a g e | 55 _____________________________________________________________International Association of Risk and Compliance...
P a g e | 56Recent policy developments forstrengthening the resilience of the financialsectorWelcoming remarks by H E Sult...
P a g e | 57 _____________________________________________________________International Association of Risk and Compliance...
P a g e | 58If I may switch now to talk about one of the subjects this meeting willdiscuss namely: SIBs or D-SIBs, it will...
P a g e | 59Nonetheless, some general guidelines on the subject from BCBS wouldbe helpful, and they will make the exercise...
P a g e | 60implemented in the region, which would mean that the D-SIB’s cost ofdoing business will go up.For example, in ...
Monday February 4 2013 Top 10 Risk Compliance News Events
Monday February 4 2013 Top 10 Risk Compliance News Events
Monday February 4 2013 Top 10 Risk Compliance News Events
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Monday February 4 2013 Top 10 Risk Compliance News Events

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the weeks agenda, and what is nextDear Member,If you want to have only the presentations of theCertified Risk and Compliance ManagementProfessional (CRCMP) program, you can havethem (at $97 instead of the $297 of the fullprogram). To learn more:www.risk-compliance-association.com/Distance_Learning_and_Certification_CRCMP_Presentations.htm_____________________________________________________________Do you know any zombie managers?Unfortunately, I do.I heard you… You asked: “What is a zombie manager George?”Simple: A zombie manager is a manager that is also a zombie…No, wait; we have a better official definition.According to Bruce Karpati, Chief, SEC Enforcement Divisions AssetManagement Unit, U.S. Securities and Exchange Commission:“Zombie funds” (or more accurately, “zombie managers”) result whenprivate equity holdings are not designed for quick liquidity. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2Since zombie managers are unable to raise new capital, their incentivesmay shift from maintaining good relations with their investors tomaximizing their own revenue using the assets that they have.Being a zombie manager in and of itself is of course not unlawful andmost zombie managers will continue to act in the best interests of theirinvestors.However, given the incentives to favor their own interests, we believe thatthere will be some problematic conduct and possible violations of the law.Read more at Number 7 of our list.Michel Barnier, the European Commissioner for Internal Market andServices, said that the EU and U.S. should implement the Basel measuresin parallel, starting in the “first weeks of 2014.”Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman ofthe Basel Committee on Banking Supervision, also said that:1. There is a material variation in risk weights for trading assets acrossbanks (after adjusting for accounting differences and for differences inthe riskiness of different bank portfolios)2. Certain modelling choices seem to be major drivers of the variation inrisk weights3. The quality of existing public disclosure is generally insufficient toallow users to determine how much of the variation in reported riskweights is a reflection of underlying risk taking, and how much stemsfrom other factors (eg modeling choices, supervisory discretions).Read more at Number 1 below.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3From ideas to implementationRemarks by Mr Stefan Ingves, Governor of theSveriges Riksbank and Chairman of the BaselCommittee on Banking Supervision, at the 8thHigh Level Meeting organised by the BaselCommittee on Banking Supervision and the Financial Stability Instituteand hosted by the South African Reserve Bank, Cape TownProtecting Investors by Seizing theOpportunity to Strengthen Audit QualityJeanette M. Franzel, PCAOB Member AmericanAccounting Association Midyear Conference andDoctoral Consortium , New Orleans, LAEIOPAMulti-Annual Work Programme2012-2014EIOPA is an independent European Supervisory Authority acting withinthe scope of various Directives covering insurance and reinsuranceundertakings, institutions for occupational retirement provision andinsurance intermediaries as well as related issues not directly covered bythese Directives. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4Recent policy developments forstrengthening the resilience of the financialsectorWelcoming remarks by H E Sultan Bin NasserAl-Suwaidi, Governor of the Central Bank of the UnitedArab Emirates, at the 8th High-Level Meeting for theMiddle East & North Africa Region on “Recent policy developments forstrengthening the resilience of the financial sector”, organized by theBasel Committee on Banking Supervision (BCBS), the Financial StabilityInstitute (FSI) and the Arab Monetary Fund (AMF), Abu Dhabi.Suitability Requirements WithRespect To the Distribution of ComplexFinancial ProductsFinal ReportIn February 2012, the IOSCO Technical Committee published aConsultation Report, entitled Suitability Requirements with respect to theDistribution of Complex Financial Products (the Consultation Report).President Obama discusses hisnomination of Mary Jo White to lead theSecurities and Exchange Commission andRichard Cordray to continue as Director ofthe Consumer Financial ProtectionBureau. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5Private Equity Enforcement ConcernsBy Bruce Karpati, Chief, SEC EnforcementDivisions Asset Management Unit, U.S.Securities and Exchange Commission, PrivateEquity International ConferenceNew York, N.Y.Recommendationon the development ofrecovery plansThe attached recommendation on the development of recovery plans isbased on the duty of the European Banking Authority (EBA) according toArticle 25 (1) of Regulation EU No. 1093/2010 (hereinafter referred as“EBA regulation”) to contribute to and participate actively in thedevelopment and coordination of effective and consistent recovery andresolution plans.Review of Requirements onInvestment Activities of InsurersImportant partsMAS adopts a principles-based approach on the regulation of theinvestment activities of insurers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6FSA statement on Basel III rules on capitalrequirements for exposures to CCPsIn July 2012 the Basel Committee on BankingSupervision (BCBS) agreed a revised Regulatoryrules text on the capital requirements for bank exposures to centralcounterparties.These rules set out the capital treatment for bank exposures to qualifyingcentral counterparties (QCCP).A QCCP is defined as an entity that is licensed to operate as a CCP(including a license granted by way of confirming an exemption), and ispermitted by the appropriate regulator/overseer to operate as such withrespect to the products offered. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7From ideas to implementationRemarks by Mr Stefan Ingves, Governor of the SverigesRiksbank and Chairman of the Basel Committee onBanking Supervision, at the 8th High Level Meetingorganised by the Basel Committee on BankingSupervision and the Financial Stability Institute and hosted by the SouthAfrican Reserve Bank, Cape TownIntroductionLet me begin today by thanking Josef Tošovský, Chairman of theFinancial Stability Institute, for organising the latest in its series of HighLevel Meetings.The Basel Committee continues to view these events as extremelyimportant, as they bring together senior policymakers and supervisors ina forum in which we can share thoughts on critical issues of the momentand reflect on long term challenges.Let me also extend my thanks to the South African Reserve Bank for itssuperb hospitality as the annual host of this High Level Meeting.Change and reform – new ideas and new ways of doing things – can bechallenging in good times.When all is well, the perceived need is low and the costs – includingopportunity costs – are difficult to justify.Even small ideas can be difficult to implement.Crises, on the other hand, provide a catalyst for fundamentally rethinkingpast practices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8Many banks have learnt this as a painful lesson in recent years: whentimes were good, potential operational, risk management and culturaldeficiencies were not examined closely enough.When serious problems emerge, however, there is a demand for new ideasand new ways of doing things: the status quo becomes unacceptable.Of course, the same scenario has applied to the regulatory frameworkmore broadly.Pre crisis, any call for stronger capital and liquidity rules was generallyhowled down as burdensome and unnecessary.Post-2008, the costs of a weak regulatory framework have been all tooobvious and painful for the banking sector, and as a result the demand fornew ideas was immediate and forceful.My theme for today is that successful regulatory reform is about ideas andimplementation.Certainly, we needed to rethink the regulatory framework in light of whatwe have learnt from the past five years – the status quo was notacceptable.But if we want to be successful, the Committee also needs to make surethat the ideas we developed into Basel III are truly put into practice.From ideas ….The Basel Committee’s response to the financial crisis was to recognisethat policy weaknesses contributed to the excesses that built up in thefinancial sector.A substantial overhaul was necessary: minor adjustments to theframework were not going to be enough.We needed some big, new far-reaching ideas.In summary, we decided that it was necessary to: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9• require banks to maintain substantially higher levels of capital, with theminimum common equity requirement increasing from 2% to 7% of riskweighted assets;• require banks to hold higher quality forms of capital, with commonequity at the core of the requirements, and standards to ensure othertypes of capital instruments are truly loss-absorbing.It is worthwhile emphasising that these reforms also go a long way tosimplifying banks’ capital structures, as well as making them moretransparent and comparable;• introduce an additional capital buffer (the capital conservation buffer)designed to enforce corrective action when a bank’s capital ratiodeteriorates.The capital conservation buffer allows banks to dip into their capitalreserves, while at the same time providing disincentives for banks to do sodue to the restrictions it imposes on dividend and bonus payments;• add a macroprudential element in the form of the countercyclical buffer,which requires banks to hold more capital in good times to prepare forinevitable downturns in the economy;• supplement the risk-based regime with a simple backstop in the form ofa (non-risk based) leverage ratio;• impose additional capital requirements on systemically important banks– both global and domestic – to take account of the externalities theirfailure would impose on society; and• introduce the first international standards for bank liquidity andfunding, designed to promote the resilience of a bank’s liquidity riskprofile to both short term liquidity shocks (the Liquidity Coverage Ratio –LCR) and longer-term mismatches in funding (the Net Stable FundingRatio – NSFR). