Financial Times – 25/3/2008 –Surveys ICA1 -Page 2For the International Accounting Standards Board (IASB), success is producing headaches as well as plaudits. It was set up in 2001 with the task of bringing order to international financial reporting standards (IFRS).
Then IASB was then thrust into the front line by the European Commission’s decision that all listed companies in Europe should follow IFRS from 2005 onwards.
Not only did the IASB have its work cut out to achieve the deadline, it also found itself in a political minefield. Here was an independent and privately-funded standard setter telling French banks, for example, what they could and could not do in their accounts.
Seeing the European corporate world heading down the IFRS route, the rest of the world started to follow suit. Now more than 100 countries are in the IFRS fold.
And China, Japan, India and others have announced deadlines by which they will join in. Regulators in the US are formally on the route to acceptance of IFRS.
The greatest barriers to a true global accounting language have fallen.
Back in 2001 this sequence of events would have been thought an astonishing fantasy.
But such development have brought with it calls for greater accountability at the IASB, making the board a victim of its own success. In a paper produced for Bruegel, the Brussels-based thinktank, Nicholas Veron, put his finger on a paradox.
The IFRS system was “a body of norms prepared by a private-sector organisation with global scope but no democratic accountability”. By so doing, he wrote, “the European Union has started a worldwide experiment whose rapidly unfolding consequences will provide lessons for other areas of policy in the financial sector and beyond. This experiment is unique by its combination of global reach, private-sector governance and significant economic impact.”
But not everyone in Europe has been happy at how the success in establishing an IFRS regime in Europe has so rapidly spread around the world.
It has diluted what some saw as their right to control their own fiefdom.
“The Europeans and now the Americans may have to compromise because globalisation means they can’t pull the strings they once did,” says Allen Blewitt, chief executive of accounting body, the ACCA.
“It is important to acknowledge that governance of a body like the IASB is a dilemma,” says Andrew Watchman, director of IFRS at Grant Thornton International. “Its success comes from its independence of jurisdiction. But there is room for improvement in how it goes about accountability.”
Mr Veron sees two different issues here. “There are the behaviours and the decisions made. Do they look independent? And then there are governance issues.”
As a result, the IASB has now published proposals it hopes will resolve both these issues and lift the criticisms. In particular, it recently announced it would accelerate the creation of an independent group to approve the appointments of the IASB trustees and review trustee oversight activities, including the IASB’s funding arrangements.
This has been broadly welcomed. The process of trustees, in effect, appointing themselves could not continue.
“It is good that the trustees are abandoning the myth they could stay a self-appointing group,” says Mr Veron. “It strengthens the legitimacy of the IASB.”
The key will be ensuring that the monitoring body can endorse trustee appointments and test the effectiveness of trustees without diluting the strength of the IASB’s independence by trying to influence or direct its activities.
“Accountability,” says Mr Watchman, “must stop short in the ability of other bodies, governments or regulators, for example, to intervene. If they had the power to hire or fire members of the IASB, it would take away the independence.”
Other proposals increase the use of feedback statements, deepen engagement with stakeholder groups, broaden funding arrangements, and widen the board’s geographical representation.
The hope is that much of the proposed reforms will satisfy the criticism, particularly from the European Parliament.
The newly appointed chairman of the trustees, Gerrit Zalm, previously deputy prime minister and finance minister of the Netherlands, may be able to help.
“The climate is changing,” he says. “The European Parliament is certainly less negative and more positive than six months ago. At my first meeting the atmosphere was not so good. But that is now changing.
“The European Parliament understands that the IASB is not a European organisation. It is a global organisation and we have to treat everyone alike. It is impossible for every region to propose its own changes.”
His views are echoed elsewhere. “Europe is still their most important customer, but everyone else should have the same advantages,” says Allister Wilson, a senior assurance partner with accounting firm Ernst & Young.
The accelerated reform programme, allied with Mr Zalm’s appointment, may be turning the tide. As one observer puts it: “The parliamentarians are delighted to have a politician to deal with rather than an accountant.”
“The key question now is the next steps,” says Mr Veron. “Will the IASB stay true and go for the highest quality standards, and not go for political compromises?”
And, to an extent, there will always be difficulties. “The dilemma is almost inherent in a standard-setter,” says Mr Watchman. “There will always be a strain between the independence of standard-setters and the sovereignty issues of the jurisdictions that decide to use the standards.”
There needs to be a breathing space in this argument.
“The IASB has been undergoing challenges to its governance for the past two to three years,” says Mr Blewitt, “and it is now much more representative than it was. It is critical the changes have absolute acceptance and the IASB can get on with its job. The real problem is that constant carping about governance is a distraction.”