Chapter 2: Globalisation and the Internationalisation of Financial Reporting Standards
2.8 Critical reflection on the impact of imperialist rivalries on the function of the IASB
2.8.2 Impact on the IASB’s structure and standard setting processes
IASB imperatives rely on self-regulation, private authority and governance models used in the US and the UK the IASB, as a private-sector body itself, cooperates with the private standard-setting institutions in Member states, while the EC bases the endorsement of standards on the recommendations of EFRAG which is also constructed as a private body. A neutral and independent transnational standard setting body also serves the interests of the bourgeoisie better, when compared to national regulations of accounting. There are significant compliance cost savings under a common set of international or local standards while private authorities, like the IASB have the necessary flexibility to cope with volatile and dynamic business sectors (Perry & Nửlke, 2005). Public inter-governmental regulations among international accountancy are generally slower as these bring political considerations based on the perspectives of democracy, accountability, fairness and the general welfare of society.
A key moment in these negotiations that established the US dominance over the IASB and shaped its structure and the content of the IFRSs came in 1999. As part of the IASB’s restructuring, a Strategy Working Party was appointed and a discussion paper with proposals issued. In contrast to most of the EC’s demands, the SEC emphasised values such as professionalism, independence and due process. It suggested a two-tiered model body based on the FASB’s structure, where powerful trustees select board members. Moreover, it proposed that its permanent members should include individuals from the most advanced economies and developed capital markets, while rotating seats would be offered for the smaller and emerging markets (Martinez-Diaz, 2005). The outcome was disappointing for the EU as SEC’s key demands prevailed. The organisational structures and practices of the IASB are identical to those of the FASB.
The structure and composition of the IASB and other crucial decision-making bodies, such as the IASC Foundation, the Trustees, and the IFRIC does not equally represent the economies and societies affected by the enforcement and implementation of standards set. The members of the Board are professional accountancy bodies, recognised by their governments, but
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which are not regarded as representing governments. The Chairman and the members are a narrow band of users, i.e. large international firms and the Big Four accounting and auditing firm regulators, most of whom actively contribute to outcomes by drafting key documents in the process of accounting standard formulation (Kerwer, 2007).
The narrow composition of the IASB reflects the resource dependency relationship of the IASB; parties that provide financial resources are privileged within an international standard setting organisation (Kerwer, 2007). Although the IASB claims to be a non-profit organisation it is closely linked with large profit-making organisations that affect the IASB’s independence and the process of standard-setting (Brown, 2006). Most contributors are banks, audit/accountancy firms, large companies which use or have an interest in promoting international standards. According to the IASB Foundation funding is provided and shared by the most advanced economies in the world on a proportionate basis, using GDP as a determining measure (IFRSF, 2013b). Countries with a large GDP are expected to commit more to the IASB than countries with a low GDP, and thus, financial contributions can exert influence when there is financial pressure. As a result, it is possible that countries that have a lower GDP and financial contribution may be in a weaker position and have less influence over the IASB’s decisions.
The lack of formal control by all the countries who have adopted IFRSs and the lack of transparent and democratic control of standard development procedures has led to certain countries and parties being accorded a privileged right of participation and influence on decision-making (Larson, 2007). Currently, many reports dispute claims related to the independence of the IASB and the quality of IFRSs (Reason, 2009). The impact of a transnational system of elite governance without any responsibility to the general public and popular mandate has significant consequences on economic development and favours rules that increase poverty and inequality (Archibugi, 2004). The IFRSs Advisory Council, which was formed to provide a forum for the IASB to represent and consult a wide range of interested parties affected by the IASB’s work and the wider community, such as preparers, academics, auditors, regulators professional accounting bodies and investor groups, is not fulfilling its role (Zeff, 2011). The IASB’s lack of wider representation is confirmed by the rather weak role of the IFRSs Advisory Council.
As the IASB has no juridical or political authority it bases its legitimacy on its ‘expertise’ in the development of high quality and internationally acceptable financial reporting standards.
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Similarly, IASB’s rhetoric of the ‘high quality’, ‘transparent’ and ‘comparable’ qualities of IFRSs is used as a strategic tool to gain legitimacy (see for example, Richardson & Eberlein, 2011). Support for the IFRSs adoption and development by accounting firms, financial institutions, business organisations, politicians, academics and the media is a development exclusively based on these qualities.
The IASB proclaims that it engages closely with global stakeholders; it also emphasises the existence of draft exposure and comment processes that enable stakeholders to participate democratically in the process of standard setting (Biondi & Suzuku, 2007). However, the lack of participation in the IASB beyond the business sector is considered ‘outstanding’ (Perry and Nửlke, 2005). Moreover, although the IASB has issued exposure drafts addressing labour-related issues, such as employee benefits and share-based payments, there is an interesting absence of any association with trade unions further institutionalising the dominance of business interests. The limited contribution of these portions of society in new forms of accounting regulation can also be interpreted as the result of a shift in the social balance of forces that disadvantages the working classes.
Finally, the IASB’s accounting standard setting process, due process, is supposed to be designed to safeguard the IASB members from political influence. Nevertheless, the IASB has been criticised for being vulnerable to political influence, by succumbing to lobbying against accounting requirements that negatively affect key contributors’ financial interests (Nobes, 2008). The IASB has faced political intervention and intense lobbying from interest groups, such as the FASB, while the European Parliament, in a Working Document on the IFRSs highlighted the IASB’s lack of transparency, noting that it is not democratically controlled. Procedures and criteria regarding the development of its work plan and the choices of members were criticised as being unclear (Kerwer, 2007). Alali and Cao (2010) present anecdotal evidence that the due process used by the IASB to adopt some international standards may have been circumvented on some occasions, such as in the case of IAS 39 discussed later. Despite concerns, the European Parliament’s proposal to adopt IFRSs passed into law without serious questioning and with unexpected speed (Biondi & Suzuku, 2007).
The EU had developed a new technique known as the ‘Comitology’ procedure;26 whereby,
26 ‘Comitology’ is a committee system which oversees the delegated acts implemented by the EC, through which the IASB’s standards could be endorsed and required by the EU publicly listed companies, without having to place each standard individually before the European Parliament and the Council for approval (Van
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the Parliament has the authority to delay or veto an endorsement, but cannot endorse standards that the European Commission has not submitted for endorsement if ‘important’
should EU governments refuse to adopt them (Zeff, 2011). This was the case for example, with IFRIC 12 on service concession arrangements and IFRSs 9 on financial instruments.
European and international accounting regulation has now been transformed into a more market-based financial system, shifting towards the logic of capital markets and the use of valuation methods that satisfy investors’ needs, as will be discussed chapter four. IFRSs adopt a rational decision theoretic discourse to interpret decision-usefulness, as traced by Ravenscroft and Williams (2009) to the rise of neo-liberalism in the US and the UK and the increasing political and ideological influence of the positive economics movement originating from the University of Chicago. Although a user-needs approach to financial reporting is adopted the actual identity and needs are assumed and are not empirically justified (Young, 2006). The increasing importance of financial capital is also seen as the ‘Americanisation’ of accounting standards, as US standards are more appropriate to international accumulation, dominated by provisions related to financial capital and specifically fictitious capital27 (Panitch & Konings, 2009). According to Perry and Nửlke (2006), IFRSs favour the financial over the productive sector, thereby supporting the interests of US-based financial intermediaries and audit networks.