Accounting Regulation and the Public Good

1. “Why and How EFRAG was Reformed” by Philippe Maystadt, https://doi.org/10.1515/ael-2017-0010

2. “A Speech on “Why Accounting Matters: A Central Bank Perspective”” by Claudia Schwarz, https://doi.org/10.1515/ael-2017-0012

3. “Thin Political Markets in Accounting and Beyond: Lessons for Leadership Education” by Karthik Ramanna, https://doi.org/10.1515/ael-2017-0011

4. “Financial Regulation for a Better Society” by Shyam Sunder, https://doi.org/10.1515/ael-2017-0013

5. “Open Debate on Accounting Regulation and the Public Good” by Imke Graeff, https://doi.org/10.1515/ael-2017-0023

Ladies and gentlemen, in a globalised economy there is more than ever a compelling case for global, high-quality standards. The EU had come to this conclusion as early as in the 90’s when we were actively seeking to achieve the single market. Transparent, comparable, reliable financial reporting was viewed as one of the necessary blocks for an efficient and integrated capital market. A second reason why comparability was so important was the fact that European companies wanting to gain access to capital markets outside Europe could not use their local financial statements. They were to provide additional information, which in most cases was based on the US GAAP. It was thought that with the harmonised set of accounting standards it would be possible to solve this problem as well.

The EU had limited options to arrive at this harmonisation, this single set of accounting standards. A first option would have been a full harmonisation through EU directives but this was deemed too difficult, too time consuming. The views differed so much between Member States. For some countries, the main purpose was to provide information to investors. In other countries, the main concern was the protection of creditors. In again other countries, the main concern was the link with the determination of profit or loss for tax purposes. So it seemed a too big challenge to go through EU harmonisation directives. A second option would have been to create an independent European standard setter, which would then provide a set of uniform rules. This one was a quite logical option, but again it was not practicable, because there were so many differences not only concerning the objectives of the harmonisation but also because of different traditions, different institutional settings. A third option, adopting the US GAAP, was viewed as unacceptable because this was tantamount to outsourcing a part of the EU legislative power to the US Congress. So finally the only realistic option was to opt for a standard setter which was truly international, truly independent and which had already provided a set of high-quality standards. This was the International Accounting Standards Board, the IASB, which had published already the IAS (International Accounting Standards) and later the IFRS (International Financing Reporting Standards). In 2002, the Council and the EP adopted a regulation, which obliged EU-listed companies to provide their financial statements on basis of the IFRS on the financial year 2005 onwards.

As you know the IASB is an autonomous private sector body and this means that it was difficult to adopt as such the standards published by the IASB. For this reason a so-called endorsement process was included in the regulation and this means that before adopting the standards published by the IASB –, it is necessary to check whether they meet the requirement of presenting a true and fair view, whether they are conducive to the European public good, and whether they meet the criteria of clarity, relevance, reliability and comparability for financial information. The task of checking whether these requirements and criteria are met was given to the Commission: The Commission decides to adopt or to reject the standard but following the advice of EFRAG (the European Financial reporting advisory group) and after a vote in the Accounting Regulatory Committee which is made of Member States’ representatives.

This choice of the EU had positive effects in terms of the quality and the comparability of the financial reporting. Even the critics of the IASB recognise that adopting the IFRS was a real step forward. However the financial crisis brought about a debate on what many experts consider as an excessive resorting to market value especially for accounting for financial instruments; in particular the establishment of fair value when there is no market or for non-liquid assets is something very complex and very risky in terms of data reliability. And indeed some critics argue that fair value accounting has significantly contributed to the financial crisis and certainly has exacerbated its severity for financial institutions.

Consequently, this debate raised the awareness of economic stakeholders but also of political decision makers about the potential impact of accounting standards on listed companies and therefore on the economy as a whole. For example in the Ecofin Council^[1] where the 2002 regulation had been adopted almost without discussion, Ministers began to raise questions about the European influence within the IASB; notably Minister Christine Lagarde was especially vocal in her critics of IASB which she saw as intellectually dominated by a country which keeps its own national GAAP. In this context where on one hand the IASB continues to acknowledge the major influence of North American position – even if it now seems clear that the US have no intention to adopt the IFRS in a foreseeable future – and on the other hand the use of the IFRS has spread to other regions of the world – notably Asia and Oceania – which legitimately ask for more influence in the IASB, the question became: How EU, the main user of IFRS in terms of market capitalisation, could gain and maintain the leadership in standards development and adoption process?

The answer to this question must take into account the fact that as it is too often the case in international organisations the European influence is reduced because it is diffused and fragmented. EFRAG but also the national standard setters, the national and European supervisory authorities, the associations of users and other stakeholders have different and sometimes opposite views about the proposals of the IASB and they notify these quite divergent views to the IASB, which of course diminishes the influence of the EU. Therefore it was necessary to revisit the way in which these activities are organised to achieve better coordination of the EU in this field. Moreover policy choices in the field of accounting involve public interest stakes that should be considered more thoroughly. By influencing the behaviour of actors in the financial markets, they can have an impact on the stability of these markets. EFRAG, which would be the natural Europe’s voice in the accounting debate, was perceived as a purely technical committee whose views did not always take appropriate account of these macroeconomic consequences. So Commissioner Barnier asked me to respond to the question raised by the Ecofin Council. I produced a report in October 2013 and, given the broad support for my recommendations in the Ecofin Council, Commissioner Barnier asked me to supervise their implementation. The main recommendations deal with EFRAG; as I said the European influence would be strengthened if the IASB could be sure that the position taken by EFRAG is a coordinated European view. The expression of different positions is quite beneficial at the early stage of the process. However when the European position has to be expressed in an official comment to the IASB there should be a single European voice. Therefore it is necessary to have an institution whose composition and rules of functioning allow for the gradual achievement of a consensus or at least for a European position supported by a large majority of stakeholders. The EFRAG supervisory board was not a true board when you come to substantive issues, the board did not approve for example the letter of comment to the IASB nor the advice for endorsement to the Commission. Therefore the main thrust of the reform was to transform EFRAG in such a way that it appears more representative and more legitimate.

Today, EFRAG’s positions are adopted by a new board and no longer by a technical experts group. This new board approves the letter of comment to the IASB, the advice for endorsement to the Commission and it must take into consideration broader economic consequences. For example EFRAG is currently advising the Commission for endorsement of IFRS-9: It is clear that EFRAG must take into account the consequences that this new standard could have for the banking sector including the long-term financial institutions. So this new board is composed in such a way that it includes representatives of the main stakeholders and for the decision of the board the rule is the consensus. Only in exceptional circumstances decision can be taken by a qualified majority of two-thirds of the members. This search for consensus might be sometimes difficult and it will be the main task of the President to do its best to achieve consensus. But finally a consensus position issued by this more representative EFRAG will have more weight within the IASB.

So let me conclude by summarising four points. First, a global uniform accounting system remains an ambitious but legitimate goal that can contribute to reducing the cost of capital in a globalised economy. Second, even if the US does not endorse the IFRS we should continue to work with the IASB for developing high-quality accounting standards. Third, in order to be more influential in the elaboration of these standards, Europeans should – as much as possible – speak with one single voice. And fourth, to make this possible, the representative legitimacy of EFRAG was strengthened along the lines recommended in my report.

Thank you for your attention.