The politics of introducing IFRS enforcement at the local level institutional work in. the Austrian regulatory space

Transcription

1 The politics of introducing IFRS enforcement at the local level institutional work in Abstract the Austrian regulatory space As part of the adoption of IFRS, in its Transparency Directive (2004) the European Union required all member states to establish enforcement systems with an external oversight body. Our paper studies how this requirement was translated into the setting of a rather small country with a relatively minor capital market: Austria. We combine the concepts of regulatory space and institutional work to analyse the actors involved and their work strategies between 2002, when first debates about enforcement started in Austria, and 2013, when Austria finally introduced a formal enforcement system. Using archival material from law-making processes, public pronouncements by organisations involved, a systematic coverage of press articles as well as 15 semi-structured interviews, we find that different actors played dominant roles at different stages. First the Austrian audit profession engaged in maintenance work by trying to find an enforcement system that suits their interests, while other parties in spite of coercive pressures by EU regulation did not see the necessity to act as the capital market in Austria was performing well without any formal enforcement system. These actors were even able to convince the government that no enforcement body was necessary thus redefining the concept of enforcement as disseminated by (and throughout) the EU. It was only after the financial crisis when the Financial Market Authority attempted to claim the authority for IFRS enforcement that auditors and preparers collaborated to establish a two-tier system including a private enforcement body to avoid complete state control over enforcement. Our paper contributes to extant literature as it sheds light on how (local) auditors, their organisations and other actors frame and resist broader regulatory developments and thereby more generally responds to calls for research to examine the translation of global regulations at the local level. Keywords: Austria, Enforcement, IFRS

2 1. Introduction The introduction of IFRS in many countries worldwide has been a major step in the recent history of financial reporting regulation (e.g. Chua & Taylor, 2008; Camfferman & Zeff, 2015). In the European Union, the decision to introduce IFRS was formalized in the EU regulation 1606/2002 that led to the mandatory use of IFRS in the group accounts of listed firms since The mere introduction of a set of common standards, however, is not regarded as sufficient to ensure that expected benefits, i.e. better comparability and accounting quality and positive economic consequences, will actually materialize (e.g. Brüggemann, Hitz & Sellhorn, 2013). What is needed, in addition to common standards, is a financial reporting infrastructure that encourages similar uses of the common standards in different countries and thus, in particular, relates to the enforcement of accounting standards. Enforcement includes effective internal company control systems, independent auditors as well as a formal oversight mechanism with sufficient expertise and power (Brown & Tarca, 2005). Regarding the latter aspect of oversight mechanisms, the EU published a Directive in 2004 (European Commission, 2004), stipulating that each member state had to establish a central competent authority to ensure the consistent application of IFRS until This step was noteworthy as such institutional oversight mechanisms had only existed in a few EU member states before (Fédération des Experts Comptables Européens, 2001) and did not form part of the traditional financial reporting regulation in others (Brown & Tarca, 2005). There are a number of studies that shed light on how financial reporting infrastructure in the EU was introduced or changed around the time of IFRS adoption. Brown & Tarca (2005) provide a comparative study of different national settings with respect to the enforcement of IFRS. Ernstberger et al. (2012) and Hitz et al. (2012) focus on the consequences of the German enforcement system, introduced in 2004, and reveal that the new enforcement regime was accompanied by lower earnings management and positive capital market effects (Ernstberger et al., 2012) and that the release of enforcement errors, required by the German enforcement agency, has a significant effect on the capital market (Hitz et al., 2012). Other single-country studies explore how (accounting and/or audit) oversight and enforcement have developed in 1 The EU regulation 1606/2002 also contained a choice for EU member states to allow or require listed companies to use IFRS in their annual accounts as well as a choice to allow or require non-listed firms to prepare their consolidated and/or annual accounts according to IFRS. According to assessments of the EU Commission there is a huge variety of how these choices have been used by member states. See 1

