By Mary Ellen Oliverio
In Brief
Implementation Is Under Way
The International Accounting Standards Committee's role on the world scene took on greater prominence in 1997 when the International Organization of Securities Commissions agreed to sanction a core set of standards for use in global securities markets if they passed technical muster. In the process of developing those core standards, which are presently under IOSCO's technical review, it became clear that IASC's structure was in need of overhaul in order for it to be accepted as "the" international accounting standards setter.
A strategy working party in December 1998 proposed a new structure which, in the opinion of most U.S. observers, did not go far enough. Despite strong negative sentiments from some of IASC's constituents, especially in Europe, in 1999 the working party finalized its recommendations, which proposed a structure very similar to FASB's. Implementation started with the formation of a nominating committee, chaired by SEC Chair Arthur Levitt, that will name the first board of trustees, which in turn will appoint the members of the other structural elements of a new IASC.
"Overwhelmingly, U.S. market participants believe that there should be an immediate and concerted movement toward the development of international accounting standards" (Broadgate Associates survey, July and August 1999). Furthermore, 87% of fund managers surveyed said they believe that the International Accounting Standards Committee (IASC) is the body to develop a global accounting system.
"The current debate on the future structure of IASC cannot be separated from the financial reporting strategy discussions.... IASC should develop in a way that can be supported by different organizations and forums in Europe, otherwise it is difficult to see why and how Europe can give more prominence to international accounting standards if it cannot exercise proper influence over the standards-setting process. IASC needs to become a truly global standards setter, meeting quality and independence requirements" [Federation des Experts Comptables Europeens (FEE) paper on a financial reporting strategy within Europe]. In FEE's view developments in Europe cannot be isolated from global developments.
"No one can take issue with the need for markets to converge on a common set of accounting standards. At the same time, it is critical to remember that a truly transparent and comparable system of financial reporting necessarily depends on the existence of a sound infrastructure. Accounting standards must rest upon a foundation that includes a quality process for developing those standards" (SEC Chair Arthur Levitt's announcement of a concept release on international accounting standards, February 16, 2000). The release seeks comment on a conceptual framework for global financial reporting.
The foregoing quotations illustrate the importance and emotional context surrounding the movement toward global accounting standards. This latest movement began in 1995 when the International Organization of Securities Commissions (IOSCO), of which the SEC is a member, reached an agreement with IASC on the development of a set of "core standards." IOSCO agreed that if its technical committee found the core standards acceptable, IOSCO would recommend endorsement of the IASC standards for use in cross-border capital raising and listing. The core standards were completed in 1999, and IOSCO's technical committee is currently evaluating them.
As the core standards were being developed, IASC recognized certain deficiencies and inadequacies in its organizational structure. In 1997, IASC named a strategy working party (SWP) to review the IASC structure and propose changes. A discussion paper, "Shaping IASC for the Future," was released in December 1998 to mixed reviews. FASB, the AICPA, and the SEC thought the recommendations did not go far enough in developing a truly independent standards-setting body. Others, especially those from Europe, felt that the structure should provide for approvals, or at least veto power, at the political jurisdiction level. The SWP considered the comments, held several meetings with IASC, and issued a follow-up report in November 1999 entitled "Recommendations on Shaping IASC for the Future." The SEC's influence in shaping the November recommendations can be seen in the statement from SEC Chief Accountant Lynn Turner acknowledging that IASC "has taken an important step by supporting an approach that focuses on the public interest, especially the interests of investors in capital markets, as the linchpin for its restructuring."
Initial Goals and Structure
IASC's inaugural meeting in 1973 was attended by representatives from the professional accountancy bodies of Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States. Other organizations were later admitted to the group.
Goals. From its beginning, IASC was charged with keeping the public interest as its guiding concern. In those early years IASC often adopted one or more existing accounting treatments; in some instances they were modified. In more recent years, however, the group has been an innovator. Its 1995 agreement with IOSCO to complete a set of core standards by 1999 was a particularly demanding challenge.
Structure. The current IASC structure, instituted in 1982, consists of IASC and the IASC Board. IASC comprises the professional accountancy bodies that are members of the International Federation of Accountants (IFAC), an organization established in 1977 that consisted of 143 member bodies from 104 countries as of December 1999.
