Diplomatic Economic Club^{® Since 1997}

Eugene Eteris, European Studies Faculty, RSU
At the G-20 meting of industrialised nations in September 2009, a firm support was voiced for a single set of high quality accounting standards to improve capital flows and cut down on cross-border arbitrage in response to the financial crisis. However, achieving consensus is proving increasingly difficult. The EU internal market commissioner Michel Barnier proposed reforms to the European and international accounting rules.

In modern times, world’s accountants as well as many investors and financial analysts are being able to compare accounts across borders. They argue, however, that this uniformity means capital would be allocated in a more efficient way. They hope that companies could less easily pick their regulators to suit them, and that accounting scandals such as those at Enron, WorldCom and Parmalat would occur less often.

Recent publications in the Financial Times reveal the new trends in universal accounting rules.

The problem to be resolved in 2011

Nevertheless, the world financial turmoil drew particular attention to one fundamental question: how to measure what an asset is worth. The reason was that during the market panic, prices for most complex financial products such as derivatives plunged as markets froze – virtually regardless of the credit quality of the underlying assets. For some it created bargains that were snapped up. For most banks and hedge funds, however, it led to devastating holes on balance sheets because of the practice of marking assets at current market prices.

The writedowns created a vicious circle where falling values prompted lenders to demand more collateral against their loans, which in turn forced overleveraged groups to sell assets, pushing prices down further. As a result, policymakers began to look with renewed favour at alternative procedures: allowing managers to judge values themselves or report them at what they originally cost and what cash they were expected to generate before they were sold.

The opinion that „fair value“ accounting weakens financial and economic stability has persisted among many regulators and politicians, mostly in Europe. But some investors, notably in the US, have remained staunch in their defence of fair value because they say it is more transparent. Hence the G-20 leaders expressed keen support for a single standard to be introduced by June 2011.

European scene

The European Union’s new internal market commissioner Michel Barnier proposed reforms to the European and international accounting rules, infuriating accountants and potentially scotching fragile hopes of global convergence.

In an apparent power grab by Brussels, Michel Barnier has suggested future funding of the International Accounting Standards Board (IASB) might depend on whether it bows to political pressure from the European Commission to make changes to its governance.

Mr. Barnier’s suggestion, made at a meeting of top accountants and regulators in London (September 2009), stunned the global accounting community by raising questions about IASB’s independence during a period of crucial talks to establish an international set of accounting rules.

The G-20 meeting in London pledged support for a single set of high quality accounting standards to improve capital flows and cut down on cross-border arbitrage in response to the financial crisis. However, achieving consensus is proving increasingly difficult.

Crucially, many European policymakers believe prudential regulators should be more involved in IASB governance so that accounting can be used as a tool for financial stability.

But accountants and business leaders – particularly in the US and Japan – argue that accounts should not be the subject of regulatory intervention but should focus on providing an accurate snapshot of a company’s value. During an increasingly tense meeting on future funding for the IASB, Mr. Barnier said that „the two issues of financing and governance can be linked“.

„We want to see more issuers – more banks and more companies – and more prudential regulators represented on the governing board [of the IASB],“ he said.
[Sanderson R. Accounting convergence threatened by EU drive. – Financial Times, 20 April 2010].  

Mr. Barnier once said that, it was „premature“ to expect the EU to increase its annual £ 4,3 mln budget contribution for the IASB (the EU intends to reconsider its annual funding), which will bring the EU into conflict with the US and Asia and derail the convergence process.

More than 110 countries, including most of Europe and Asia, use the International Financial Reporting Standards drawn up by the IASB. US companies continue to report under Generally Accepted Accounting Principles while regulators consider whether to endorse IFRS.

History and present

The accountancy is a long-history problem: ever since the 15th century when Luca Pacioli, a wandering Franciscan monk and friend of Leonardo da Vinci, invented modern accounting in the Tuscan hills, there have been arguments about its meaning and purpose. It is still quite uncertain as to whether accounting is a social construct and just one way of looking at the world, or is it a quasi-science based on precise facts?
Sanderson R. and Hughes J. Accounting: Carried forward. –FT, 19.04.2010

Depending on how the rule-makers’ investigations go, the US Securities and Exchange Commission, SEC intends to decide by that date whether all American companies should stop using US Generally Accepted Accounting Principles, the current national system, and move to the IASB’s International Financial Reporting Standards, used in most of the rest of the world.

Investors are mostly in favour of convergence but some worry that in the rush to meet the G-20 deadline mistakes could be made that would create future problems for company reporting. „The most important thing for investors is that it is high-quality standards, and that they do meet the demands of shareholders and the wider investment community.  

The SEC’s decision will be crucial, as without support of the world’s largest capital market, any global standard would be global only in name. But as the deadline of 2011 approaches, the inevitable cultural differences, disagreements and rivalries that come with a global enterprise on this scale – and that have plagued accounting debates for centuries – are threatening to disrupt the process. In spite of months of negotiations, the FASB and IASB have been unable to agree on pricing financial instruments.

The story of how accounting became a hotbed of acrimony that pitted regulators, accountants, investors and company executives against one another has its roots in the weeks before the Lehman Brothers collapse in September 2008. Late that August, the project to create a single global standard by bringing the US and the rest of the world closer together reached what is still its all-time high point.

Christopher Cox, then chairman of the SEC, announced a tentative deal that would switch all US companies to IFRS by 2014. Within weeks of Lehman’s collapse, Mr Cox was replaced by Mary Schapiro as part of President Barack Obama’s incoming administration. During her confirmation hearings, Ms. Schapiro said she „would not be prepared to delegate standard-setting or oversight responsibility to the IASB“.

Sir David Tweedie, the former KPMG partner who heads the IASB, had his own problems to deal with across the Atlantic. EU pressure forced the publication in October 2008 of a rule that was widely considered as decreasing reporting quality; they may have saved some European banks from collapse.

Full text at the website of The Baltic Course Establishing European and international set of accounting rules