3 Greece (Caramanis et al., 2015), Ireland (Canning & O Dwyer, 2016) and Romania (Albu et al., 2017). This paper follows the line of research that provides detailed case studies into individual countries to understand how changes in the financial reporting infrastructure come about. The focus of this paper is on the attempt to introduce an independent oversight body for the enforcement of listed firms in Austria. Austria is a remarkable case for multiple reasons: First, Austria has a high economic status compared to most other EU member states but the capital market is less developed than elsewhere. Instead, bank financing is more important in Austria which is typically linked to a lower demand for (transparent) financial reports (Soderstrom & Sun, 2007). This is important as IFRS are tailored to the interests of capital market participants and their valuation decisions (e.g. IASB, 2010, OB2) with elements of the financial reporting infrastructure trying to support this role. Second, Austria shares the tradition with other continental European countries that enforcement of financial reporting used to be in the domain of companies, auditors and courts (e.g. Merkl-Davis, 2004). While other countries rapidly changed their systems and following the benchmark of Anglo-American models of enforcement improved their enforcement scores 2, Austria did not follow suit. Brown et al. (2014) compare the enforcement systems in different countries and put Austria among the worst ranked countries in the study in terms of accounting enforcement. With a score of 8, Austria is ranked on an equal level with Croatia, the Czech Republic and Slovenia and behind countries such as Poland, Romania and Greece, the latter two countries being portrayed as exemplars of problematic oversight structures in accounting/auditing in the literature (Caramanis et al., 2015; Albu et al., 2017). In contrast to the other countries mentioned, Austria was also the only country not even formally adopting the requirements of the EU Directive until Our study explores how the change in the local enforcement system happened in Austria. More specifically, we address the research questions of how actors and events shaped the (development of the) Austrian enforcement regulatory space. As a theoretical background we draw on the concepts of regulatory space (Hancher & Moran, 1989) and institutional work (Lawrence & Suddaby, 2006) and study how institutional work was used by actors in the Austrian enforcement regulatory space to promote their agendas and how certain events influenced opportunities for such work strategies to unfold. As an empirical basis, we include archival material that comprises legal proposals, comment letters, proposals by interest groups 2 The score for Germany on a scale between 2 and 24 increased from a 5 in 2002 to a 21 in 2008 (Brown et al., 2014). 2

4 as well as articles in professional journals for the period between We also include press articles from a Factiva search during that period. This archival material is complemented by 15 interviews that were carried out with actors who were involved in or at least observing the development of an Austrian enforcement institution. This paper finds that the development of an enforcement body is not necessarily a linear process, even in cases where the establishment is required by transnational regulation. For the period until 2009 we present a case where the local Austrian interest groups, primarily preparers, the Chamber of Labour and large parts of auditors had no self-interest in establishing a new external oversight body responsible for enforcing the financial reports of listed firms. Their maintenance work was successful as they silenced the early efforts of a subgroup of auditors suggesting an enforcement model with least impact on auditors and ultimately even convinced the government that no new enforcement body was necessary. In other words, their work led to an official redefinition of enforcement that was in contrast to the way enforcement was understood and enacted at the level (and throughout) the EU. This is different from other studies that have analysed the rise of oversight bodies where such bodies were formally established but then not provided with sufficient resources (Caramanis et al., 2015; Albu et al., 2017). In these cases, institutional work was primarily happening after the establishment of the institution to promote maintenance or change (Canning & O Dwyer, 2016). Our case shows that institutional work during the implementation of transnational regulation can already be successful by questioning the sense and substance of transnational requirements. The Austrian enforcement regulatory space was only reopened in the wake of the financial crisis. In particular, the local financial market regulator perceived a deficiency (compared to (nearly) all other EU countries) that it had no authority to enforce financial reporting rules and therefore publicly argued and actively mobilized resources in order to take up this role. However, this was almost immediately met by strong opposition as those that had before the crisis denied any necessity for a new enforcement regime now collaborated to hinder the solution of a single-tier model with the Financial Market Authority (FMA). Thus, the crisis was a major event (e.g. Rainelli Weiss & Huault, 2016) that fundamentally changed the regulatory space as the prior common view that no new enforcement was necessary gave way to a debate on how to organize enforcement. Due to the strong opposition by preparers and auditors to a state solution (taken up by politicians of Austria s Peoples Party) on the one hand and the strong promotion of the FMA together with its allies (the Chamber of Labour and the Social Democrats), it came to political deadlock that 3

5 lasted from 2009 to Only then, increased external pressure from the EU and Germany led politicians to develop a compromise that allowed for different readings and, ultimately, proved difficult to implement in (enforcement) practice. The paper proceeds as follows. Section 2 introduces regulatory space and institutional work as the theoretical foundations of our study. Section 3 outlines the method adopted. Section 4 provides some descriptive background on our case. Section 5 presents our analysis, while Section 6 offers some conclusions. 2. Theory According to Hancher and Moran (1989, p. 277) a regulatory space is an abstract analytical construct containing the range of regulatory issues subject to public decision. A regulatory space is available for occupation and is unevenly divided among actors. Usually, a regulatory space is composed of a range of regulatory issues in a community or sector. As the issues decided within a regulatory space are seen as affecting the actors gathered in this space, these issues require negotiation about their practical meaning and the legitimate role of the regulator among the regulatees. Thus, a regulatory space is continuously constructed by people, organizations and events that act upon specific regulatory issues (Canning & O Dwyer, 2013). Consequently, actors often contest the regulatory space and engage in struggles for advantage. To understand the emergence of regulatory positions of actors, one must look beyond the boundaries of individual actors and analyze the broader space in which the actors operate (Young, 1994). The decisions of actors are embedded in social and historical contexts (Young, 1994), shaped by national political and legal settings, historical timing, organizational structure, the character of markets, and the nature of issue arenas (Hancher & Moran, 1989, p. 271). Hancher and Moran (1989) emphasize that regulation is an activity and thus it must be organized. Actors with sufficient resources, knowledge to create or copy regulatory institutions, expertise to conceptualize rules and to monitor their enforcement will dominate regulatory space. They depict large organizations as major occupiers of regulatory space, as the success of regulatory aims can only be accomplished with co-operation of these actors. Large organizations form notions about the appropriate scope of regulation, routinize them and embed them in organizational procedures. The concept of regulatory space enables the study of the dynamics trough which powerful organizations gain, maintain or lose their dominant position in a regulatory arena (Canning & 4

