Accounting - making enemies in high places

The fact that the International Accounting Standards Board has somehow assumed so much power over the fate of European financial reporting is irksome enough for some Europeans. The fact that it is not producing the accounting standards wanted in some quarters changes this from irksome to impossible to accept. Since this column warned readers that the French financial services industry was up in arms over the International Accounting Standard on financial instruments (IAS 32 and 39) and the philosophy of fair value which lay behind it, IASB chairman Sir David Tweedie and his team have been branded as ‘Ayatollah accountants’ by the chairman of a French insurance company. Leaving aside how Tweedie feels that insult compared to the billboard that proclaimed him ‘Britain’s most hated accountant’, the name-calling underlines the determination that some in Europe have to stop the IASB succeeding in promulgating standards that others find unacceptable.

The IASB acknowledges there is a growing bandwagon to bring some kind of political pressure to bear on its output, but maintains that its only interest is to produce good accounting standards, free from distortion for social or political reasons. And, to a certain extent, the IASB’s standard setters are protected by the Board’s constitution. The IASB has a duty to review its constitution every five years, which means the first revision is due in 2006. But the IASB’s trustees are to start that review process after Christmas. This creates plenty of opportunity for Europe to bring pressure to change the way the IASB operates.

The old International Accounting Standards Committee worked on a representational model. It was a regionally based organisation, where any country that wanted to be represented could apply to join the committee. When the IASB was formed out of the ashes of the IASC, that representational model was ditched in favour of recruiting people to set standards based on their experience and expertise. Those criticising the IASB would suggest it has recruited in its own image and is now pushing one particular vision of accounting standards.

Having agreed to harmonise accounting standards across Europe on the international standards rather than developing its own, Europe is now the single largest user or customer of IAS. Yet it does not have commensurate influence. This is even more annoying from a European perspective when compared with the situation the US has worked out for itself. The US makes lovely noises about harmonising with IAS, but the US hasn’t given away the power to say, ‘No’. At the moment, the only power the EU has is not to endorse IASB’s standards. It would be more attractive for many in Europe if the IASB reverted to the IASC model and gave the Europeans a much bigger say.

So what is the European Commission doing? The answer revolves around Frits Bolkestein, the European Commissioner responsible for the internal market, taxation and customs issues. In essence, he is fighting on two fronts. First he is trying to take more control of the advisory body of the European Financial Reporting Advisory Group (EFRAG) which is currently made up mostly of national standard setters. It is their job to recommend adopting IASs. The EC has decided that EFRAG needs to be strengthened so that it has a greater input in the international standards setting process. Bolkestein wants EFRAG to be organised in a more transparent and efficient way, with a secure funding base, possibly including EC funding.

Second, Bolkestein is dealing with the IASB. In November he reported to finance ministers about his meeting with the IASB’s board chaired by Paul Volcker.

In the words of the official EC statement, that meeting “concentrated on an improvement of the accountability of the IASB and its due process, and a strengthening of the European input in the work of the IASB”. He also informed ministers about progress in the discussions concerning IAS 32 and 39 and his “continued efforts to encourage all parties concerned to continue the dialogue”.

Time is running out. Soon there will be no alternative other than the nuclear option of refusing to endorse the standard. By bringing EFRAG under its control that would be possible. But it would scupper plans for harmonising financial reporting. The only other route is twisting the arm of the IASB over the controversial standard and Tweedie is already on record as saying his arm is not for twisting. What happens next is anyone’s guess.