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10Of course, there are plenty of other big ideas being floated on how thebanking industry should be restructured in the aftermath of the crisis,particularly those related to varying models of structural separation (egthe ideas of Volker, Vickers and Liikanen).But for those that fall within the mandate of the Basel Committee, webelieve that the ideas produced by Basel Committee thinking – translatedinto the Basel III reforms, and subsequently endorsed by the G20 andFinancial Stability Board – provide a substantial foundation on which thebanking system can be rebuilt to be much more robust and resilient in thefuture.Basel III capital requirements are probably well known to all of you, so Ido not propose to say much more about them today.What I would instead like to focus on is our thinking in relation toliquidity, and particularly the LCR.As an idea, it is simple: a bank should have enough liquid assets tosurvive a 30-day period of stress.And perhaps to some, it might seem underwhelming.If you tell your spouse that we have implemented a reform that requiresbanks to have enough cash to last 30 days, more than likely you will getthe same response I did when I tried to explain it to my wife: “what doyou mean, only 30 days?”Yet this idea has been one of the most fundamental reforms of the crisis.It also is a classic example of an idea that had been toyed with for a longtime, but took a crisis to bring to fruition.A study of Basel Committee history shows liquidity to have been on theagenda almost for the entire existence of the Committee, but we havenever come close to an international standard.Basel III has changed that. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11So even though the LCR is “only 30 days of cash”, its significance shouldnot be underestimated.As you would be aware, the focus of the Committee over the past twoyears has been on refining the formulation of the LCR announced in 2010.Given this is the first time the international community had developed aglobal liquidity standard, it was agreed that it should be subject to anobservation period, during which it could be adjusted as a result of furtheranalysis and assessment.The aim of the observation process was not to further tighten or weakenthe standard: the goal was purely to ensure the calibration was morereflective of empirical evidence and appropriate for implementation as aminimum standard, across the Committee’s 27 member countries andmore broadly.The changes agreed to by the Committee focus on three main areas:• High quality liquid assets (HQLA): A diverse and sufficiently largestock of HQLA is essential to help banks withstand liquidity stress.The revised definition now provides limited recognition of additionalassets such as a broader range of corporate bonds, a selection of listedequities, and some highly-rated residential associated with such assets,their inclusion in the stock of HQLA is subject to a relatively low limit aswell as significant “haircuts”.The Committee has tried to balance the benefits of greater diversificationof the liquidity pool against the cost of including slightly lower qualityassets.• We have also changed some of the assumed inflow and outflow ratesthat determine the size of the pool of liquid assets that a bank is requiredto hold. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12• As in the case of the capital conservation buffer, the standards nowmake very clear that liquidity is to be built up and maintained in goodtimes so that it can be used in times of need.In other words, liquidity is not useful if it is frozen.In addition, in light of the considerable stress facing banking systems insome regions of the world, the Committee revised the implementationplan of the LCR by introducing a phase-in arrangement.The LCR will come into force as planned in 2015, although banks now willhave until 1 January 2019 to meet the standard in full.Nevertheless, I expect many banks will choose to move to the higherstandard more quickly.In announcing the revisions to the LCR, many headline writerscategorised it as some kind of win for the banking industry over theregulators.This is simplistic.We had an observation period for good reason: to make sure we got thesettings right.There was, I think, legitimate concern that, as a minimum standard, the2010 formulation of the LCR may have been calibrated too conservativelyoverall.For example, the treatment of traditional retail and commercial bankingwas probably too harsh, and this has been adjusted.Equally the treatment of derivative-related risks was probably too weak,and so that has been adjusted too.Much has been made of the inclusion of RMBS in the definition of highquality liquid assets, but the eligibility criteria are tight and the initial _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13perception that the Committee had granted carte blanche to thesecuritisation sector is well wide of the mark.As the Chairman of the Basel Committee’s governing body, GovernorKing of the Bank of England, said when announcing the full set ofchanges, they are designed to make the LCR “more realistic”.I think this sums it up very well.Of course, the overall impact of the changes is to improve the reportedLCR of the banking system.Based on our most recent data (end June 2012), we estimate that theweighted average LCR for a sample of roughly 200 of the world’s largestbanks is around 125%, compared with a little over 100% for the previouscalibration.This does not mean, however, that all banks are ready and able to meetthe standard today.Even though the industry average is well above the minimum, ourestimates suggest that roughly one-quarter of our sample could still havean LCR below 100% even with the latest policy changes.So there remains a significant liquidity shortfall that will need to beaddressed by a number of banks.One also has to bear in mind that favourable terms from central bankshave helped to improve bank funding.Central banks serve as lenders of last resort and, as economic conditionsimprove, banks will need to become more self-reliant.However, the timetable for the gradual introduction of the ratio ensuresthat the new liquidity standard will in no way hinder the ability of theglobal banking system to finance a recovery.It has taken a lot of time and effort to reach agreement on the LCR. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14It is, as I said, a deceptively simple idea, but its implications are big andfar-reaching.Unsurprisingly, there is much in the detail that required a lot of carefulanalysis and thought, not to mention a willingness to find a way throughdiffering national perspectives.It is, however, critical that the new ideas such as the LCR (and the othernew features of Basel III such as the capital conservation buffer,countercyclical buffer, leverage ratio and NSFR) are implemented if theirbenefits are to be realised.Against that background, let me now turn to the work we have started toensure that the Basel III framework is implemented as intended.…. to implementationSteady progress is being made.As of January 2013, 11 out of 19 Basel Committee jurisdictions have finalBasel III rules in place, including our hosts today, South Africa.A number of non-member countries also implemented Basel III at thebeginning of the year, further expanding its coverage.While it would be ideal to have much broader coverage at this time (as attoday, around one-third of global banking assets are officially subject tothe Basel III requirements), the delays should not be interpreted as anylack of commitment by global regulators to implement the agreedreforms.At recent international gatherings, all members have been asked toreaffirm their commitment to implementing the agreed reforms as soonas possible.And they have given that commitment (subject, of course, to the vagariesof domestic rule-making processes that each must follow). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15Nevertheless, let me be clear: the question being discussed is when thereforms will be implemented, not if.Any setback to implementation is undesirable, since Basel III is a keyplatform on which to rebuild a stronger global banking system.But the delays are not critical at this point, for two reasons.First, the Basel III capital rules contain a lengthy phase-in period,meaning that in 2013 the new requirements should not be particularlyburdensome for banks (eg none of the new deductions from capital areapplied this year).Second, many regulators who have been unable to implement the newstandards by the beginning of this year are still measuring andmonitoring their banks’ capacity to meet the new requirements.And, of course, markets are applying similar pressure.In other words, the “force” of the new capital regime is much broaderthan just those countries that have implemented their domesticregulations.Nevertheless, to ensure visibility of the implementation of reforms, theBasel Committee has been regularly publishing information aboutmembers’ adoption of Basel III.We will continue to do this so as to keep all stakeholders and the marketsinformed, and to maintain peer pressure where necessary.It is especially important that jurisdictions that are home to globalsystemically important banks (G-SIBs) make every effort to issue finalregulations at the earliest possible opportunity.But simply issuing domestic rules is not enough to achieve what the G20Leaders asked for: full, timely and consistent implementation of Basel III.In response to this call, in 2012 the Committee initiated what has becomeknown as the Regulatory Consistency Assessment Programme (RCAP). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16The regular progress reports are simply one part of this programme,which assesses domestic regulations’ compliance with the Baselstandards, and examines the outcomes at individual banks.The RCAP process will be fundamental to ensuring confidence inregulatory ratios and promoting a level playing field forinternationally-operating banks.It is inevitable that, as the Committee begins to review aspects of theregulatory framework in far more detail than it (or anyone else) has everdone in the past, we will find aspects of implementation that do not meetthe G20’s aspiration: full, timely and consistent.We are going to find parts of the framework that have been implementedonly in part, or late, or inconsistently.The financial crisis identified that, like the standards themselves,implementation of global standards was not as robust as it should havebeen.This could be classed as a failure by global standard setters.To some extent, the criticism can be justified – not enough has been donein the past to ensure global agreements have been truly implemented bynational authorities.However, just as the Committee has been determined to revise the Baselframework to fix the problems that emerged from the lessons of the crisis,the RCAP should be seen as demonstrating the Committee’sdetermination to also find implementation problems and fix them.Committee published recently by Professor Charles Goodhart notes thatthe Committee has on more than one occasion over the past 35 yearsconsidered undertaking more detailed analysis of domesticimplementation of global standards, but shied away from this as being“too intrusive”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17However, we have now taken that step, since if we are serious aboutfixing the problems of the past, then we need to not just look at the policysettings, but also their application.Our efforts on implementation should therefore be seen as an integralpart of the reform agenda – not just an adjunct to it.When it comes to our country-by-country assessments, thus far theCommittee has conducted detailed assessments of the final regulationsadopted in Japan, and the draft regulations in the European Union andthe United States.Follow-up assessments in the European Union and United States will beconducted once final regulations are available.Assessments under the RCAP are currently underway for Singapore andSwitzerland.Later this year will follow China, Australia, Brazil and Canada.As with all of the RCAP work, transparency is critical to success – all ofthese reports will, of course, be published in full when complete.It is important to note that, in undertaking this work, the BaselCommittee has no enforcement power, so it would be meaningless tothink we can force jurisdictions to change their local regulations if we findgaps.Our goal is therefore framed more positively: to deepen theimplementation process and to help jurisdictions identify the gaps andaddress them.Ideally, the assessments provide a roadmap by which identified gaps canbe closed.They also provide stakeholders and markets with a much higher degree oftransparency about the extent of any local divergence from agreedinternational standards, and the importance of these. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18In this way, we believe we will establish the appropriate incentives forlocal rulemakers to apply the global standards, and for markets and othersto apply appropriate pressure where banks may be subject toweaker-then-expected prudential requirements.More consistent domestic regulations will be an improvement.But beyond looking at how local regulators have transposed Baselagreements into domestic regulations, the Committee has also begunexamining whether the framework(s) are producing consistent outcomes.Ultimately, what counts is that the capital ratio calculated and reported byindividual banks provides a meaningful and comparable representation oftheir capital strength.Differences in regulation, or their application, can undermine theregulatory framework by making it more difficult for bank depositors,counterparties, investors, shareholders and supervisors to haveconfidence that reported capital ratios serve their intended purpose.In this context, some concerns have been recently voiced that banks arenot calculating risk weighted assets consistently.The Committee has, in fact, been investigating this issue for much of thepast year.This work has examined the calculation of risk weights in both thebanking and the trading books.As with our country assessments, we will publish the results of bothstudies.The preliminary results of the trading book are most advanced, and willbe published very shortly.The analysis is based on two sources of data: public disclosures by banksand a hypothetical test portfolio exercise in which 15 large, internationallyactive banks have participated from nine Basel Committee jurisdictions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19I will not pre-release the detailed results today, but the headline messagesare that:• there is a material variation in risk weights for trading assets acrossbanks (after adjusting for accounting differences and for differences inthe riskiness of different bank portfolios);• certain modelling choices seem to be major drivers of the variation inrisk weights; and• the quality of existing public disclosure is generally insufficient to allowusers to determine how much of the variation in reported risk weights is areflection of underlying risk taking, and how much stems from otherfactors (eg modeling choices, supervisory discretions).In thinking about these results, it needs to be borne in mind that theobjective is not to achieve zero variation.If we wished to achieve that outcome, we could simply force all banksonto the standardised approach to capital adequacy and remove anymodelling options.But the standardised approach – while an ostensibly consistentmethodology – would not necessarily guarantee a meaningful measure ofrisk when applied to the world’s largest banks with the biggest and mostcomplex trading portfolios.Modelling necessarily introduces a degree of variability, since Baselstandards deliberately allow banks and supervisors flexibility in order toaccommodate for differences in risk appetite and local practices, but withthe goal of also providing greater accuracy.Further, from a financial stability perspective, it is desirable to have somediversity in risk management practices so as to avoid that all banks act ina similar way.When banks would have identical response functions, economiccyclicality would increase, potentially creating additional instability. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20At the same time, excessive variation in risk measurement is clearlyundesirable.Finding the right balance is the key.The preliminary work suggests we may not have the balance right in thecurrent set-up.But as with all of our work on implementation, it is necessary to identifyproblems before we can set about correcting them.The on-going analysis has generated a wealth of information about riskmodelling by banks.This is useful for international policymakers.The Committee has not yet decided what actions it might take inresponse to the analysis, but some of the possible policy options couldcomprise improvements in public disclosure practices, limitations in themodeling choices for banks, and further harmonisation of supervisorypractices.These ideas will also feed into the current fundamental review of thetrading book.In addition, our international study provides national supervisors with amuch clearer understanding of how the risk models of their bankscompare to those of international peers.This means that national supervisors are much better equipped to discussthe results with their banks and take action where needed.The Committee will be doing further work on the trading book, inaddition to the banking book work, to explore the outcomes in moredepth. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21I am confident that it will generate additional insights in the modelling ofrisk-weighted assets and to explain better why modelling results differacross banks.It will also allow building quantitative benchmarks against whichsupervisors can test their banks.The Committee’s work on how banks calculate risk weighted assets alsofeeds into a broader concern that, in pursuit of risk sensitivity, the BaselIII framework has grown too complex.There are many contributory factors to the build-up of complexity,including developments in the financial markets and adoption ofsophisticated risk management practices by banks.It is naïve to think banks utilising complex trading strategies andproducts, across global markets, can be supervised using simple rules(even if calibrated to penal settings).Indeed, an important driver has been the necessity to address perverseincentives that are created by simple rules.So while seeking appropriate risk sensitivity, care is also being taken toensure that complexity does not undermine the very benefits it offers.The Basel Committee has also been working during 2012 to reviewpossible areas for simplification, aiming to strike a term, the Committeeintends to publish a paper to explain its thinking on the trade-offs thatneed to be made, and identifying potential ways to make the frameworksimpler and more comparable.ConclusionIf there is one message I would like to leave you with it is that, when itcomes to reform, ideas and implementation go together. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22Much of the Basel Committee’s work on big “ideas” that respond to theshortcomings in the regulatory framework identified by the financialcrisis is reaching the end stage.The capital rules are set (and, in an increasing number of jurisdictions,coming into force), and the revisions to the LCR have recently beenagreed.In 2013, we will seek to set out the specification of the backstop leverageratio, and the NSFR will be refined between now and the end of 2014.Clearly, we still have work to do, but increasingly it is about getting thetechnical details correct rather than new far-reaching ideas.Even when the Committee’s policy response to the crisis is complete,much more work will still be needed.Implementation needs to be seen as an integral part of the reform agenda,not a sideline activity.As we examine this issue to a depth that it has not previously beenexamined, we will inevitably find things that need improvement.Turning a blind eye to these, as may have occurred in the past, is not anoption – we need to persevere and find those areas where additionalmodifications to the regulatory framework are needed to ensure it iseffective.If we do not work to improve implementation, we will not embed thereforms into domestic banking systems in the full, timely and consistentmanner that is in everyone’s interests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23Protecting Investors by Seizing theOpportunity to Strengthen Audit QualityJeanette M. Franzel, PCAOB Member AmericanAccounting Association Midyear Conference andDoctoral ConsortiumNew Orleans, LAI am honored to be here today at the mid-yearauditing section conference of the AmericanAccounting Association (AAA).Before I get started, I must tell you that the views Iexpress today are my personal views and do not necessarily reflect theviews of the Board, any other Board member, or the staff of the PCAOB.In preparing for this conference, I noted that the theme for the AAAsupcoming annual conference in August deals with viewing currentsignificant challenges as "Brilliantly Disguised Opportunities."This is a fantastic theme, and I thought Id take the opportunity to get allof us thinking along these lines now, as we begin 2013.The "brilliantly disguised opportunity" I want to talk to you about todayis strengthening audit quality in the aftermath of the recent financialcrisis.We find ourselves, once again, forced to evaluate the integrity of theassurance provided to the financial markets through financial reportingand auditing.All participants in the supply chain of financial reporting and auditing, aswell as the regulators and corporate governors, need to seize the"opportunities" we are currently facing to instill lasting change that willprotect investors and help ensure that we can continue to pass alongopportunity and prosperity to future generations of Americans. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24Each of you, too — as educators of students entering the accountingprofession and as researchers on the issues we are facing, plays a key rolein the solutions.At the PCAOB, we are taking on an ambitious list of significant issues tohelp ensure investor protection and high quality audits now and for thelong term.Today, I will discuss four of these key issues in audit oversight and ourplans for change: audit quality, professional skepticism, inspections andremediation, and standard setting.Audit Quality, Professional Skepticism, Inspections andRemediation, and Standard SettingWeve all heard those words before.Two are about how auditors do their work -- audit quality andprofessional skepticism; and the others are about how the PCAOB doesits work -- inspection and remediation, and standard setting.In 2013, the Board is looking at them anew. In revising our strategic planlast year, we stepped back, took stock, and looked at these issues with along term view.As the PCAOB marks its 10th anniversary this year, it is appropriate andnecessary to evaluate our progress.The PCAOB is a relatively new regulator and still has work to do toestablish sustainable regulatory approaches for the long term, whileremaining nimble and responsive to emerging risks and issues.The Boards recently updated strategic plan[1] reflects this. Its near termpriorities for 2013 include:Audit Quality: identifying audit quality measures, with a longer term goalof tracking such measures for domestic global network firms[2] andreporting changes in these measures over time; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25Inspection Findings: enhancing the PCAOBs processes and systems torefine the analysis of PCAOB inspection findings, including comparativeanalysis across firms over time, to further inform the investing public andPCAOBs standard-setting and other regulatory activities;Inspection Reports: improving the timeliness, content and readability ofinspection reports;Remediation Determinations: improving the timeliness of remediationdeterminations and providing additional information on the PCAOBsremediation process;Standard Setting: enhancing the framework for the PCAOBsstandard-setting process and the related project-tracking informationprovided to the investing public; andAudit Committees: enhancing the PCAOBs outreach to, and interactionwith, audit committees to constructively engage in areas of commoninterest, including auditor independence and audit quality.Assessing and Tracking Audit QualityThe first of these near term priorities that I want to talk about today isassessing and tracking audit quality.Ten years after the establishment of the PCAOB, it is fair to ask, "What isthe present state of audit quality?" and "Has audit quality improved sincethe enactment of the Sarbanes-Oxley Act?"Weve had many stakeholders and members of the profession tell us thatthey believe audit quality has improved, and we, at the PCAOB, tend toagree.PCAOB inspections, however, continue to find serious audit deficienciesin public company audits on a regular basis.In addition, the results of our first round of inspections of audits ofbrokers and dealers are troubling. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26In pursuing our core mission of protecting investors through auditoversight, the Board has a number of initiatives targeted at improvingmajor areas of audit practice that establish audit quality.In light of the many financial reporting and auditing crises over recentdecades, I find it surprising that a generally understood and measurableconcept of audit quality has not emerged.This issue was raised at the outset of the recent financial crisis in arecommendation of the Department of the Treasurys AdvisoryCommittee on the Auditing Profession (ACAP).The committee recommended that the PCAOB study the feasibility ofdeveloping key indicators of audit quality and effectiveness.And, earlier this week, the International Auditing and AssuranceStandards Board issued a consultation paper on a proposed frameworkfor audit quality that sets out key attributes that are conducive to auditquality.A recent synthesis paper, Audit Quality: Insights from the AcademicLiterature, notes that despite more than two decades of research, there islittle consensus about how to define, let alone measure, audit quality.Furthermore, the various stakeholders in the financial reporting processhave different views as to what constitutes audit quality.While some might define a quality audit in terms of audit inputs -- such aswhether auditors follow standards -- investors and audit committeemembers may focus on certain audit outcomes -- demanding that auditsuncover fraud, for instance.Many have also viewed audit quality in terms of the absence of negativeoutcomes such as restatements, litigation, or subsequently discoveredmaterial problems.The divergence in views on audit quality has contributed to the"expectations gap" over what an audit should be. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27This has persisted for decades, and also causes a divergence in definitionsof what constitutes an audit failure.PCAOB uses its own definition of audit failure in inspection reports.It is a deficiency of such significance that the firm, at the time it issued itsaudit report, failed to obtain sufficient appropriate evidence to support itsaudit opinion on the financial statements and/or on the effectiveness ofinternal control.Under the definition, deficiencies include instances where a firm did notidentify or address appropriately financial statement misstatements orimproper disclosures, as well as failures by the firm to follow auditingstandards.The Board has made it a 2013 priority to identify audit quality indicators.A longer term goal is to track such measures for domestic global networkfirms and report on those measures over time.This project is already underway and will include the identification ofaudit quality measures in the areas of audit process and results, as well asthe development of methods for objectively measuring those audit qualityindicators.Because of the complexity of these issues, our process for developingthese measures likely will be iterative.Due to the multi-dimensional nature of audit quality, a "balancedscorecard" approach with various indicators and measures likely will benecessary.I anticipate that the development, measurement, and analysis of auditquality indicators will inform PCAOB policy making and provide keyinformation about the state of audit quality across firms and over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28The results of this process will also provide us with information forreviewing, adding context to, or clarifying our current definition of "auditfailure" for our inspection reports.In my view, the PCAOBs project on audit quality indicators andmeasures will represent a significant development in helping to advanceaudit quality and the reliability of audits now and in the long term.The PCAOB is in a unique position to observe, track, and measure manyaspects of audit