6 O Dwyer, 2013). As Young (1994) highlights, it is within the regulatory space that processes of regulatory change occur. We mobilize the concept to analyze the (intended) entry of a new regulatory body (through the establishment of an institutional oversight mechanism) into an existing regulatory arena, as this concept is very well suited for the examination of the entry of a new regulatory entity such as an institutional oversight body into an existing regulatory arena (Canning & O Dwyer, 2013; MacDonald & Richardson, 2004). It emphasizes the interconnectedness of various actors as well as the importance of the broader social and economic environment (Young, 1994). Young (1994) explores the complex processes through which accounting change occurs by examining the emergence of three accounting issues that were included on the FASB s technical agenda. She argues that this emergence of issues onto FASB s agenda cannot be understood solely focusing upon the internal dynamics of the FASB because no strict organizational boundaries can be drawn between the FASB and its environment (p. 84). The FASB and the other actors in its environment are located in a regulatory space defined by the issues subject to decision. Within this regulatory space, expectations about the actors role and purpose exist; thus, leading the FASB to respond to and act upon accounting issues according to a logic of appropriateness (March & Olsen, 1989). MacDonald and Richardson (2004) investigate how the behavior of the Public Accountants Council of Ontario in the regulatory space surrounding public accounting practice rights was guided by a logic of appropriateness based on its social identity. The Council s social identity was negotiated within a regulatory space where the Council was able to construct its own role that excluded some functions which it was entitled to fulfill, but also expanded the literal role assigned to it under the [Public Accountancy] Act (p. 520). We reconfigure the concept of regulatory space as a concept of actors interacting to create, maintain or disrupt institutions (Lawrence & Suddaby, 2006) to secure their dominant or advantageous position in a regulatory arena. For this purpose, we focus on the practices employed by the actors occupying the regulatory space rather than on the outcomes of regulatory efforts. This focus is deepened by framing the analysis with the concept of institutional work (Lawrence & Suddaby, 2006). This allows to examine the dynamics and practices in which actors engage to create, maintain or disrupt institutions. Lawrence and Suddaby (2006, p. 215) refer to institutional work as the purposive action of individuals and organizations aimed at creating, maintaining and disrupting institutions. Their concept brings together specific types of institutional work with institutional outcomes; the 5

7 creation, maintenance, and disruption of institutions (Currie et al., 2012). The concept of institutional work assumes actors to possess the ability to engage in actions to intentionally seek to affect institutions with a reflective and conscious purposefulness (Canning & O Dwyer, 2016). Using the lens of institutional theory, we regard a traditional local (national) enforcement system as an institution because it reflects taken-for-granted and enduring sets of practices (e.g. Rainelli Weiss & Huault, 2016). A common critique to this assumption of the taken-for-granted and the enduring sets of practices is the lacking understanding that institutions do not reproduce themselves and continue in a taken-for-granted way but are rather reliant on the active involvement of individuals and organizations and emphasizing too much on the effect of institutions on individual actions (Canning & O Dwyer, 2016; Lawrence & Suddaby, 2006). The perspective of institutional work uncovers how instructions can be products of human action and reaction, thereby allowing an in depth investigation of the actors interests, efforts and capacities to affect institutions. An actor s institutional work and its purpose are contingent on the actor s social position in a field and his control of resources (Canning & O Dwyer, 2016; Currie et al., 2012; Lawrence & Suddaby, 2006). According to Canning and O Dwyer (2016) the social position of an actor is derived from the actor s informal networks, his formal authority and resources like his specialist expertise. Institutional work to create institutions involves the political work of vesting, defining and advocacy. Vesting means to create rule structures that confer property rights, defining refers to the creation of rule systems that confer status, identify boundaries of membership or create status of hierarchies to encourage compliance. Advocating is the active mobilization of political and regulatory support through direct and deliberate techniques of social suasion (Lawrence & Suddaby, 2006, p. 221). The construction of identities, changing of normative associations and construction of normative networks refer to actions to reconfigure actor s belief systems. Finally, mimicry, theorizing and educating comprises work to alter abstract categorizations in which the boundaries of meaning systems are altered (Lawrence & Suddaby, 2006, p. 221). Institutional maintenance work refers to the ongoing maintenance necessary for the reproduction of institutions and is typically triggered by pending changes of the existing institutional arrangements (Micelotta & Washington, 2013). This kind of institutional work has a coercive and normative dimension (Currie et al., 2012; Lawrence & Suddaby, 2006). The coercive dimension promotes compliance with existing rule systems through enabling 6

