EU v. rest of the world
Having a say in what the International Accounting Standards Board does has become a hot political issue. Here's a review of the comments offered by regulators
Financial regulators around the world have split along fairly predictable lines in the argument about control of the body, that sets international accounting rules.
At least that's on the basis of a small number of formal comments made by regulatory authorities on the latest stage of the review of the constitution of the International Accounting Standards Committee Foundation. The foundation is the trustee body charged with overseeing the International Accounting Standards Board (IASB) as the Board carries out its mission to develop a single set of high quality, understandable and enforceable global accounting standards.
The European Commission, which as the executive arm of the European Union initiates financial regulation in the 25-nation bloc, confirmed in its comment letter that it wants more power over the London-based IASB, the developer of the new accounting rules known as International Financial Reporting Standards (IFRS).
The Commission wants preference in appointments to the 14-member IASB to be given to people from countries and jurisdiction that either already apply IFRS, like the EU, or intend to apply them soon. It wants to apply the same reasoning to the appointing of the 19 trustees.
If accepted the Commission's proposals would inevitably mean a downgrading of the influence of the US, which doesn't apply IFRS, on IASB affairs. The US holds five seats on the IASB and North Americans account for six of the trustees who are chaired by former US Federal Reserve Board chairman Paul Volcker.
But regulatory authorities outside the EU aren't so keen - they see the Commission's ideas as a threat to the desirable goal of achieving a single set of global accounting rules.
Japan's chief financial sector watchdog, the Financial Services Agency, said it strongly supports the view that particular regions should not be given additional emphasis because of their commitment to use IFRS. Weighting a particular region because of its current position on IFRS might impede the objective of developing global standards, the agency said.
And the International Organization of Securities Commissions, the Madrid-based grouping of the world's securities market regulators, opposes any reference in the constitution that might suggest the IASB should concentrate its efforts on writing standards for particular markets, as opposed to all markets.
Trustee chairman Volcker, speaking in late February, acknowledged that the EU has a large stake in the effort to develop a common set of respected accounting standards applicable in all significant markets.
"What is remarkable is the extent to which emerging and transitional economies without established and credible accounting systems - Russia, China, India, much of the rest of Asia and Latin America - are committed by policy or law to the common objective, as is Japan," Volker told the EU's Accounting Regulatory Committee in Brussels. The Committee comprises accounting experts from the 25 EU member states and gives opinions on the Commission's accounting proposals.
"At the same time," Volcker added, "it's evident that truly international accounting standards cannot be fully effective - cannot come close to their potential - without encompassing the world's largest capital market, the United States."
Convergence sought
The IASB is working with the Financial Accounting Standards Board, the US accounting rule-maker, on a programme that aims to bring about the convergence of IFRS and US GAAP (generally accepted accounting principles).
In January the IASB and the Accounting Standards Board of Japan agreed on a joint project to minimise differences between IFRS and Japanese accounting standards with a final goal of achieving convergence. Further talks were held in Tokyo in March.
Latest estimates are that 94 countries currently either require or permit the use of IFRS.
Volcker said that the decision of the EU to implement IFRS does not "logically lead to a decision to overweight European representation on the Board or the Committee. The `end game', after all, is the acceptability of international standards right around the world."
He said the importance of the EU is already strongly reflected. He noted five of the 14 IASB members are from Europe, the same as from the US - and two of the Americans carry British passports. Seven, or more than a third, of the 19-member Trustees are Europeans, more than the number from North America.
Eighty comment letters
As Global Risk Regulator went to press, the Trustees were due to discuss the up to 80 comment letters they received on their proposals for amending the constitution. The comments came mainly from accounting and auditing firms and associations as well as industry trade bodies.
Volcker said the Trustees' intent to exercise closer procedural oversight in response to concerns about accountability and to review the IASB's agenda should be clearly evident in the proposed constitutional changes.
"What we do not propose to change is the basic concept of an independent decision-making Board, expert and experienced, aware of, and responsive to, the needs of business and investors alike, but protected from national, political or sectoral interests."
Accounting industry experts believe that while the Commission may gain some concessions it will find it difficult to get all it wants.
The Commission's formal demands followed recent calls by the EU's top financial regulator, internal markets commissioner Charlie McCreevy, for greater democratic governance and accountability of the IASB.
In making these calls McCreevy, who took over his job in November, followed in the footsteps of his immediate predecessor, Frits Bolkestein.
Bolkestein was at the heart of the wrangle that led to the partial adoption by the Commission of the IAS 39 rule for valuing financial assets and liabilities in accounts, an action that critics say undermined the single global standards goal and which will cause confusion in EU accounting.
French banks in particular objected to IAS 39's insistence that derivative contracts be measured at fair value, or current market prices, rather than at cost. The banks said this would cause misleading volatility in their accounts.
As a result, the Commission adopted a watered-down version of IAS 39, at least temporarily, which `carves out' certain provisions relating to hedge accounting and the fair value option in the mixed-measurement IAS 39.
The IAS 39 debate was used by Luxembourg central bank governor Yves Mersch in mid-February to illustrate the differences between the so-called Anglo-Saxon and mainland European business and political cultures that lie behind some of the Commission's demands.
Mersch told the American Chamber of Commerce in Luxembourg that the question of "what you consider is more important came to the fore again" with the argument over IAS 39.
Dominated by US and UK
The IASB, whose membership, said Mersch, is dominated by people originating from the UK and the US, believes that the information given to investors about the financial value of an asset is paramount.
"In the rest of Europe we consider that there are other values to be respected. For example, we consider that companies are not only financial assets; companies are also corporate citizens that give jobs to people and pay taxes to buy public goods. We consider that fair value could be extremely destabilising for the financial system, because it would favour erratic results and procyclical behaviour by banks,"
Other European regulatory bodies commenting on the constitutional review generally backed the Commission's position. These included the Bank of France, the Committee of European Banking Supervisors (CEBS) and the Committee of European Securities (CESR). CEBS is the body of senior banking supervisors from the EU member states whose main task is to advise the Commission on the EU implementation of the complex Basel II rules on bank safety. CESR groups EU securities market regulators with the aim of aiding and advising the Commission on securities regulation.
View from Basel
The Basel Committee on Banking Supervision did not make formal comments this time. But earlier in the constitutional review process the Committee, the body of senior banking supervisors from North America, Europe and Japan that in effect regulates international banking, argued that the IASB composition should be more reflective of different accounting traditions. It said it supported the trustees' plan to refocus its primary criterion for selection of IASB members from technical expertise to professional competence and practical experience.
US Federal Reserve Board governor Susan Schmidt Bies argued last year that organisations like the Basel Committee should be consulted on the selection of trustees.
Arnold Schilder, the Dutch central banker who heads the Basel Committee's accounting task force, told the international banking regulator summit in September that accounting standards setters don't appear to give much thought to the financial stability implications of their proposals.
The standard setters seemed indifferent as to how much additional volatility could be created as a result of the wider use of fair value, for instance.
Supporters of the IASB say the rule-makers would probably counter by saying that regulators need better to understand the role of standard setting. The essential point regulators need to grasp, particularly in the context of the fair value option, is that accounting entries don't create risk. It's a firm's activities that create risk and how those activities are accounted for won't change the risk.