IASC Board members are appointed by the IFAC Council. The board, which is comprised of representatives from 13 countries, is responsible for approving standards and exposure drafts and final interpretations. Steering committees are assigned the task of preparing drafts for proposed standards. Steering committee members are appointed by the board, which seeks both a geographical balance and a mix of accountants in public practice, preparers, and users. In 1997, the IASC Board formed the Standing Interpretations Committee (SIC) to consider accounting issues likely to receive divergent or unacceptable treatment in the absence of authoritative guidance. To encourage harmonization of accounting standards, the Consultative Group was formed in 1981. An advisory council was formed in 1995 to monitor the effectiveness of the board and help with fund-raising and promotion.
Staff. The IASC Board staff consists of a secretary-general, a technical director, and four to six other full-time technical staff and a part-time project manager. Additionally, there are a commercial director and nine other support staff.
Recognition. IASC is recognized by IFAC as the sole body having the responsibility and authority to issue, in its own name, pronouncements on international accounting standards.
The 1998 Proposed Structure
The SWP's 1998 discussion paper accepted certain aspects of the current structure as sufficient and did not seek to transform IASC. Its members would continue to be the professional accountancy bodies that were also members of IFAC. Members would receive the report of the trustees and approve changes to IASC's constitution by a simple majority. The key components of the structure set forth in the 1998 discussion paper are as follows:
Trustees. Twelve trustees would have the authority to appoint members, board members, chairs, and vice chairs of both the SDC and SIC.
Board. The IASC Board would comprise 20 country seats for professional accountancy bodies and 5 seats for other interested organizations.
Standards Development Committee. The current steering committee function would be replaced by the Standards Development Committee (SDC), which would be responsible for preparing exposure drafts and international accounting standards for submission to the board.
Standards Development Advisory Committee. The Standards Development Advisory Committee would provide input to SDC on agenda issues.
Standing Interpretations Committee. The current SIC would continue as a separate body
Staff. The current secretary-general would be replaced by the SDC chair, who would serve as CEO. This chair would assume the functions currently performed by the secretary-general.
SDC and the board would assume the technical functions, while the trustees would assume the commercial functions. Staff would include a technical director and a commercial director.
Due Process. The SWP underscored the significance of due process and the advantages of open meetings, using new technology for electronic observation of meetings, and publishing agendas in advance.
Timetable. The SWP set up a timetable for change that would result in the revised structure becoming effective as of July 1, 2000. Such a goal was ambitious, according to many observers.
Other Initiatives Influencing Global Standards Setting
Other developments underscore the realization that a global standards setter is critical for worldwide commerce--
Financial Accounting Standards Board Report. The 1998 report, "International Accounting Standard Setting: A Vision for the Future," asserted that FASB would play a leadership role in the evolution of the international accounting system. The ultimate outcome should be worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting.
The report took note of a number of alternatives, including the possibility that FASB might reorganize itself to become an international standards setter or that an alternative international structure and process that meet FASB's fundamental objectives could be established.
International Forum on Accountancy Development. IFAC launched the forum in mid-1999, and its members include international financial institutions, other key international organizations, and the accountancy and auditing profession. IFAC, IASC, IFAC regional organizations, and representatives from the five largest international accounting firms attended a June 1999 gathering in New York City. Key initial proposals related to supporting the use of IASs, raising auditing standards and practices, using the IFAC code of ethics, and enhancing the education and training of professional accountants.
International Accounting Standards in Canada. Guy Legault, president and COO of the Certified General Accountants Association of Canada, approved in July 1999 a policy statement supporting the adoption of IASs for financial reporting by for-profit entities in Canada. Legault stated: "IASC's influence is steadily growing, and IASC standards are now used by countries as diverse as Australia, France, and Zimbabwe. It is expected that these standards will eventually become the single dominant measure of financial results."
FEE Discussion Paper. In its presentation of a financial reporting strategy within Europe, the FEE concluded that it favors giving companies the option to use IASs without requiring compliance with the European Union's accounting directives. The paper observed that "in some countries there is a tendency by companies to move to U.S. GAAP rather than to IASs since they see U.S. GAAP as having greater long-term acceptability." Nevertheless, the report concluded, "It is doubtful whether Europe should or could support a set of standards over which it cannot exercise influence (U.S. GAAP), even though FASB may wish to see itself taking the lead as the worldwide standards setter."
Key Points of Comment Letters
The SWP received 84 comment letters to its original December 1998 proposal, representing 88 groups and individuals from various constituencies. Member bodies and other accounting bodies represented the largest group of respondents (23), and standards-setting bodies represented the second largest (12). Eleven responses were received from the United States.