8 existing institutions through the creation of rules that facilitate, supplement and support them. Further, through policing of the compliance with existing institutions through enforcement, auditing and monitoring. Compliance with an already existing institution might also be granted through deterrence which means to establish coercive barriers to institutional change. The normative dimension promotes the maintenance of an institution through valorizing and demonizing of positive and negative examples that illustrate the normative foundations of an institution, through mythologizing the history of an institution and through embedding and routinizing normative foundations of an institution into the participants day-to-day routines and organizational practices. The institutional disruption work refers to work of individuals or collective actors that involves attacking or undermining the mechanisms to comply with institutions. This comprises the disconnection of sanctions and rewards from existing institutions, the disassociation of an institution from its moral foundation as appropriate, and undermining core assumptions and beliefs of an institution. Canning and O Dwyer (2016) apply Lawrence and Suddaby s (2006) concept to investigate how shifting regulatory logics influenced and were influenced by institutional work undertaken within the Irish Auditing and Accounting Supervisory Authority (IAASA) to realise regulatory change in the field of the Irish accounting profession oversight. They show that the process of institutional work by individual actors of the IAASA is more fluid than suggested by Lawrence and Suddaby (2006), enabling them to develop a nuanced categorization of institutional work with types of institutional work that crossed categories of creation, maintenance and disruption work. Currie et al. (2012) examine how specialist doctors engaged in institutional maintenance work to preserve their professional dominance as it was threatened by the introduction of new nursing or medical roles in the English National Health Service. Similar to Canning and O Dwyer (2016), they find evidence for types of institutional creation and maintenance work to cross categories as the professional elite employed work categorized as creation work to achieve the maintenance of their power by ensuring that the delivery of specific services is rather delegated to than substituted by the new nursing and medical roles. We argue that the regulatory change in the field of accounting in our case the introduction of an institutional oversight mechanism is a dynamic and unpredictable process that leads to varying outcomes in different times and places (Canning & O Dwyer, 2016; Caramanis et al., 2015). To understand the dynamics surrounding this regulatory change we assume that the affected actors negotiate the meaning of the regulatory issue in a regulatory space and that it is 7

9 in this regulatory space where actors engage in institutional work to gain control of resources to promote their interests. 3. Method To address our objective of extending and develop the understanding of the dynamics involved and efforts undertaken by individuals and organizations to instigate institutional change in the regulation regarding the enforcement of the proper application of IFRS trough the formation of an Austrian institutional oversight mechanism, we conduct an in-depth case study. This research design is very well suited to render visible the micro-processes of actors institutional work (Currie et al, 2012; Lawrence et al., 2009). The principal methods we employed were documentary data analysis and semi-structured interviews. Our analysis focuses predominantly on the actors involved in the regulatory space surrounding the establishment of an Austrian institutional oversight. The empirical component of our research project relates to a period starting with the initial discussion about a formal oversight mechanism in the Austrian context in 2002 until the start of the Austrian oversight institutions tasked with IFRS enforcement in The core documentary evidence used in this analysis consists of elaborations and position papers of the Austrian profession auditing body (IWP) from 2002 until 2005, public pronouncements and presentations made by the IWP, the position paper of the AFRAC and the subsequent initial draft law dealing with the establishment of a formal oversight mechanism in August We also analyzed 23 publicly available comment letters relating to the public consultation process on this initial draft law. The comment letters of representatives of industry associations, share issuers and the Vienna Stock Exchange (which is owned by listed companies and banks) were chosen as proxy for these actors positions. Comment letters can be seen as a reasonable proxy for an actor s position, provided that one considers that because of their public availability they are highly sanitized versions of actual positions (Alon & Dwyer, 2016, p. 6). Further, we analyzed transcripts of the debates in the Austrian parliament where the transposition of the Transparency Directive into national law and the Austrian Accounting Control Act in 2012 were treated. Also comment letters on the process on an amendment of criminal law concerning balance sheet offenses in March 2015 were analyzed as professional audit and accounting bodies and listed companies were referring to the threat of exuberant criminalization triggered by the existence of an institutional oversight mechanism. 8

10 To inform ourselves about the public debate on the implementation of an institutional oversight mechanism we searched scientific and professional literature and news databases (Factiva) for relevant articles about from 2002 until Austrian newspaper reports picked up the topic of IFRS enforcement through a formal oversight mechanism commonly named as accounting police. The analysis of the documentary data allowed us to gain conclusions about key actors, their positions, resources and the institutional work they employed, relevant events and the interrelations and interconnectedness between actors. To assess the plausibility of our understanding of the events and key actors involved we were able to triangulate our data by interviewing key actors (Micelotta & Washington, 2013). Thus, and most importantly, we draw on 15 semi-structured interviews conducted from September 2016 until April The interview partners were either chosen because they participated in the discourse, were engaged in the establishment process, or represented enforcement institutions. They are representatives of professional audit bodies, the Big Four, the national enforcement institutions, industry associations, shareholder associations and employee associations, and the Ministry of justice and the Ministry of Finance. Interviews were also conducted with representatives of the German enforcer and the Ministry of Justice first, because the German institutional oversight mechanism served as a template for the Austrian system and second, to contrast the Austrian and the German context. The interviews had a duration of at least 17 minutes to 110 minutes. The interviews were recorded and then transcribed. 3 3 One interview was only partly recorded because of technical difficulties. 9

