Pointing the finger

Jeremy Woolfe argues that attacks on governance of global accounting standards are “unbalanced”

Concerns about governance of world accountancy standards, which have been rumbling around in Brussels since last year, are now emerging into more open debate. An accusatory finger is being pointed at the International Accounting Standards Board (IASB).

At a recent financial committee debate in the European Parliament, two German MEPs added weight to the opposition cause that criticises the institutional governance set-up responsible for international accountancy standards setting. Apparently, they are questioning the board’s role as well as the general strategy that is responsible for the standards, notably the International Financial Reporting Standards (IFRS), which are currently sweeping across the world. However, the IASB has countered criticisms with a strong defence, concentrating on its painstaking compliance with democratic principles.

The history of the debate goes back to statements made late last year by the French socialist MEP, Pervenche Berès, at a conference on convergence between IFRS and US GAAP (where the target may since have slipped to “equivalence” in 2009). Berès, who is chairwoman of the European Parliament’s economics and monetary affairs committee (ECON), hammered the world’s present governance system for the accountancy institutions. Speaking in Brussels at the meeting organised by the European Federation of Accountants (FEE), Berès said she was supportive of the principles of convergence. But, she remarked pointedly, the architecture of public bodies at the worldwide level (IMF, WTO) had, up to the present, not been designed to cope with global challenges arising from the setting of IFRS standards.

Market concern

Examples of problems given by Berès concerned the role of the IASB over its competence to nurture the SME sector. Later, in a press interview, she explained that the present set-up could lead to “the financialisation of the [world] economy”. This term, from a company viewpoint, meant “decisions are no longer taken on economic or employment considerations, but mainly on how financial markets will react”.

“It led to management boards being more concerned about financial markets than about the true economic well-being of the company,” she stated. It would ignore all considerations except for short-term profit. The term “financialisation” is also current in sociology. Sociologists see it as having fundamentally altered the way of life in the US over the past four decades. They lament that it entirely ignores worker protection.

Her general view is that the US has too much influence on the IASB, and it is presumably this sentiment that prompted the protest movement, as picked up by Alexander Radwan, a German parliamentary delegate in the European People’s Party (EPP). At the recent ECON meeting, Radwan told other MEPs that he wanted to see open discussion on how “a group without legitimacy” can define standards by itself. He questioned who gave him (meaning Sir David Tweedie, the IASB chairman) his mandate? Expect serious resistance, Radwan warned.

His fellow countryman, MEP Wolf Klinz, of the centrist, Liberal party, was similarly harsh. He labelled the London-based international body as a “purely privately organised institution”. He added: “We have not been given the impression that [Sir David] sees himself as accountable!” He opposed the idea of the piper calling the tune.

Behind the scenes, accountancy legislation professionals in Brussels are aghast. “I completely refute such attacks on the IASB,” said one insider, clearly shocked. Another incredulous bystander adopted the word “unbalanced” in her reaction. Rumours have been denied that closer ties between the European Financial Reporting Advisory Group (EFRAG), an advisory group on accountancy matters to the Commission, and the Commission itself, were prompted by a need to oppose IASB Americanisation.

In March, the Commission did announce the formalisation of its “working arrangements” between the bodies. The formalisation was due to come anyway. However, Charlie McCreevy, the Commissioner, has announced that the Commission is now considering creating a separate small group of independent financial reporting experts (High Level Group) to review EFRAG’s opinions.

In light of the attacks on the IASB, it is worth revising the London Cannon Street-based international institution’s background. Following Europe’s Lisbon plans, drawn up by the Council in 2000, which included the de-Balkanisation of the EU member states’ standards for corporate reporting, the European Union agreed to use International Financial Reporting Standards, established by the IASB in Cannon Street, London.

One of the overall objectives of the EU was to remove the impediment to the free flow of capital through the EU economies, a factor which was clamping economic growth and driving down potential standards of living for the citizens. The IASB, comprising a small group of select experts (14 decision-makers and a staff of 30), was given the responsibility for the EU to come up with a package that would be both modern and take into account the needs of the different cultures across the economic zone.

There was never, at any time, any reason whatsoever for it to be secretive or a closed-in kind of group. However, it was faced with what could have been seen as an overwhelming challenge of navigating its proposals through numerous bureaucracies. Many of those would have strong elements that would have resented change of whatever nature.

Democratic and transparency were (and are) keynotes in the operations. Meetings are held with access to the public. Discussion papers were (and are) routinely made openly available. Public comment periods on all proposals are required. There was (and is) in place an international committee of trustees to ensure that due process is followed. Another body involved in the comitology process of full liaison was the Accounting Regulating Committee (ARC), which brings together officials from all the EU member states in the decision-making process.

To everyone’s surprise, what followed was success perhaps beyond the wildest dreams of those involved. Following elaborate co-ordination with the European Commission and the European Parliament, and support from Brussels praised by the IASB as “extraordinary”, the EU wound up with a corporate reporting system brought into force as a regulation. IFRS came into effect for the EU 25 on 1 January 2005.

A significant force

Since then, progress has galloped ahead. Now, 100 countries have signed, or are signing, up to the international standards. What might have been considered as an arcane matter of accountancy, a mere process of shuffling figures, has now become upgraded to being a significant international economic force.

Against this kind of background, the IASB feels that it has every reason to question the implications from the German MEPs that today’s standards “came from nowhere”. The operations manager at Cannon Street, Tom Seidenstein, told accounting & business: “I don’t feel that the statements represent the history of where the standards come from. For the European Union, the European Parliament itself was the body that passed the regulation that required IFRSs in Europe for public companies. The structure of the IASB was well-known at the time, and the European Commission had a major role in determining the IASB’s original structure.”

Seidenstein pointed out that, as new standards get proposed, European groups have the opportunity to comment and, ultimately, it is for the member states to decide whether the standards are appropriate to adopt for European companies. “Obviously, if Europe decides not to adopt them too frequently, then we do have a breakdown in the international convergence process.” Obviously! But that is not really the issue of the governance debate.

Jeremy Woolfe is a financial journalist based in Brussels.