Corporate governance: Proud parents

It is a bit like an embarrassing family dispute, the sort where a rather
old-fashioned father finds that his son, on becoming an adult, has turned into a
brilliant and successful individual. There are two common reactions to this. The
father can embrace the success and bask in the reflected glory. Or he can
begrudge it and turn bitter, increasingly disparaging his achievements. We have
all seen both.
And if you look at the way European officialdom has reacted to the success of
the system of international financial reporting standards it instigated, you can
see the latter reaction has become their chosen course of action.

You could see it earlier this year when Bruegel, the European think-tank,
produced a report on the achievements of the body which produces IFRS, the
International Accounting Standards Board. Half of the report was effusive in its
praise. “This experiment is unique,” it said, “by its combination of global
reach, private sector governance and significant economic impact.”

But then the other half, like the grumpy father, told another story. This
effective body, the IASB, wasn’t part of the stultifying bureaucracy of the EU
and surely that couldn’t be correct. It didn’t use those words. But it attacked
the IASB’s governance and suggested that, unlike the EU bureaucracy, it was
somehow undemocratic to have a private sector and independent organisation doing
all this.

It is not, of course, that any of the burgeoning number of European bodies ­
which seek to safeguard something or other on the accounting standard scene
within this European bureaucracy ­ exhibited much in the way of democracy
either. But at least they were subservient and stuck to the official line of the
EU playing the frustrated elderly father.

Now we have another report, the Radwan Report, which follows more or less the
same line. The really sad thing is that the astonishing success of IFRS is down
to the decision by the EU to insist that from 2005 all listed companies in
Europe had to use IFRS. Since then, the process has spread like wildfire around
the world to the extent that even the isolationist US is on the verge of
allowing IFRS to be used there. A bright and youthful European would be raising
his glass and describing the original decision as far-sighted and
world-conquering. Instead, these embittered people sit in the dry air of
Brussels committee rooms and insist that the glass cannot be brimming over. It
cannot even be viewed as half full. It can only be viewed as half-empty, and
emptying fast.

It is extraordinary that a success story unparalleled in accounting history
has to be denied and fought against. Once upon a time everyone pointed their
finger at the US and accused it of being isolationist. Now, it is Europe which
sits at home spitting with anger. For the great IFRS experiment has moved
outwards to the world. And the Europeans, quite rightly, can no longer get the
system to do their narrow bidding.

Probably the finest example of this is the fate of the proposed standard for
small and medium-sized enterprise. This standard currently only exists in draft
form. But across Europe it is sneered at. As the Radwan Report puts it: “It is
unclear who gave a mandate to the IASB to suggest such an IFRS for SMEs and it
is even questionable whether there was ever a need or demand for such a
standard.”

Such is the attitude of a sclerotic Europe in denial over the success of its
offspring. And it may be that in a Europe of elderly industries the bureaucrats
cannot see the point in such a standard.

They should look up from their isolationist misery. They should look to South
Africa, an economy which has had more than its share of real problems. There,
they are so enthused about the life-changing potential of the proposed SME
standard that they have wasted no time. They have taken the standard in its
draft form and implemented it in that form with immediate effect. The dullards
of Europe should listen to the President of the South African Institute of Cha
rtered Accountants, Ignatius Seehole. Talking in London last month, he was
passionate about how useful the SME standard would be to the majority of listed
companies in South Africa. And he expanded on his theme with words which would
have the Brussels people racing for their offices, their hands over their ears.
“Without IFRS we have an international free-for-all, with a lack of
comparability and chaos, especially in developing nations which are often not
the countries of choice for capital investment even at the best of times,” was
his theme.

Around the world that does tend ­ with reservations here and there ­ to be
the attitude. But the Europeans, who created this sparkling revolution, simply
isolate themselves further and argue about the awful fate which is sure to
befall their offspring.