Monday, June 1, 2009

More Trouble in IFRS Paradise: More Political Woes

IASB Governance: The Next Accounting Battlefield

Another great blog by Joey Borson at the Controller's Executive Board

As the International Accounting Standards Board (IASB) matures as one of the world's two major accounting standard-setters, its governance structure must evolve to oversee its new jurisdictions, and to satisfy new or more demanding stakeholders. This has become a point of controversy, with a European Commissioner
recently condemning the IASB's current governance structure as too insular and ineffective.

In the next several years, expect reforms to the Board's oversight committee, and changes in its funding structure. However, the IASB walks a delicate line-it must ensure independence while maintaining oversight over accounting standards-and the risk of a "carve out" of its authority by politicians remains a real possibility.

Board Governance: Structure and FundingIASB governance has long been a major concern; in their
Roadmap for IFRS adoption in the United States, the SEC flagged IASB governance as one of their five main pre-conditions for adoption. This has been echoed by US stakeholders more generally - a third of all Roadmap commentators expressing concern with the current board governance practices. There are three main issues.

1. Board Membership: Currently, the IASB is overseen by a 22 member
IASC Foundation, which is primarily responsible for appointing board members. There is a geographic representation requirement, with six members from Asia/Oceana, six from Europe, six from North America, and four who are "floating." The main concern here is a loss of influence neither U.S. nor European firms (and governments) have quite adjusted to having only a quarter of Board seats. In addition, there have been consistent complaints that the Boards will be too academic and that there will be inadequate investor representation on the committees.

2. Funding: Unlike the FASB, which is funded by mandatory levies on market participants, the IASB is still
mainly funded by voluntary contributions from individual companies or accounting firms (in 2008, each of the Big Four contributed $2 million). Critics are concerned that stakeholders who pay the bills will have undue influence, and that voluntary payments, which can always be stopped, will prevent the Board from ever becoming truly independent.

3. Country-Specific Oversight: The IASB recently created a new oversight body, the
Monitoring Board, which appoints the IASC Foundation members. This is staffed by representatives from the SEC, European Commission, Financial Services Agency of Japan, and the IOSCO. It was designed to give individual country's the final say over accounting policies, although it remains unclear what de facto oversight it will have, and in any event, will almost certainly be far weaker than the relationship between the SEC and FASB.

4. The IASB has been sensitive to these concerns; it is working to move towards mandatory, broad-based contributions, and has given lip-service towards broadening the functional background of board members, although it has yet to institute specific requirements. The Monitoring Board was also created in response to specific complaints. In addition, as the IASB tries to ensure sure US adoption of IFRS, it will make more concessions regarding governance improvement.

However, there will always be some tension. As an international body, the IASB has a much broader set of stakeholders than a purely domestic standard-setter, and the issues of representation and influence will not go away. This will be especially true when standard-setters try to use specific representation quotas, which are always vulnerable to changes in the underlying character of the IASB's constituency. In addition, the board structure is, by definition, a compromise among different countries and investors, and some stakeholders will inevitably be dissatisfied.

"Politicization" In Accounting:Though not strictly a governance issue, the IASB is also in a delicate position over how its standards are enforced. Technically, it does not formally set accounting standards for particular jurisdictions, instead, those countries will endorse the IASB standards they prefer for countries within their jurisdictions. Normally, countries automatically endorse all IASB rules-but in some cases, political authorities become more involved, and pick and choose particular standards.

Most famously, this happened when the European Commission
carved out certain aspects of IAS 39 in 2004, but there are other examples where a version of IFRS has been adopted, though not "as written by the IASB." This is not unique to the IASB; earlier this year the US Congress strongly called upon the FASB to change fair value rules-and threatened to change the rules themselves if necessary. However, the fact that countries can "pick and choose" from IFRS has been a persistent, and genuine, complaint-especially for an organization that strives to create a single, global standard.

As a result, the IASB has had to toe a fine line-it needs its standards to be created in an independent nature, but it also needs to be at least cognizant of the desires of major political leaders. Otherwise, it risks writing excellent technical standards-that countries opt out of. This introduces a messy element to accounting standard-setting, and though not strictly speaking an issue of governance, it is a major factor on the minds of those responsible for governing the Board.

Next Steps: The next governance reforms the IASB will take are reasonably clear:

Funding: As a condition of the SEC Roadmap, we can almost certainly expect some form of independent, mandatory funding for the IASB. This will probably be a levy on public companies, similar to what occurs in the United States with the FASB.

Oversight Board Composition: It's unclear what impact the Monitoring Board will have, but it will properly play only a pro forma role in oversight. In addition, it remains unclear whether the IASB will institute some form of mandatory investor representative, either on the IASC Foundation or on the IASB itself. We can expect slight changes here, but probably no fundamental shifts in governance.

Political Relationships: Like it or not, accounting is now becoming increasingly politicized, and we can expect the IASB (and the FASB) to be more cognizant of the demands of politicians. They have shown admirable spine in withstanding some of the more outlandish requests, but they will probably have to make minor concessions along the way, as the cost of generally maintaining their standard-setting authority. This may create complications, and will certainly lead to less "pure" standards, but will probably be a reality, at least until the economic crisis ends and accounting receives less public attention.
Controllers Executive Board

1 comment:

uimsinv said...

I visited your blog today for the first time. I have found this blog and others you posted to be concise and very helpful in getting up to speed on the changes in IASB and FASB as it relates to Financial Instruments.

Thank you.