11 Table 1 Interview participants Interview No. Roles Interview 1 Interest representative of the audit profession; Partner at a Big 4 audit firm Interview 2 Member of the SGA; Former partner at a Big 4 audit firm Interview 3 Representative of the Austrian Federation of Industries Interview 4 Representative of the Austrian Chamber of Labour Interview 5 Representative of the Financial Market Authority; Representative of the Austrian enforcer Interview 6 Representative of the Austrian Federal Economic Chamber Interview 7 Representative of the Austrian Shareholder Association Interview 8 Representative of the Austrian Financial Reporting Enforcement Panel Interview 9 Former interest representative of the audit profession; Former partner at a Big 4 audit firm Interview 10 Former representative of the Financial Market Authority Interview 11 Two representatives of the Federal Ministry of Justice Interview 12 Representative of the German Financial Reporting Enforcement Panel Interview 13 Member of the SGA; Partner at a Big 4 audit firm Interview 14 Former representative of the German Financial Reporting Enforcement Panel Interview 15 Former representative of the Accounting Standards Committee of Germany A first round of data analysis started at the documentary data collection phase. The analysis of the documentary data helped to gain a deeper insight and understanding of the range of concurrent regulatory issues (e.g. preservation of self-regulation of audit profession, calls for a reform of criminal law concerning balance sheet offenses, general efforts of the industry towards self-regulation) defining the regulatory space surrounding the implementation of an institutional oversight mechanism during the period 2002 to This made unfold the events and the chronology of changes in the regulatory space and gave insights of the key actors involved. The emphasis of this round of data examination was mostly descriptive and to provide in-depth knowledge of the empirical case (Hazgui & Gendron, 2015). We further deepened our understanding of the key actors and events involved throughout the duration of the interviews (Canning & O Dwyer, 2016). In a second round of data analysis, we commenced to code the interview data to gain insights into the actors understanding of the evolution of the institutional change. We realized that the various actors were ongoingly responding to the actions of the others, bringing to the fore that the actors not only discursively engaged with each other but also used resources to convince other actors in the regulatory space, drag actors into or to exclude actors from the regulatory space. 10

12 This unfolding of the interconnectedness of the actors and their activities led us to code our interview and documentary data using the concept of institutional work (Lawrence & Suddaby, 2006). We decided to focus our analysis on the actors and to assign them the types of institutional work employed. This allows us to elaborate on the intensions of the actors, their cultural and institutional context, the purpose of their institutional work, the resulting conscious and unconscious effects and how other actors responded to and picked up various types of institutional work. This process required to move iteratively between the data and the literature on institutional work. The number of our interviews and the resulting transcriptions allowed us to do our coding without the use of any qualitative data analysis software (Albu et al., 2014). 4. Case background The Fédération des Experts Comptables Européens (FEE, name changed to Accountancy Europe in 2016) was aware of the seriousness raised for the audit profession by the collapse of Enron and feared the position of auditors to be questioned (FEE, 2002). In a discussion paper on enforcement of IFRS in Europe FEE (2002a) conveyed its ideas. FEE is the representation of close to 1 million accountants, auditors and advisors from 50 professional organisations from 37 countries and lobbies EU policy makers. FEE s basic premise was that an institutional oversight system should be in operation in each member state at least in 2005 and that in the near term investigations should only be carried out on the basis of specific complaints. The two options on how to organize enforcement set out by FEE were, first, to establish a review panel or, second, to include the enforcement authority as part of the securities supervisory authority, while FEE clearly favored the first option (FEE, 2002a). In autumn 2002, two members of the Institute of Austrian Certified Public Accountants (IWP) who were also Austrian delegates at the FEE expressed first ideas about the design and organization of an Austrian institutional oversight mechanism at an annual conference of the Austrian audit profession that were later summarized in a discussion paper (Samer, Kandler & Waldeck, 2003). At that time, Austria was assessed as having no institutional oversight mechanism in charge (FEE, 2001). On the contrary, oversight tasks were seen to be falling within the competence of criminal and civil courts (Merkl-Davis, 2004; Samer et al., 2003). These first thoughts gave the Austrian audit profession an understanding of FEE s ideas of an institutional oversight mechanism but did not include a concrete implementation recommendation. The audit profession agreed that in the Austrian context either variant of 11

