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Corporate governance: Doesn’t compare

History will show whether Remembrance Day 2008 was a day we will also record
as a high point in the history of the
International
Accounting Standards Board
, or whether it marked the beginning of
the end.

I write this just before the
G20
meeting of heads of state in Washington and with my usual trepidation about any
good coming of politicians dabbling in the world of financial reporting. You can
see this as ominous or heart-warming, depending on how long you have followed
the fortunes of the financial reporting world, but just listen to what the US
Under-Secretary of the Treasury David McCormick said to the press in the days
before the G20 meeting.

“There are a number of topics that leaders might touch on, one under the area
of transparency and accountability would be global accounting standards. This
has been an area that’s gotten a lot of attention and by creating a more aligned
and ultimately convergence of global accounting standards, that reduces a huge
burden on businesses and ensures a level playing field in terms of how we
measure the performance of different businesses,” he said.

Now that sounds fine. But the problem is that as soon as politicians find a
new toy ­ and financial reporting rules is a new toy to them ­ they think they
can turn it upside down and see if it can be made to work to their advantage.
McCormick went on to issue a good clarion call, as politicians are wont to do.

“I suspect the leaders will touch on the importance of finding ways to
collaborate across global regulations,” he said. “So regulations are
historically national, but we certainly recognise the need to collaborate as
much as possible and wherever possible to ensure our regulations are aligned, to
make sure they don’t disadvantage one country over another. And there may be a
number of areas where our regulatory approaches can converge. So, accounting is
a great example of that, where it makes all the sense in the world and it is to
the benefit of everyone to have a common accounting standard.”

Again, sounds okay. But in London a few days before, it had become obvious
that some nations do not think regulations should be aligned and would very much
like to get back to that idea of financial reporting standards being
‘historically national’.

This was a hearing of the House of Commons Treasury Select Committee over the
banking crisis. The main witness in the second half of the day’s deliberations
was Sir David Tweedie, the tenacious IASB chairman. Normally, the chairman of
the Treasury Committee, the redoubtable John McFall MP, tends to take what some
call a strong (others call a bullying) line with the hapless City souls he finds
before him. With Sir David, perhaps recognising another determined Scot in his
own mould, McFall takes a stern, but understanding, role ­ perhaps even a
supportive one. If the IASB can show it is doing good things, he will brook no
interference with its independence: which is where what was said on the 11
November may be seen as pivotal.

The discussion came to focus on the efforts by the European Commission to
carve out some lines it found to be against the interests of some banks in
continental Europe from the financial reporting rules. This was related by Sir
David to McFall as “A blunt threat to blow the IASB away”.

Instead of banks’ accounting and financial positions being transparent and
clear to all, a great smokescreen would billow up. Under the proposed carve out,
Sir David said the consequence would be that “You would never have known what
had happened.” The result? “Companies’ accounting would be totally out of
control.”

That could apply the world over. The great revolution, which has seen country
after country move its national financial reporting rules into line with inter
national financial reporting standards, could come shuddering to a halt. If the
world’s largest economy gets cold feet when on the verge of moving its
corporate structure onto IFRS, the process could simply reverse.

So far, the global shift to IFRS has been based on momentum and the clear
understanding that if this is the direction in which the business world is
moving, nobody wants to be left out. Which is why America made it plain that it
wanted to join in.

But the goal was a common global system. If the European Commission allowed a
French bank here, or a German bank there, to follow different rules, the
commonality goal ebbs away. Without it, IFRSs are useful, but not essential. At
an IFRS conference a couple of days after the select committee hearings, one of
Europe’s top analysts, Citigroup’s Ken Lee, said IFRS had enabled him to go to,
say, Johannesburg, and know that the basis of the figures he looks at there is
broadly the same as most other countries he visits. That was the prize at stake
in that crowded room in Whitehall on Remembrance Day.

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