quality inputs and provide benchmarking information tofirms, promote firm accountability, and provide transparency and usefulinformation to investors and other stakeholders.Such information will be useful in the marketplace as well, so thatinvestors and audit committees can demand better audit quality and shiftaudit firm competition over price to competition over quality.Auditors Use of Professional Skepticism in AuditsA key element of audit quality is the auditors use of professionalskepticism.Professional skepticism is particularly important in those areas of theaudit that involve significant management judgment or transactionsoutside the normal course of business, and the auditors consideration offraud.These are often the high risk areas of the audit.PCAOB inspections have identified numerous audits with deficiencieswhere auditors did not consistently and diligently apply professionalskepticism.In many of those cases, the audit teams did not obtain sufficientappropriate evidence to support their audit opinions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29This issue has been of such prevalence that we have identified theapparent failure to appropriately apply professional skepticism as asystemic quality control issue in some firms.In addition, as part of the Boards outreach on auditor independence overthe past 18 months, a major theme that the Board heard from a variety ofstakeholders was the need for professional skepticism to be emphasizedmore in the education, training, and standard setting for auditors, as wellas in the firms cultures, tone at the top, and systems of quality control.On December 4, 2012, PCAOB issued Staff Audit Practice Alert No. 10:Maintaining and Applying Professional Skepticism in Audits toemphasize and remind auditors of the requirement to appropriately applyprofessional skepticism throughout audits.It provides specific examples of audit deficiencies in which a lack ofprofessional skepticism was at least a contributing factor.The Practice Alert includes examples that raise concerns about a lack ofprofessional skepticism, such as instances in which engagement teamsdid not:- obtain an understanding of the specific methods or assumptions underlying estimates;- evaluate the significance of evidence that supported values other than those closest to the issuers recorded prices;- test beyond inquiring of management the significant assumptions underlying valuations;- question whether certain assets were potentially impaired, despite evidence that the carrying amount may not be recoverable; and- question an issuers use of a GAAP exception even though doing so conflicted with the plain language of the exception and with the firms internal accounting literature. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30The Practice Alert also identifies possible impediments to the applicationof professional skepticism, including:unconscious biases and other circumstances that cause auditors togather, evaluate, rationalize, and recall information in a way that isconsistent with client preferences;incentives and pressures in the audit environment such as pressures tobuild or maintain a long term audit engagement, avoid significantconflicts with management, provide an unqualified audit opinion prior tothe issuers filing deadline, achieve high client satisfaction ratings, keepaudit costs low, or cross-sell other services; andscheduling and workload demands that put pressure on engagementteams to complete their assignments too quickly, which might leadauditors to seek evidence that is easier to obtain rather than evidence thatis more relevant and reliable, to obtain less evidence than is necessary, orto give undue weight to confirming evidence without adequatelyconsidering contrary evidence.Finally, the Practice Alert contains a discussion of how firms can promotethe appropriate application of professional skepticism on audits througha robust system of quality control.A number of firms are currently undertaking significant initiatives inresponse to PCAOB inspection findings to better understand the factorsthat influence the application of professional skepticism on their audits.To do this, they need to evaluate the specific factors that led to any lackof, or impairments to, the application of skepticism.This is a difficult but crucial area to get right in auditing.As described in a recent literature synthesis on this topic, professionalskepticism is a multi-dimensional concept that remains difficult to defineand measure. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31It is often difficult to determine if a lack of skepticism is the primarycause of audit deficiencies, and if so, which factors led to the lack ofskepticism.Specifically, was it a problem with the auditor recognizing that a potentialissue exists that may require more work or effort (lack of skepticaljudgment)?Or was it a failure of the auditor to change behavior in response to anissue that was recognized (lack of skeptical action)?What were the specific characteristics and circumstances attributable tothe auditor, the evidence, the client, and the audit environment that mayhave contributed to or caused the lack of appropriate professionalskepticism in an audit?The PCAOB will continue to focus on the appropriate application ofprofessional skepticism in our inspections and our discussions with thefirms.This is an area where the firms could benefit from academic thoughtleadership, research, and application tools.I encourage you — in the auditing section of the AAA -- to consider waysto provide relevant research results to the firms, and to assist firms indeveloping and implementing potential tools, such as surveys and othermetrics, for tracking and assessing how professional skepticism isapplied on audits.We would like to hear your ideas, too.Inspections and RemediationThe third subject Id like to talk to you about today — also among theBoards 2013 priorities — is our inspections and our oversight of therelated remediation of identified deficiencies in firms systems of qualitycontrol. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32As you know, the largest PCAOB-registered public accounting firms —those auditing more than 100 issuers — are inspected annually by thePCAOB.Firms that issue 100 or fewer issuer audit reports each year are subject toinspection at least every three years.During 2012, the PCAOB inspected nine firms that audited more than 100issuers in 2011.As we were conducting the 2012 inspections, we were also issuing theinspection reports for the 2011 inspections of these firms.During 2012, we issued the 2011 inspection reports for six of the nineannually inspected firms.In addition, during 2012, the PCAOB conducted 244 triennial inspectionsat 167 domestic and 77 foreign firms.The length of time it takes to complete preparation of the inspectionreports has been an ongoing challenge for the PCAOB, but weve recentlymade significant progress in clearing a backlog of older inspections.During 2011, the Board processed numerous older inspection reports,issuing a total of 344 inspection reports that year. (As a reference point,the Board conducted a total of 254 inspections during the previous year.)During 2012, the Board continued to make progress in clearing most ofthe remaining backlog of older inspection reports.The Board issued a total of 257 inspection reports during 2012. (Thiscompares to a total of 213 inspections conducted during 2011.)The Board also is working through the related remediationdeterminations that follow the issuance of inspection reports. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33Firms are given 12 months from the date of the inspection report toremediate any deficiencies noted in their quality control systems, whichare included in the nonpublic Part II of the reports.Otherwise, they face publication of that portion of the inspection report.As we become more current in our issuance of inspection reports andremediation determinations, we are taking a fundamental look at ourprocesses for issuing these reports.We want to develop processes and tracking metrics to help improve theoverall timeliness of these reports and to prevent backlogs from occurringin the future.In addition, we plan to conduct a thorough review of the content andreadability of our inspection reports.This review will include proactive outreach to users, such as yourselves,to help us identify ways to improve the usefulness of the reports.Before I move on, let me talk a minute about our inspection findings.As Im sure you know, the number of serious deficiencies we reportedspiked in our 2010 inspections, and remained high in the 2011 inspections.Common areas where we found audit deficiencies included revenuerecognition, fair value of financial instruments, testing and evaluatinginternal controls, related party transactions, the auditors assessment ofand response to fraud risk, and the auditing of equity financinginstruments, among others.Quality control findings in the nonpublic Part II of our inspection reportsfocus on issues that may have caused the audit performance deficienciesreported in Part I, as well as other aspects of the firms management of itsaudit practice that could negatively impact audit quality.Some examples of areas of specific concern that have appeared in Part IIinclude problems in the areas of professional skepticism, internal _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34inspections, and firms quality control processes related to specificaspects of auditing, such as testing and evaluating internal control overfinancial reporting, fair value, and other areas.The Board regularly engages in constructive dialogue with firms toencourage them to improve their practices and procedures.Successful remediation and sustained improvements in audit quality areclearly the goals of this process.Fortunately, we have seen most firms take their responsibilities forremedial efforts and improvements seriously.Based on the timing of the related remediation periods and the firmsefforts in those areas, it is reasonable to expect that firms would achievesignificant improvements in their PCAOB inspection results for theaudits of the 2012 financial statements -- which will be inspected during2013 -- in those areas identified as problems during the 2010 and 2011inspections.I would also hope that we see some improvements emerge in the firmsinspection results for the 2012 inspection cycle in comparison to the 2010inspections.Standard-Setting ActivitiesLastly, Id like to speak to you today about 2013 enhancements in the areaof standard setting.The PCAOB is uniquely positioned to use its insight from inspectionactivities to improve existing auditing standards to support high qualityaudits to protect investors and the public interest.As we look to what the PCAOB has accomplished through its standardsetting, and what still needs to be done, we have taken on an ambitiousproject to broadly reexamine our standard-setting approach. