The listening board

Michelle Perry reports on the IASB’s constitutional reforms which are intended to reaffirm to critics that the board is listening and working with, not against, all affected parties. However, there are many who believe the reforms still don’t go far enough

Attempts by Paul Volcker and his group of trustees to address criticism of the procedures, independence and make-up of the International Accounting Standards Board and its overseer appear, on the surface, to be achieving little.

With the trustees just weeks away from endorsing their proposed changes to the constitution, which governs the operating procedures of the IASCF and the International Accounting Standards Board chaired until 2006 by Sir David Tweedie, the criticism should really have subsided. But what the debate seems to have done is to galvanise opposition towards the standard setter.

In recent weeks, the new internal markets commissioner of the European Union, Charlie McCreevy, has stuck his head out and is heavily criticising the board, demanding the changes go further than those which the trustees have recommended.

In a nutshell, critics, mostly from within the European Union, want more accountability, transparency and board representation from those countries that are using the standards. They also want less US influence on the board.

Rightly or wrongly, it is felt that the IASB is making too many concessions to fit with US convergence of international financial reporting standards, but not acknowledging the practical implications for those companies currently applying the rules.

In its proposals for change, the trustees have concluded ‘the basic elements of the existing constitution have proved to be sound’. They have, however, recognised that concerns over the trustees’ oversight role, the composition of the IASB and the trustees, and the IASB’s operating procedures ‘are strongly held and warrant attention’.

To tackle complaints, particularly from the French, the trustees are proposing to remove the main qualification of board members to have technical qualifications. Instead, the main qualification for IASB membership will be that of ‘professional competence and practical experience’. It is the emphasis on ‘practical experience’ that should be a positive signal for critics, especially those in Europe.

‘The trustees have changed the requirement so that knowledge of IFRS is required, so as countries start using them they will have that knowledge,’ says Tom Seidenstein, director of operations at the IASB, implying we might see more Europeans on the board soon.

Publicly, the trustees refuse to bow to pressure. They concluded: ‘Weighting a particular region because of its current position on IFRSs might impede the objective of developing global standards. To emphasise particular areas that are using IFRSs might focus the IASC Foundation and the IASB on regional or national concerns at the expense of the organisation’s broader international objectives.’

EALIC, the European Association for Listed Companies, however warns: ‘We might end up regretting the fact that the various bodies do not include a large majority of members who come from countries or regions [where IFRS is compulsory] and that, furthermore, no consideration will be given to geographical criteria in future.’

The real test will be in the forthcoming board appointments. Last year saw the reappointment of four board members, two of which were from North America. Board members are allowed only one reappointment. This year the terms of three more board members, James Leisenring from the US, Gilbert Gélard from France, and Robert Garnett of South Africa, expire.

This presents the trustees with a real opportunity to prove that it is an inclusive, attentive, answerable organisation, and not just another behemoth wielding its unaccountable weight.

A further attempt to appease critics comes in the trustees’ proposal to expand their number from 19 to 22 to broaden geographical representation.

But, on other issues, detractors might not feel their criticisms have been addressed sufficiently.

On the funding issue, also recently criticised by McCreevy, the trustees aren’t proposing any current changes, but they are carrying out a study of various funding mechanisms, including a fee-based system, and plan to report on it soon.

As for their independence, some suggest the trustees should be elected by other organisations, such as the World Bank or the IMF.

Richard Martin, head of financial reporting at ACCA, says the trustees could have gone for a more parliamentary-type model, but he says it would have resulted in a much bigger, and perhaps unwieldy, board, not to mention a completely different structure.

‘They could have gone for a radical solution but they haven’t. There’s a limit to how to change the constitution to address the concerns,’ says Martin.

In response to criticism, the trustees say: ‘The IASC Foundation is an independent entity and does not regulate its own members, and therefore no inherent conflict of interest exists.’

Specific mention of small and medium-sized companies and emerging economies will also now be included in the constitution. But the trustees decided against focusing on the not-for-profit and public sector.

It’s a point that has disappointed ACCA and undoubtedly other countries around the world which do not enjoy a high level of publicly listed companies, such as in eastern Europe.

‘We would have preferred a wider recognition of the purposes of IFRS. It’s not enough for us. ‘I do think that IFRS will be used more widely than just the capital markets in reality, so there’s a need to think outside the box, as it were,’ argues Martin.

In a further bid to allay concerns over the board’s procedures is a proposal to increase the voting requirements for an exposure draft, a standard or final interpretation from eight votes (simple majority) to nine (64%).

The trustees, however, point out that only one standard, IFRS 4, had been passed by a majority of less than nine votes, with most passed by a majority of 11 votes or more.

Still, the reforms haven’t completely silenced critics. John Pierce, chief executive of the Quoted Companies Alliance, which represents over 2,000 companies outside the FTSE 350, says: ‘In the consultation process in the UK we didn’t feel that our responses were given sufficient weight. They were rather dismissive of them.’

Consultation

Others feel the consultation periods are too short. In its response to the constitutional review, the EALIC, of which the QCA is a member, says there should be two public consultations for each draft rule and increased response periods for major or complex drafts. There is currently only one public consultation period for each standard and a 90-day response period.

Pierce agrees, saying ‘more time is needed at each stage of the process’.

If the Europeans feel the proposals don’t go far enough, which is what McCreevy is indicating, the IASB could face repeat scenarios of what happened to IAS 39, when the European Union carved out some rules resulting in a second version for European companies wishing to opt out.

The result is that accounts among many companies won’t be comparable if they are using different rules for derivatives.

To achieve buy-in to the reforms, and avoid any future dilution of IFRS, the trustees must persuade the Europeans that they are not an ivory tower pandering to the demands of the US Securities and Exchange Commission. But the Europeans also have to realise that IFRS is used in over 90 countries around the world, many of those outside the European Union.

Michelle Perry is a freelance journalist specialising in financial and business issues.