Many respondents made general comments about aspects of the proposed structure that they found troublesome. While it is not possible to capture the richness and extensiveness of the responses, the range of concern is identifiable:
The Radical Approach. "We believe that a more radical approach is needed than that proposed by the SWP and that IASC should enter into a constructive partnership with all its constituent interests--not just national standards setters."
Too Close to FASB. "The proposed structure is quite close to the current structure of FASB. There are considerations applying to a potential global standards setter that do not apply to national standards setters."
Real Power in Small Group. "[T]he nature of the changes ... may have the result of leaving the real power and influence in global accounting standards setting under the control or strong influence of a small group of countries.... [I]t is fundamental to the success of IASs that they gain widespread acceptability and usage and that the process for approving them involves a wide and balanced group of countries to give them legitimacy. "
Independent Decision-Making Group. "IASC should reject any proposal that does not grant the ultimate standards-setting authority to an independent decision-making body consisting of expert standards setters. The current SWP proposal to provide the IASC Board with the ability to veto the output of the group of technical experts serving on SDC represents a mismatch between IASC's objectives and pursuit of an efficient and effective structure."
Balance Influence. "Our concerns ... revolve around the need to balance the influence of national standards
setters in IASC's processes with that of users, preparers, and other constituencies. IASs will not achieve the credibility they need unless they are supported by those for whose benefit they exist and are regarded as realistic by those who have to comply with them."
In the Hands of National Standards Setters. "We agree with the general view ... that increased involvement of national standards setters would be beneficial in many respects. Where we depart is in the degree to which an end result effectively places international standards setting in the hands of national standards setters, and a limited number at that."
Quality Improvement. "The eight essential functions of a quality international standards setter are leadership, innovation, relevance, responsiveness, objectivity, acceptability and credibility, understandability, and accountability.... [T]he [four] essential characteristics of a quality international standards setter are an independent decision-making body; adequate due process; adequate, technically qualified staff; and independent fundraising."
The foregoing excerpts are merely illustrative. They reflect respondents that chose to comment within the total context of what is being envisioned.
The IASC Board Staff Listens and Responds
The response to criticism of the 1998 proposed structure began formally when the SWP met with the IASC Board on June 30, 1999. The problem of overlapping authority between two groups, a common question raised in comment letters, was immediately addressed. IASC reported a strong preference for adopting a unicameral structure for achieving IASC's objectives rather than the bicameral structure proposed in the discussion paper. The single board would include both full-time members (including some members of the boards of national standards setters) and part-time members, with the appointments to be made by trustees.
Following this initial meeting where the proposed structure was discussed, Financial Times noted:
After months of bitter crossfire, IASC met and considered a blueprint for its future constitution designed to bridge the gulf between U.S. and European aspirations....
There is a clear gap between two distinct sides. The EU wants the board, with its several European seats, protected, while the standards-setters like the idea of power moving to SDC, where they would be in independent control.
The EU wants a body with political legitimacy--not one dominated by the United States or with seats for former standards-setters with little economic clout. FASB wanted independence as exemplified by its own system. It does not want a round of horse-trading with complex arguments decided by vested interests.
The EU made progress with its argument that power in the new body should reflect economic importance rather than the historical accident that the world's top standards setters operate in places such as Australia, Canada, New Zealand, and the United States.
In November 1999, the SWP completed its review and issued "Recommendations on Shaping IASC for the Future." The SWP had moved from a discussion document to specific recommendations for the IASC Board to consider. The recommendations were discussed at the November meetings in Venice, at which time the board approved a resolution supporting the revised proposals by a 160 vote.
The 98-paragraph report reflects a break with the original IASC structure. It identifies three critical issues: representativeness of the decision-making body, independence of its members, and technical expertise. It concludes that the legitimacy of IASC standards would be established if standards development were undertaken by an autonomous body comprised of a small number of full-time and highly skilled experts.
Objectives and Strategy. The recommendations propose that IASC's objectives be expanded to--
* develop in the public interest a single set of high-quality understandable and enforceable global accounting standards that require high-quality transparent and comparable information in financial statements to help participants in the world's capital markets make sound economic decisions;
* promote the use and rigorous application of those standards; and
* bring about convergence of national accounting standards and IASs to high quality solutions.
Overview of SWP Recommendations
IASC. The current IASC membership comprising the professional accountancy bodies that are members of IFAC would not be continued.