13 organizing enforcement would create problems. First, the establishment of a review panel (following the role model of the British FRRP) was considered as lacking enforcement power as sanctions only consist of legal proceedings before a civil court. Second, to provide the enforcement authority to the securities supervision authority (similar to the US SEC) was seen to bear the threat of an immediate proceeding before a criminal court in case of infringements. Either way, the staffing with qualified personnel was seen as problematic as, at the time, only Big Four auditors and some large companies had already dealt with IFRS in Austria (Samer et al., 2003). Meanwhile at the European level, the need for the formation of an institutional oversight mechanism was manifested in the Directive 2004/109/EC (Transparency Directive) and standards on the design of enforcement mechanisms were stipulated through the recommendations in CESR s standards No. 1 and No. 2. Several countries introduced oversight mechanisms during that time. For example, in December 2004, Germany passed the Accounting Control Act and established a two-tier oversight mechanism (Reiter & Nagy, 2005). Incorporating the events metioned above, it was again the subgroup of the IWP who picked up the topic in autumn 2004 (Kandler, Kerschbaumer & Maresch, 2005) and tried to mobilize allies for the establishment of a two-tier enforcement mechanism. The suggested system consisted of an independent private Review Panel (in the legal form of a limited corporation) and a sovereign collegiate body. The Review Panel should examine the compliance of Austrian listed firms with IFRS and Austrian GAAP on a proactive and reactive basis relying on the voluntary cooperation of listed companies. The collegiate body should take actions only in cases of lacking or inadequate cooperation by the companies examined. Companies with incorrect financial reporting face sanctions in the form of mandatory error publications as well as notifications of responsible authorities, like the stock exchange, the FMA, the company register and the criminal court. Furthermore, the Austrian Financial Market Authority (FMA) should be able to give orders to the collegiate body to take actions. To guarantee a smooth functioning of the system, the IWP stressed the importance of the public perceiving the enforcement system as independent and autonomous. Thus, it is suggested that the Austrian Economic Chamber, of which all Austrian commercial entrepreneurs are members, and the Vienna Stock Exchange should finance the Review Panel and that the Panel s staff should be employed on a full-time basis. Unlike in Germany, where the government mandated a commission to deal with the topic of enforcement (Tielmann, 2001) the Austrian legislator did not jump into action (Samer et al., 12

14 2003; Kandler et al., 2005). In 2006 the IWP managed to arrange a working group of the newly founded private Austrian Financial Reporting and Auditing Committee (AFRAC) to deal with the topic. AFRAC s major tasks are to professionally advise ministries regarding draft laws, advance and interpret accounting rules and, if necessary, align the national group accounting rules with international benchmarks. However, AFRAC s position papers are not legally binding for preparers or auditors. In accordance with the IWP proposal, AFRAC also recommended a mechanism entailing a private law Review Panel and a sovereign collegiate body as the central competent authority in May As AFRAC s association members consist of several Ministries and interest groups from the industry and the accounting and audit profession, treating the topic in an AFRAC working group seemed to help the topic to pick up speed and bolster governmental support. In August 2006, the Federal Ministry of Finance used the AFRAC position statement as a basis when it presented its draft proposal for the establishment of an institutional oversight mechanism (Enforcemenstellen-Gesetz, 2006; EnfStG) together with proposed changes to the Stock Exchange Act to serve for the transposition of the Transparency Directive into national law. The draft of the EnfStG suggests an autonomous Review Panel and a sovereign collegiate body, the Börseberufungssenat, as the central competent authority. In its original purpose the Börseberufungsenat was a governmental department only to be temporarily convened to decide about a company s appeal against the denial or repeal of its admission to the listing on the stock exchange. Since the establishment of the Vienna Stock Exchange the Börseberufungssenat has never had to be convened to decide about such a matter (Vienna Stock Exchange, 2006). According to AFRAC s view, the Review Panel should be organised as a private law association. In principle, the Review Panel should carry out the examination activities on its own initiative, but must report the start of an examination to the collegiate body. The collegiate body can only conduct examinations on its own if there are reasonable doubts on the appropriateness of the Review Panel s investigation, if the Panel reports on the denial of cooperation by a firm, and if a firm disagrees with the Review Panel s decision. Listed firms and association members would have to finance the Review Panel by paying fixed annual contributions. The listed firms would also cover any remaining costs according to their market capitalisation. The draft proposal was submitted for public consultation. During the public consultation period, the National Council received 23 comment letters to the draft proposal. On the 1st of December 2006, only days after the end of the consultation period, parliamentary elections took 13

