Selection process
The Council’s supervision includes a population of listed companies with Sweden as a home member state and financial instruments listed on a regulated market. Chapter 16, of the Securities Market Act (2007:528) exempt certain issuers, e.g. sovereigns and municipalities and issuers of bonds or other transferable debt instruments where each one has a nominal value equivalent to not less than 100,000 euros.
The Council conducts an annual selection of companies for review. The selection model is based on risk, rotation and random in accordance with Esma Guidelines on enforcement of financial information. The Council resources focuses on circumstances where there is an increased probability of errors or incorrect use of IFRS and the Annual Accounts Act etc. The majority of the selected companies are therefore selected on risk-based assumptions. The risk selection takes into account both the risk of incorrect information (probability risk) and how the incorrect information affects the user of the financial report and the financial markets (impact risk). The risk model takes into account specific events in the companies’ accounting, such as impairment, provisions and items affecting comparability as well as indications of inaccuracies in the sustainability reporting. The model also considers indirect factors which may impact a company’s accounting, for example acquisitions, operational changes, financial difficulties and abnormal price fluctuations. Circumstances on an industry level can also result in a company being selected for review.
The Council’s selection model ensures that all companies in the population are reviewed at least once every ten years. Companies whose position and size are presumed to have larger market impact are reviewed more often. The Council also randomly selects a few companies for review every year.
The main part of the selection is made early in the year, adapting the review process to the publication of the companies’ annual report for the previous year. This selection is supplemented by an ongoing selection during the year based on risk, i.e. on events and circumstances in individual companies that need to be reviewed immediately.
Esma Guidelines distinguish between an unlimited examination and a focused examination of financial reports. An unlimited examination means that the entire content of the financial report is reviewed to identify issues/areas that require closer analysis to assess whether the information meets the requirements of the relevant regulatory framework. A focused examination means that the review covers predefined and delimited areas/questions in the financial report.
Decisions
The basis for assessment of compliance with IFRS, the Annual Accounts Act and Esma Guidelines for alternative performance measures is the materiality according to IAS 1, p 7. It states that omissions or inaccuracies are material if they, individually or jointly, can affect the financial decisions that the user makes on the basis of the financial reports. Materiality thus depends on the size and nature of the deficiencies that have been identified.
The Council considers if the financial report, including the sustainability report, and the accounting methods reviewed are in accordance with the relevant reporting framework. The Council’s approach is to assess that the information in the financial report primarily is relevant and specific to the company and that non-essential information may be omitted. If errors cannot be considered minor and can affect a user’s understanding of the information, the Council must consider a supervisory measure orf the error is deemed more serious, have the Swedish Financial Supervisory Authority (“SFSA") conduct a review.
The Council does not have any authority to issue sanctions. In the event the outcome of a review is that the company has failed to prepare its financial information in accordance with applicable regulations and the errors can be considered minor, the Council may as an enforcement action request the company to correct the errors in future financial reports or to publish a corrective note. Where a departure from the financial reporting framework is detected but is without material effect in the financial reporting, but there is a significant risk that it might become material in the future, the Council should inform the issuer about the departure.
In the event the Council deems that the infringements cannot be considered minor, or the company fails to cooperate or fails to comply with the Council’s request, all relevant details of the case shall be submitted immediately to the SFSA, which will conduct an independent review of the violation. In the event the SFSA finds that the violation cannot be considered minor, it may issue a warning and impose a sanction fee.
Follow-up
All reviews resulting in an enforcement action are followed up to check that the reviewed company has made the changes stated in the Council's decision. The timing of the follow-up depends on when the measure is expected to be completed. In many cases, the Council can immediately establish that a correction has taken place, but sometimes the Council needs to ask supplementary questions to ensure this. If the Council is satisfied with how the company has rectified the matter, the review is closed.
If the company has not taken the expected measures, and there are no acceptable reasons for this and the remaining deficiency is deemed to be significant, the case is handed over to the SFSA for further examination in accordance with § 14, FFFS 2018:18.