Two Main Bodies. IASC's primary authority would rest with a 19-member board of trustees and a 14-member standards-setting board, with clearly different responsibilities. The trustees would have diverse geographic and functional backgrounds and be responsible for appointing members of the board, the SIC, and the Standards Advisory Council. Additionally, they would monitor IASC, raise funds, approve the budget, and be responsible for constitutional changes. The original group of trustees would be appointed by a nominating committee. The board of trustees would be representative of the international community: six representatives from North America, six from Europe, four from Asia Pacific, and three from any area as long as geographic balance is maintained. Once the new structure is established, the trustees would be responsible for selecting all subsequent trustees.
The foremost qualification for the 14 IASC Board members would be technical expertise. Those on the board would have "the best available combination of technical skills and background experience of relevant international business and market conditions in order to contribute to the development of high-quality international accounting standards. The selection of board members would not be based on geographic representation."
IASC Board members would sever all employment relationships. The desired diversity of the board is reflected by a requirement that five board members would have a background as practicing auditors, at least three would have a background in financial statement preparation, at least three would have a background as financial statement users, and at least one would have an academic background. Seven of the full-time board members would be expected to have formal liaison responsibility for one or more designated national standards setters.
Standards Advisory Council. The Standards Advisory Council would provide a forum for the debate of technical and other issues with the board and would serve as advisors to the trustees. The council, comprised of about 30 people, would possess a wide spectrum of experience.
Standards Interpretations Committee. SIC would continue in its present form with 12 members, mostly accountants in public practice. The SWP believes that SIC provides a vehicle for more timely guidance within IASC's due process strategy.
Nominating Committee. The initial group of trustees would be appointed by a nominating committee, to be named by the current IASC Board. The nominating committee, consisting of five to eight outstanding individuals from diverse geographic and functional backgrounds, would also designate the chair. The committee's responsibilities would cease once the trustees had been selected.
Implementation
At its December 1999 meeting in Amsterdam, the IASC Board appointed the nominating committee. The following members were appointed by unanimous vote:
* Karl H. Baumann, chair of the supervisory board, Siemens, AG; deputy chair DRSC (The German national accounting standards setter)
* James E. Copeland, Jr., CEO, Deloitte Touche Tohmatsu
* Howard Davies, chair, U.K. Financial Services Authority
* Arthur Levitt, Jr., chair, U.S. Securities and Exchange Commission
* Michel Prada, chair, French Commission des Operations de Bourse
* Andrew Sheng, chair, Hong Kong Securities Futures Commission
* James D. Wolfensohn, president, World Bank.
At its first meeting, on January 13, 2000, SEC Chair Arthur Levitt was selected to chair the nominating committee. The deadline for nominations was most recently extended to March 15, 2000. Under the timetable proposed by the SWP, the nominating committee would submit its recommendations for trustees to the IASC Board by April 2000.
The IASC Board, at a March 17 meeting in São Paulo, voted approval of the revised structure as presented in the November 1999 report. IASC members are expected to approve the resolutions at their May 2000 meeting. Trustees would begin to appoint new board members after the May meeting, and the new board is expected to commence activities on January 1, 2001.
A Smooth Path in Sight?
Accountancy, the magazine of the Institute of Chartered Accountants in England and Wales, has reported that, despite the apparent unanimous approval of the SWP's recommendations, all is not well in some quarters of the world. In a news brief titled "IASC Sold Out to the U.S., Says E.C.," Accountancy reported that European Commission observers were angry that IASC had "given in" to pressure from the United States and believed that IASC could no longer call itself an international organization.
As of mid-March 2000, this impression appears somewhat pessimistic. There is considerable momentum behind establishing a structure that is appropriate for a global society. But the IASC structure is just the beginning of the larger task of establishing a credible global financial reporting system. The recent SEC concept release on international accounting standards seeks comment on the elements of a "high-quality global financial reporting structure that goes beyond the standards themselves" (The deadline is May 23, 2000). In addition to high-quality accounting standards, the SEC seeks comment upon the following elements:
* Effective, independent, and high-quality accounting and auditing standards setters,
* High-quality auditing standards
* Audit firms with effective quality controls worldwide
* Profession-wide quality assurance, and
* Active regulatory oversight.
It would appear that the SEC believes that the structure for establishing international accounting standards is in place and it is time to move on to a comprehensive infrastructure that is required for the establishment of truly global securities markets. *
Mary Ellen Oliverio, PhD, CPA, is a professor of accounting at Pace University, N.Y.
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