15 place. The formation of a grand coalition and the reconstitution of the National Council were finished in the middle of January In the case of new parliamentary elections, draft laws of the previous government become void and, if desired, must be introduced again. Therefore, already on the 14th of December 2006 five members of the Austrian Parliament submitted an initiative request to the National Council to stimulate the transposition of the Transparency Directive into national law by amending the Stock Exchange Act. The initiative request broadly corresponded to the draft law of the Stock Exchange Act amendments of August 2006, but did not refer to the draft proposal of August 2006 and did not contain the establishment of an institutional oversight mechanism (Szücs, 2007). As requested by law, the initiative request was treated in the responsible committee, passed to the National Council and was then decided on the 29th of March The amendments of the Stock Exchange Act came into force on the 26th of April 2007, three months after the expiry of the implementation deadline of the Transparency Directive. However, the implementation of an institutional oversight mechanism was not part of the initiative request and the EnfStG was thus never realized. On part of the government, the topic was picked up again in October First, plans to mandate the FMA with the examination of financial reports of listed firms were proclaimed and then changed to the establishment of a two-tier oversight system in which the auditors ought to play an important role and the FMA engages only at the second tier. Due to disunity between the two governing parties neither of the plans was realized. On the 8th of November 2012, the SPÖ and ÖVP reached an agreement on an institutional oversight mechanism that was called to be an one and a half-tier enforcement system and was implemented in the Accounting Control Act (RL-KG). The RL-KG came into force on the 1st of July 2013 and is to be applied on financial reports of financial years that end after the 30th of December Case analysis 5.1 First steps in the regulatory space: the Austrian auditors The need for a change in the Austrian enforcement system following the EU demands of appropriate IFRS application was seen as apparent by an (informal) subgroup of auditors (SGA) (Interview 2). First, this was due to the work of FEE which made its members aware that in the wake of the proposal for a regulation on the application of International Accounting Standards not only the European Commission proclaimed the need for external supervision in order to 14

16 protect investors, but also that the SEC was calling for the enforcement of accounting standards in its Concept Release on International Accounting Standards (FEE, 2001). Second, some of the SGA s members had a background of working as CPAs in the US or had been engaged in advisory activities in Brussels for the Federal Ministry of Justice and were thus aware of the inescapable developments towards internationalisation in accounting and the accompanying demands to enforcement which would entail a gradual disruption of the traditional enforcement system (Interview 2, Interview 13). It was thus the higher awareness of these actors of international developments, compared to others in Austria, which put them in the position to act as a (possible) first mover. For the SGA the disruption of the traditional enforcement system was confirmed by the release of the IAS Regulation and its recital no. 16. In the same year, 2002, the accounting profession experienced a threat to public trust in audit opinions, as the collapse of Enron severely impeded on the reputation of auditors, also in Europe (FEE, 2002). Concerns that the establishment of an institutional oversight mechanism might threaten the audit profession s self-regulation regime in Austria triggered activities of members of the SGA to occupy the regulatory space surrounding the establishment of such a mechanism (Interview 2, Samer et al., 2003). Consequently, the SGA started to construct a normative network among the audit profession and the industry in support of the establishment of an institutional oversight mechanism maintaining the audit profession s self-regulation regime. The issue was put on the agenda for discussion at the IWP s annual conference in 2002 where the SGA engaged in educating work considered essential to align the audit profession with FEE s ideas of proper IFRS enforcement. First, the SGA wanted to develop an understanding for the need of the existence of institutional oversight mechanisms by illustrating the crucial importance of strengthening the trust of investors in European financial markets. Second, the SGA equipped the audit profession with knowledge about the purpose and the core features and competencies an oversight mechanism should possess to be deemed appropriate, thus providing the audit profession with necessary knowledge to support the new institution (Lawrence & Suddaby, 2006, p. 221). This knowledge was meant to allow the members of the audit profession to engage in advocacy work vis-à-vis their clients, i.e. the companies affected by the regulation, or political actors for an institutional oversight mechanism suited to their needs. The SGA deliberately called for the KSW and the IWP to take the initiative and to promote the issue in the public and in front of the listed companies and to develop suggestions on how to design the oversight mechanism (Samer et al., 2003, p. 175), well aware that the success of the SGA s endeavours would depend on the willingness of the audit profession and the listed companies to cooperate. 15

17 Driven by the specific Austrian context, where the number of companies affected by enforcement would be rather small and international accounting expertise was concentrated among a small group of actors, the discussion at IWP s annual conference unveiled several problematic issues showing the scepticism of the audit profession towards such a system rather than active support. The audit profession engaged in demonizing work to maintain the traditional enforcement system: From today s perspective, the design of an enforcement body with appropriate resources, in particular staff resources, in Austria would likely be highly problematic. (Samer et al., 2003, p. 176) Further, the audit profession expressed doubts that a review panel, based on the model of the British Financial Reporting Review Panel (FRRP), would have the ability to enforce the corrections of erroneous financial reporting. While the FMA would certainly have this ability, the limited possibilities to appeal against decisions of the FMA were seen as equally problematic (Samer et al., 2003). This revealed underlying core assumptions and beliefs that an effective oversight mechanism might not be easily achieved in Austria by reliance on the mechanisms established in other countries and that moving away from the traditional Austrian enforcement system might bear some risks. The audit profession saw itself brought into a selfdefence situation caused by accusations to overlook errors in financial reporting and feared that CFOs and auditors might become involved in criminal proceedings triggered by the detection of erroneous financial reporting (Interview 13). Thus, even the SGA s endeavours to construct a regulatory space in which the audit profession and the industry were supposed to form a normative network to promote an institutional oversight mechanism designed by the audit profession at first were not taken up by fellow auditors or other groups. When the big Austrian neighbour, Germany, established a two-tier institutional oversight mechanism in December 2004, the SGA promptly decided to develop a solution for the establishment of an institutional oversight mechanism by drawing on the German oversight mechanism to obtain the audit profession s support. In 2005, the SGA published a position paper, suggesting a two-tier institutional oversight mechanism, in which they copied a readymade solution from Germany and drew on an existing institutional configuration in Austria that had been created for the regulation of telecommunication companies, also entailing a private law body and a sovereign authority (Kandler et al., 2005). Austria s history has been interwoven with that of Germany for centuries and still today, Germany is Austria s most 16

