The Bruce Column — Independence, eligibility, and the IASB

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21 Feb, 2012

Independence and accountability have always been the big issues for the IASB and the IFRS Foundation. Now the Foundation’s Monitoring Board has produced a report which deals with the most sensitive issues. Robert Bruce, our regular resident columnist takes a look.

The question which has faced the IASB from its outset is how to square the circle of independence and accountability. The answer has always been to show more rigorous governance. The better the governance the less wriggle-room there will be for critics. And the latest in these efforts is the report on the review of the IFRS Foundation’s governance by its Monitoring Board (the securities markets authorities responsible for monitoring the activities of the IFRS Foundation).

The process itself was rigorous. Its aim was to assess whether the current governance arrangements promoted  ‘the primary mission of the International Accounting Standards Board, (IASB), of developing high quality, understandable, enforceable and globally accepted accounting standards, and provide for both the accountability and independence of the IASB’.  To achieve this, a series of proposals for governance improvements were published last year, a full consultation period ensued, responses were considered, and roundtables were held around the world.

One of the more obvious concerns was that the crossroads where independence, ownership, influence and other issues could collide should be properly defined. For example, the elusive goal of ‘financial stability’ which motivates prudential supervisors should not be a motivation, necessarily, of standard setters.

All this has been clarified in the report. ‘While there were some strong calls for the involvement of prudential authorities in the monitoring process’, says the report, ‘a larger number of respondents cautioned that financial stability should not be regarded as a primary objective of financial reporting, and that inputs from such standpoint should be made to the standard-setter through other existing channels. Considering the diversity of views and also the possible undesirable effect any changes to the current set-up would have on stakeholders’ perceptions, the Monitoring Board concluded that the status quo should be maintained’.

Overall the report is governed by a simple statement. The aim is ‘to increase understanding and introduce greater clarity’, and a whole variety of measures are introduced to achieve just that. But there is one which contains a degree of political diplomacy. And this is the membership of the Monitoring Board. This will continue on the same basis. ‘Full membership of the Monitoring Board will continue to be confined to capital markets authorities, defined as those authorities responsible for setting the form and content of financial reporting for use in the capital markets in respective jurisdictions’.  And membership is to be expanded from the current five seats to eleven, by including additional capital markets authorities, ‘primarily from major emerging markets’. . But they are also to ‘refine the existing membership criterion’. At present members need to have a strong commitment to: ‘supporting the development of high quality international accounting standards’. But now that commitment has been refined ‘to call for demonstration of this commitment through domestic use of IFRSs in the jurisdiction’s capital market and participation by the jurisdiction in Foundation funding. To become and/or remain a member, all permanent members must meet that criterion, and will be assessed for their eligibility on a regular basis’.

This answers the persistent gripe of countries around the world which see countries participating in the IFRS decision-making process while not using IFRS. Now if you want a seat at the table you have to be in the game as well. So what of the prominent current absentees from the actual playing-field, like Japan and the US, who hold two of the current five seats? Well, like so much in accounting, it is all about the timing.

The report, with a degree of deftness, makes this clear. ‘The first assessment of eligibility will start in early 2013’, it says. And, ‘during early 2012, the Monitoring Board intends to develop and document in its Charter a definition for the criterion “use of IFRSs”’. In other words the development of the criteria and the first assessment will not begin until after the point, hopefully, when the SEC makes it reasonably clear what happens with IFRS in the US. And Japan has long been expected to follow suit. The report itself was, after all, produced by the IOSCO secretariat in Japan.

This report is a clever and helpful piece of work. And by putting independence, understanding and clarity at its centre it has shown that its heart is in the right place.

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