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35In our current strategic plan, we included a new strategy for standardsetting for audits of emerging growth companies, in light of the recentlyenacted Jumpstart Our Business Startups Act (JOBS Act).We expect to continue to devote significant time and resources topreparing analyses to assist the Securities and Exchange Commission inmaking determinations under this Act regarding the applicability of newPCAOB standards to emerging growth companies, as well as continuingto explore ways to further incorporate economic analysis into ourrulemaking processes.For the long term, we are doing the work necessary to establish a visionand framework to guide and prioritize our standard-setting activities.Such a framework would be flexible and adjustable to respond toemerging risks and trends.As part of this framework, we will consider using a combination of variousapproaches and related criteria for standard-setting projects, dependingon the circumstances.We are thinking about the different categories or "tracks" for ourstandards projects.For instance, when we determine that a project is necessary because ofunique circumstances related to U.S. issuers, we choose to take on aproject even if other standard-setting organizations are not dealing withthe issue.In other cases, there may be issues that other standard-settingorganizations have raised or have acted upon where we can leverage thatwork to varying degrees in our own related projects.As part of these efforts, we are looking to find a mechanism to eliminatethe notion of "interim" standards — the title we use for the originalAICPA standards the Board adopted when it began operations back in2003. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36We have a 2013 project entitled, "Reorganization of PCAOB AuditingStandards."This project involves developing an approach to integrating andreorganizing the interim auditing standards (referred to as "AU") withthe auditing standards issued by the Board (referred to as "AS").This project is intended to make it easier for users to navigate thestandards and facilitate users ability to compare PCAOB standards to theInternational Standards on Auditing (ISA) and other standards.This reorganization project is included in the Boards recently releasedstandard -setting agenda.The agenda has been updated and improved with a new format whereprojects are divided into six month increments.It will be updated periodically.The new format allows for greater flexibility, while also providing greatertransparency into ongoing developments.The agenda is highly ambitious.The following five projects are scheduled for action in the first half of2013:Related parties (adoption or re-proposal)Reorganization of PCAOB standards (proposal)Auditors reporting model (proposal)Auditors responsibilities with respect to other accounting firms,individual accountants, and specialists (proposal)Audit transparency: identification of the engagement partner (adoption orre-proposal) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37The timing of two other potential 2013 standard-setting projects isdependent on third parties:Audits of brokers and dealers (dependent on SEC rulemaking)Going concern (proposal, dependent on FASB timing)An additional eight projects also remain on our standards agenda:Auditor independence and audit firm rotation (next steps underconsideration)Audit transparency: identification of other public accounting firms orpersons not employed by the auditor (adoption or re-proposal)Assignment and documentation of firm supervisory responsibilities(proposal)Quality control standards (concept release)Auditing fair value measurements (proposal)Auditing accounting estimates (proposal)Confirmation (re-proposal)Subsequent events (proposal)We plan to make substantial progress during 2013 on the current agendawhile also continuing to develop a long term view and framework forsetting standards beyond the current project list.This is a substantive workload, and it is something to watch throughoutthe coming year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38ConclusionAs you can see, the Boards 2013 agenda is brimming with opportunitiesto make needed improvements in auditing while enhancing our auditoversight.I expect the firms to demonstrate meaningful, measurable progress inaudit quality in the next few years.At the same time, the PCAOB is working on better tools to measure andmonitor audit quality levels.A major driver of audit quality throughout the audit process isprofessional skepticism, and the Board is overseeing firms initiatives tolook closely at factors that lead to any lack or impairment of professionalskepticism, and how to adjust their quality control systems to strengthenits application.PCAOB inspections and remediation oversight is a profound regulatorytool.We will be working hard this year to refine the analysis of inspectionfindings, and we will begin improvements to the timing, content andreadability of our inspection reports.Finally, the Board has adopted an ambitious list of standard-settingactivities for this year, while improving its standard-setting processes andproject-tracking.The PCAOB was established as the result of a devastating financial crisis,and was given a key role in protecting investors and the public interest inaudit oversight.Since that time, much progress has been made, but more needs to bedone. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39After nearly 10 years on the job, the PCAOB is working hard to make sureaudit firms remember to focus on the fundamentals of good audit qualityand investor protection.I look forward to continuing to work with the academic community tofurther our goals in these areas.Thank you. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40EIOPAMulti-Annual Work Programme2012-20141. IntroductionEIOPA is an independent European Supervisory Authority acting withinthe scope of various Directives covering insurance and reinsuranceundertakings, institutions for occupational retirement provision andinsurance intermediaries as well as related issues not directly covered bythese Directives.EIOPA has legal personality, administrative and financial autonomy andis accountable to the European Parliament and the Council of theEuropean Union.EIOPA’s objective is to protect public interests by contributing to theshort, medium and long-term stability and effectiveness of the financialsystem, for the Union economy, its citizens and businesses.This objective is pursued by promoting a sound regulatory frameworkand consistent supervisory practices in order to protect the rights ofpolicyholders, occupational pension scheme members and beneficiariesand contribute to the public confidence in the European Union’sinsurance and occupational pensions sectors.EIOPA is part of the Joint Committee which has the goal ofstrengthening cooperation between the ESAs.EIOPA’s tasks, responsibilities and scope of action are wide-ranging.It is therefore essential to define strategic choices in each of the differentareas of work. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 412. Regulatory TasksEIOPA’s regulatory powers in the insurance, reinsurance andoccupational pensions sectors include developing technical standards,issuing guidelines and recommendations and providing opinions inEIOPA’s field of competence.The policy environment will be subject to significant change between2012 and 2014 with the finalisation, implementation and subsequentmonitoring of the Solvency II framework for insurance and reinsurance,and development of revised legislation for occupational pensions.EIOPA will take an ambitious European approach to policy in thesesectors: there will be substantial benefits to greater harmonisation in themeasurement of the risks facing both insurance undertakings and IORPs,in their internal governance, and in the information they provide tomembers, policyholders and supervisors.We will work with consumers and industry, with the EU member states,and with European and international organisations.We will use the full range of EIOPA’s tools to implement our policy:standards, guidelines, opinions, and advice.Strategic directions 2012-2014 - Completion of the standards and guidelines required for theintroduction of Solvency II, and the monitoring of their implementation - Establishment of the operational tasks required of EIOPA underSolvency II - Enhancement of convergence in supervision by greater use of toolse.g. supervisory review process, Q&A- Assessment of impact of Solvency II framework on consumers _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42- Advice to the European Commission on review of EU legislation foroccupational pensions- Quantitative impact of EIOPA’s proposals with special focus on defined benefit pensions - Best practices and recommendations for treatment of definedcontribution pensions, particularly in the areas of default funds andinformation to members- Advice the European Commission on a framework for the activities and supervision of personal pension schemes- Increase EIOPA’s voice in international pensions fora - Embed selection and use of EIOPA’s existing tools for assessing theeffects of regulatory changes: regulatory impact assessment;quantitative impact studies; stress tests; public consultation- Improve use of evidence in policy development and option selection3. Supervisory TasksEIOPA is a supervisory authority that contributes to high qualitysupervisory standards and practices, through consistent and efficientapplication of the Union acts.Colleges of Supervisors (Colleges) are considered effective tools toenhance mutual understanding among supervisors and convergence ofsupervisory practices, with tangible benefits to undertakings, supervisorsand policyholders.EIOPA has a leading role in building the position of the EEA supervisorycommunity towards the cross-border operating insurance groups for thebenefit of both group and solo supervision. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43With Solvency II coming into force group supervision and thecooperation amongst supervisors through colleges on pillar 1, pillar 2 andpillar 3 related issues becomes a legal requirement.In order to shape the overall supervisory practices EIOPA will providetools to support the convergent implementation of Solvency II, e.g. asupervisory handbook and a centre of expertise in the field of internalmodels.Strategic directions 2012-2014- Participate in college meetings and joint on-site inspections- Support the preparation of the colleges for Solvency II with the aim that they are ready for the task by the entry into force of Solvency II- Facilitate information exchange and provide support on the discussion on risks in the colleges- Enhance functioning of colleges by collecting, defining and disseminating best practices regarding e.g. internal model pre-application assessment process, delegation of tasks- Enhance practical approach to colleges via the establishment of a Q&A procedure to practical or supervisory questions on established guidelines, recommendations and standards- Development of a supervisory handbook addressing best practises in the supervisory process- Promote consistency through sharing best practices and providing support to competent national authorities- Investigate alleged cases of breach or non-application of Union Law and address recommendations to competent authorities where necessary _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 444. Consumer Protection and Financial InnovationUnder Article 9 of the EIOPA Regulation, EIOPA is already taking aleading role in promoting transparency, simplicity and fairness in themarket for consumer financial products or services across the internalmarket.In this respect, EIOPA’s strategy in the area of consumer protection andfinancial innovation is to proactively create added value for consumersand enhance consumer protection in the area of insurance andoccupational pensions.Moreover, EIOPA ensures convergence of regulatory practices on thebasis of fundamental Union principles as follows.Strategic directions 2012-2014- Develop common methodologies to assess the effect of product characteristics and distribution processes on consumer protection and on the financial position of institutions- Promote transparency, simplicity and fairness for consumer financial products or services across the internal market- Collect, analyse and report on consumer trends and identifying areas where action of EIOPA can make a difference to consumers- Review and coordinate financial literacy and education initiatives by the competent authorities- Develop training standards for the industry- Contribute to the development of common disclosure rules- Coordinate regulatory and supervisory treatment of new or innovative financial activities _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45- Adopt guidelines and recommendations with a view to promote safety and soundness of financial markets and convergence of regulatory practice- Issue warnings and, within the cases specified and under the conditions laid down in sectoral legislation, temporarily prohibit or restrict certain financial activities- Contribute to the assessment of the need for a European network of national insurance guarantee schemes- Lead preliminary work on the operations tasks required of EIOPA under the proposed revised Insurance Mediation Directive (IMD2) and delegated acts required under IMD25. Common Supervisory CultureThe EIOPA Regulation stresses the importance of a common supervisoryculture in the European Union.EIOPA strongly supports the shift from regulation to commonsupervisory culture and plays an active role in building consistentsupervisory practices, as well as ensuring uniform procedures andconsistent approaches throughout the Union.Strategic directions 2012-2014- Establish and conducting sectoral and cross-sectoral training programmes for European insurance and occupational pensions supervisors to enhance convergence in supervisory practices- Prepare and train operational supervisors for Solvency II implementation with the view towards consistent and efficient supervision under Solvency II _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46- Establish and conduct EIOPA Conferences and joint trainings for supervisors and industry representatives to reach better mutual understanding- Facilitate personnel exchanges and secondments between competent national authorities- Conduct regular thematic peer reviews across all national competent authorities to strengthen the consistency and quality of supervisory practices- Resolve disagreements between competent national authorities in Cross-border situations by way of binding and non-binding mediation- Establish mediation procedures and an independent EIOPA Mediation Panel that facilitates the mediation6. Financial StabilityEIOPA is granted the task of enhancing European financial stability inthe insurance and occupational pension fund sectors.EIOPA shall assess potential threats to the stability of the financialsystem and make appropriate recommendations for actions to thecompetent authorities concerned.It shall ensure that possible systemic risk posed by some financialinstitutions is taken into account when developing draft regulatory andimplementing standards.The overall aim of EIOPA’s Financial Stability work is to monitor andassess market developments and their implications.In consultation with the European Systemic Risk Board (ESRB), itdevelops criteria for the identification and measurement of systemic riskwith particular focus on the insurance and occupational pensions sector. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47Strategic directions 2012-2014- Issue financial stability reports and report outcomes of financial stability and vulnerability analyses to the ESRB, the European Commission, the European Parliament and the Council of the European Union- Stress tests of the Insurance and Occupational Pensions sectors- Maintenance and further development of financial stability risk dashboard- Assess market impact of potential regulatory changes that influence the insurance and occupational pension sectors and developing policy options that enhance financial stability and limit possible systemic risk- Support competent national authorities with financial stability issues, including bilateral contacts and visits to the national authorities to build a better mutual understanding of risk assessment and more national specific issues- Monitor and assess financial markets and following up identified risks- Provide third parties with relevant statistical analyses and further develop the statistical framework7. Crisis Prevention, Management and ResolutionEIOPA is empowered to take action to identify an “emergency situation”and, once such a situation is declared by the Council of the EuropeanUnion, to act to deal with it.EIOPA also has a responsibility to facilitate and, where appropriate,coordinate actions taken by national supervisory authorities to deal withadverse developments threatening EU financial stability. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48Strategic directions 2012-2014- Promote vigilance on the part of insurance and pensions supervisory authorities in EEA Member States to anticipate and prevent financial crises:o identify risk “hotspots” and feed this information back to EEAsupervisory authoritieso assess the risk of an “emergency situation” and make a proposalto the European Council when necessary- Raise awareness and improve preparedness of national competent authorities to deal with financial crises:o promote information exchange and development of actions todeal with crisis situationso serve as a platform for supervisory authorities to work togetherto deal with crisis situationso development of consistency and best practice in the area ofcrisis management- Facilitate and, where necessary, coordinate supervisory actions to deal with a crisis:o refine and develop EIOPA’s own capability to deal with crisisprevention and management issueso coordinate national competent authorities in their actions- Stand ready to take direct action within EIOPA’s powers:o be ready to make decisions addressed to competent authorities orfinancial market participants under Article 18 of the EIOPA regulation- Play a key role in the development of resolution policy for insurance in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49Europe:o work with the European Commission through its consultationprocess to ensure that any new legislation is well tailored forinsuranceo put in place whatever internal processes and structures arerequired to operate the new resolution regime8. External RelationsIn compliance with the powers granted by the Regulation EIOPA isplaying an active role in the field of international insurance andoccupational pensions.An important goal of EIOPA is to guarantee a level playing field for allmarket participants.To achieve this, equivalence and compatibility of the different regulatoryand supervisory regimes play a key role.EIOPA furthers and contributes to the development of a global regulatorystandard.In this context, EIOPA promotes a joint European approach to activelyshape the global debate in international fora such as IAIS and IOPS andto get the European voice better heard to eventually make a