18 important trading partner (McLeay & Merkl, 2004). The close economic relations between the two countries have often been used to justify the tradition of legal transfer from Germany, especially concerning accounting regulation. As McLeay and Merkl (2004, p. 322) state the consensus opinion seems to be that German regulations are an example that should be followed, and that justification is required when Austrian regulations differ from the German model, and not when they follow it.. This refers to the imitation of German regulation as a taken-forgranted practice that can be leveraged by actors to associate the new with the old in some way that eases the adoption (Lawrence & Suddaby, 2006, p. 225) of the new institution. Concurrently, the German system further allowed the SGA to construct the identity of the authority involved on the second tier according to their idea of the least possible government interference while simultaneously ensuring compliance of companies under review. The German Securities Trading Act allows the Federal Financial Supervisory Authority (the German counterpart of the FMA, the BaFin) only to step in to determine whether an error has occurred if the private German Financial Reporting Enforcement Panel s (FREP) opinion differs from the company s, to order the publication of identified errors, and to perform an examination using sovereign means if a company is not willing to cooperate with the FREP (BilKoG, 2004). The SGA in its position paper gave the public authority solely the role of a sanctioning unit that could not become involved on its own and thus was factually excluded from the regulatory space although it formally ought to be part of the institutional oversight system (Kandler et al., 2005). Thus, by promoting a two-tier oversight mechanism the SGA aimed to undermine core assumptions and perceived risks that a design involving a private law review panel might lack possibilities to sanction companies and that a government authority in charge to detect erroneous financial reporting leaves the affected actors without any say. The SGA praised the mechanism s benefit to combine the cooperation character of a private law model with the sanctioning possibilities of a sovereign authority (Kandler et al., 2005, P. 221). The cooperation character reflected by the involvement of the affected companies, investors, academia and the audit profession in the review panel (Kandler et al., 2005, p. 222). Lawrence and Suddaby (2006, p. 237) point out that work done to undermine core assumptions and beliefs relating to perceived risks of innovation is essential to disrupt institutions as they might keep actors from moving away from taken-for-granted practices and rules. A member of the SGA recalled the endeavours to establish an oversight mechanism with the least possible government interference and the aims to gain political advocacy for the mechanism by placing influential actors in the review panel: 17

19 We knew that we needed some sovereign status, but we wanted to keep it away from the Financial Market Authority as far as possible. We thought to place there some judges, some representatives from the social partners and principally do the same thing [as in Germany]. The sanctions were not so high, so they didn t require a criminal judge. We discussed it in several committees and everyone liked it. (Interview 2) The SGA tried to mobilise regulatory support for their concept of an institutional oversight mechanism and circulated the idea in events and also confronted the government representative for the capital market with their plans. The SGA seized the opportunity to engage in advocacy work the mobilisation of political and regulatory support through setting up an AFRAC working group. As the AFRAC is supposed to advice the government in issues of accounting regulation, the SGA saw its chance to transform its ideas into a law that is supported by all actors involved in the working group (AFRAC, 2006). The AFRAC working group thus consisted of a wide range of actors: Four representatives of the audit profession, seven representatives of large listed companies and the Austrian Insurance Federation, three representatives of academia and two representatives from the FMA. A member of the SGA remembered: In the beginning AFRAC didn t exist, but later it was obvious to us that this is a level where the topic should be treated, as AFRAC involves both ministries [Ministry of Finance and Ministry of Justice]. (Interview 2) The further elaboration of the AFRAC working group on the SGA s suggestion of a two-tier system implied that the actors involved shared and supported the SGA s preferences for a private law solution and were willing to construct a normative network to ease the establishment of the new institution. Thus, through the AFRAC working group the number of actors that formed part of the regulatory space was substantially extended and was aligned with the first movers in the space the SGA. For the time being, the SGA s overt mobilisation of political support succeeded as the government released a draft law on the establishment of a two-tier institutional oversight mechanism. However, also some resistance against the establishment of an institutional oversight mechanism was coming from the audit profession s own ranks and actors from the industry who felt the need to enter the regulatory space because of the impending legal implementation. 18