realdifference.Over the next years, EIOPA will produce sound, prudent and qualityregulatory frameworks in insurance and occupational pensions.EIOPA is highly committed to involve the professional expertise,know-how and experience of its Stakeholder Groups provided throughthe well balanced and diverse background of their members.We strongly believe in a mutual benefit through a trustful and transparentcooperation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50Strategic directions 2012-2014- Provide a platform for EIOPA, EIOPA Members, EU Institutions and third country competent authorities or administrations as well as other international stakeholders too Facilitate mutual understanding, know-how exchange andmutual learning from experience in different jurisdictions on anon_going basiso Address topics of overarching international relevance- Support, coordinate and facilitate the work in the area of Third country equivalence, in particular the Equivalence Committee as well as other projects relevant in this context- Coordinate, facilitate and support the functioning and the work of the two EIOPA Stakeholder Groupso Ensure successful delivery of the Stakeholder Group opinions toEIOPA on publicly consulted documents- Liaise and cooperate with the other ESAs and the European System of Financial Supervision (ESFS)o Support the ESA Joint Committee activities to ensure overallcross-sectoral consistency and take over chairing the Joint Committee in2013- Liaise with EU Institutions and other stakeholders on relevant subjects for EIOPA and contribute to those discussions9. EIOPA Internal OrganisationAfter the initial set up in 2011, EIOPA will be further established in 2012-2014 as a fully-fledged EU Agency. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51The Authority will grow into a modern, efficient and adaptiveorganisation, well equipped to meet the various and challengingdemands.These demands originate from EIOPA’s evolving external environment,adjustments to EIOPA’s products and services, the furtherimplementation of the EIOPA Regulation and of the specific rules andregulations related to staff and financial matters.On the basis of the approved IT Strategy and IT Strategy implementationplan EIOPA will develop a centralised system for secure transfer andmanagement of information within EIOPA and between EIOPA and itsMembers.EIOPA also implements the recommendations and benefits fromcontributions of the Internal Audit Services (IAS) of the EuropeanCommission and the European Court of Auditors.Strategic directions 2012-2014Ensure EIOPA has the required competent and motivated staff- further equip EIOPA with competent staff whose team work skills, flexibility and continuous learning abilities enable the institution to be agile and adaptive- further build on EIOPA’s identity and culture, creating a working environment where staff can thrive- promote the secondment of national experts to EIOPA Enhance EIOPA’s processes and supporting ICT solutions- further design and deploy EIOPA’s key processes, aiming at a high level of compliance, transparency, efficiency and effectiveness- create fast and secure information storage and exchange solutions supporting EIOPA’s core business activities _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52- extend administrative supporting systems- ensure efficient budgetary, financial and internal control arrangements- implement best practices in the area of budgeting, ensuring budget is planned and justified from scratch each year based on actual needs- build up and enhance the financial policy framework with a focus on efficient and compliant processes- continuously improve the internal framework in order to ensure timely, efficient and economic delivery of its tasks whilst striving to deliver the highest quality of EIOPA’s products and services Contingency planning- ensure contingency if EIOPA headquarters become unavailable, by establishing alternative locations and modalities for high level meetings- ensure availability of key products and services within agreed time frames and according to the highest security and confidentiality standards EIOPA taking full corporate & social responsibility- reduce the carbon footprint by using environmental friendly solutions- set up robust working processes of communication with media and public- continue educating our youth, offering opportunities for trainees and students- build a positive EIOPA image in social media and networks _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56Recent policy developments forstrengthening the resilience of the financialsectorWelcoming remarks by H E Sultan Bin NasserAl-Suwaidi, Governor of the Central Bank of the UnitedArab Emirates, at the 8th High-Level Meeting for theMiddle East & North Africa Region on “Recent policydevelopments for strengthening the resilience of thefinancial sector”, organized by the Basel Committee onBanking Supervision (BCBS), the Financial Stability Institute (FSI) andthe Arab Monetary Fund (AMF), Abu DhabiGood morning, Excellencies, Ladies & gentlemen, Y.E. MarGudmundsson, Governor of Central Bank of Iceland, The Honorable,Josef Tošovský, Chairman of the Financial Stability Institute of the BIS,Y.E. Dr. Jassim Al Mannai, General Manager & Chairman of the ArabMonetary Fund, The Distinguished Speakers,It gives me great pleasure to welcome you to the UAE, especially thosewho travelled a long way to be here with us at the outset of this importanthigh level meeting.The subjects that would be discussed today are familiar and current, andvery much relevant to stability of the financial systems.The financial systems stability in all countries, and this region is noexception, are very important for economic stability.I will start by giving you an idea about the UAE financial system, whichfalls under the Central Bank supervision. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. P a g e | 57 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  58. 58. P a g e | 58If I may switch now to talk about one of the subjects this meeting willdiscuss namely: SIBs or D-SIBs, it will be worthwhile to work on aframework to identify D-SIBs in the region at the first stage.The framework should take into account:(a) the size of the bank (based on simple indicators such as total assetsand the bank’s reliance on specific sectors, like the real estate sector andthe GREs and counter parties),(b) the interconnectedness between banks (as indicated by deposits fromand loans to), and the degree of complexity, even though this does notplay a significant role in the UAE, as banks do not trade or invest insophisticated financial products.Also, cross-border activities by banks in the region can’t be used todetermine if they qualify as D-SIBs, as these activities are insignificant.II. Issues for consideration1. The BCBS assessment framework suggests that Local regulators areentrusted with the task to set up their own methodology for the process ofidentifying which banks to be considered as D-SIBs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  59. 59. P a g e | 59Nonetheless, some general guidelines on the subject from BCBS wouldbe helpful, and they will make the exercise more consistent region-wide.2. Central Banks in our region could develop a peer-group approach forthis exercise so they could learn from each other.3. It seems that the D-SIBs proposal is restricted to banks.Would Non-bank Financial Institutions (NBSFIs) be considered?Would the assessment of systemic importance cover subsidiaries (and notbranches) of banking groups.4. The assessment framework also suggest there will be a mix ofqualitative and quantitative judgments for each D-SIB.With the general guidelines from BCBS, it would be the responsibility ofthe local authority to assign the appropriate weights to the qualitative vs.the quantitative judgments.5. While waiting for the final version of BCBS document, Central Banks inour region could start working on the identification exercise of D-SIBs,taking into account local considerations, learning from countries ofsimilar financial systems, and benefiting from peer-reviews.III. Higher loss absorbency (HLA)1. As in the G-SIBs framework, D-SIBs will be required to hold additionalCommon Equity Tier 1 Capital (CET1) to meet their HLA requirements,which eventually support capital conservation of the Basel III capitalframework.It is a positive development that national regulators are given theauthority to decide on the appropriate level of additional CET1,consistent with each bank’s systemic importance.However there is some concern that the proposed HLA would justduplicate the already in place country-specific prudential measures _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  60. 60. P a g e | 60implemented in the region, which would mean that the D-SIB’s cost ofdoing business will go up.For example, in the UAE we impose the following capital ratios:– Tier 1 core capital: a minimum of 8% (actual is: 14.5%)– Tier 1 and other tiers: a minimum of 12% (actual is: 20.5%)2. However, it is suggested that local regulators should allow identifiedD-SIBs a comprehensive grace period to fully comply with the HLArequirements.3. As local debt markets are at an infancy stage in many countries in theregion, this would make it difficult for potential D-SIBs to holdhigh-quality liquid debt instruments as “pre-emptive” liquidity buffersagainst early signs of stress.Hence, there is a need to find an appropriate way to deal with this issue,until debt markets in the region witness significant improvements.To conclude, it should be stressed that strengthening the bankingsupervision exercise in our countries is key to tackling systemic risk inD-SIBs and other financial institutions.Excellencies, Ladies & gentlemenWith this I come to the end of my speech, but before I close, I would liketo thank the FSI of BIS and the AMF, for holding this important highlevel meeting here in Abu Dhabi, UAE.I wish you all a successful meeting. Thank you for your attention. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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