Chapter 2: Globalisation and the Internationalisation of Financial Reporting Standards
2.7 Imperialist Controversies and their impact on the accounting field: the US vs. the EU
2.7.1 The domination of the US
The increasing internationalisation of economies, state functions and the tendency towards the supranational integration of states has significantly determined the role and functionality of financial reporting regulations. The IASC’s role on the international financial regulation scene changed when in 1987 the US SEC, acting through the committees of International Organisation of Securities Commission (IOSCO) approached the IASC. Under increasing international and domestic pressures to liberalise their strict disclosure requirements, the SEC attempted to initiate discussions with the IASC in order to develop a foundation at an international level that would be accepted by the USA (Hopwood, 1994, p. 244). The proposal to endorse the IASC for use by standard-setters appears to be based on the fact that the regulatory burden related to financial reporting had increased, greatly affecting the international competition experienced by US companies and the stock markets (Flower, 1997). However, the IASC had to modify its standards to receive SEC’s support; the SEC played a hegemonic role, exerting influence on the international convergence of accounting (Hoarau, 1995). After discussions and negotiations the IASC and IOSCO agreed, in 1995, on the development of a set of accounting standards set by the IASC; meanwhile, the IOSCO decided to permit and recommend these standards to its members for capital raising purposes in international capital markets. A year later, in 1996, SEC made its first public statement regarding the key elements that the standards developed by the IASC should possess in order to be accepted for the preparation of financial statements in international listings. The concept of ‘high quality’ standards was first introduced as a general attribute and since then it has been widely used in discussions about standard-setting (Zeff, 2011). In 2000, IOSCO recommended that its members apply IAS to financial statements contained in international listings (Véron, 2007). This endorsement was decisive for the IAS’s wider acceptance and also signalled another attempt by IOSCO to emphasise its authority. The same year, a new statutory ‘Constitution’ was adopted by the IASC in a reform that created the new IASC Foundation, based in Delaware. In 2007, the SEC proposed that foreign companies listed on the American capital markets which use IFRSs would be allowed to access the US capital markets without having to reconcile their financial statements to US GAAP adopting “IFRSs as published by the IASB” (Zeff, 2011).
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In February 2006, the FASB and the IASB signed a working agreement targeted towards achieving convergence between American and international financial reporting standards. In October 2002, the IASB and the FASB issued a Memorandum of Understanding (MoU) known as ‘The Norwalk Agreement’ aiming at beginning a process of mutual convergence of the IASB with the FASB, in order to make their two sets of standards more compatible25. However, due to political lobbying and under the pressure of the current economic crisis on capital markets the future of IFRSs in the US is not clear, as the SEC which had intended to make a decision regarding the IFRSs during 2011, has postpone this decision (Tysiac, 2012).
It was not only the intervention of IOSCO and SEC, but also the involvement of ruling class and more advanced countries through G4+1. Between 1992 and 2001 a working group of national accounting standard-setters was established, comprising of four Anglo-Saxon standard setters from Canada, Australia, New Zealand, the UK and the US The one (+1) was an IASC representative attending as an observer. The G4+1 played a vital role in the restructuring of the IASC by motivating the Committee through it working group to proceed to a broad transformation with the aim to become a high quality international accounting standard-setter (Street, 2006). The G4 echoed a similar message as the US stock exchange regulator and pursued the idea of a single accounting standard-setting model that was acceptable to both national standard setters of advanced and powerful states and their capital market regulators. IASB’s structure, processes and priorities such as, adequate due process, a structure based on independent decision-making and the appropriate technical expertise are in line with the G4’s vision. The influence that the G4 and its members exerted on the IASB was evident until recently. For example, Sir David Tweedie, who served as the first Chair of the G4+1, was selected as the first Chair of the IASB and a representative of national standard-setters that were part of the G4+1 are entitled to hold a liaison seat on the Board.
The G4 ceased its working group meeting after the formation of the International Accounting Standards Board (ibid.).
25 This commitment was further reinforced in 2006 when the boards updated their joint work programme and set specific targets be reached by 2008 publishing the ‘A roadmap for convergence 2006-2008’. According to the latter, the term convergence is used to describe the elimination of differences between their respective standards through the development of high quality standards.
34 2.7.2 The intervention of the European Union
Important changes occurred on the European continent in the late 1980s, especially after the reunification of West and East Germany and the fall of the Soviet Union. These provided opportunities for the expansion of German capital into East Germany and other Eastern Europe areas. For the first time since WWII, large German companies sought access to foreign capital to gain a market share in international markets and surrendered to the commercial imperative to prepare financial statements based on internationally accepted accounting principles (Nobes, 2006).
Europe was shifting more towards the need for accounting standards attuned to the needs and requirements of international financial investors under the auspices of the Single Market.
From the mid-1990s, the discussion about the need to develop the European internal capital market became more intense and the issue of setting comparable accounting practices to satisfy the information needs of investors became a key issue (Flower, 1997). With the increasing rise of equity capital markets, the US capital market’s volume and liquidity attracted companies from European countries. Even though European companies had been adopting US GAAP before the 1990s, after this time there was a surge in large companies adapting their financial reporting systems to the IAS and the US GAAP abandoning national accounting regulations. In 1993, the decision of Daimler-Benz to list on the New York Stock Exchange represented a sea change favouring the US GAAP. For large corporations, like Daimler-Benz, applying for a listing on the US stock market signified a reduced dependence on bank finance, and the opportunity to raise funds from equity markets and increase the marketability of their shares (Radebaugh et al., 1995). More importantly, however, it signalled the possibility that US GAAP would be adopted de facto as an internationally accepted accounting standard, with EU losing control over international developments and the opportunity to participate in cross border capital markets. This added strong political pressure from the EC and national regulatory bodies by European corporations and governments to harmonise accounting standards (Canibano & Mora, 2000) and was a significant factors in the EU’s decision to adopt IASB accounting regulations 2005 onwards (Dewing & Russell, 2004).
The EC adopted a more positive stance towards IASs as an alternative accounting framework to Company Law Directives, supporting the IASC and agreeing to become a member of the Commission’s Consultative Group and an observer on the Board. In 1990, an expert-based
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Accounting Advisory Forum was composed, with the intention of fostering the debate on accounting issues, imposing greater influence on the national standard-setters and advising the EC (Flower, 1997). The EC started to have concerns regarding the acceptability of large European companies’ accounts that were prepared according to national legislation and based on EU accounting Directives. The Fourth and Seventh Company Law Directives incorporated by Member states were not investor-oriented financial reporting systems (EC, 1995, paragraph 1.4). The preparation of two sets of accounts, according to the Directives and the requirements of international companies was costly, complex for investors and increased the risk of large companies being drawn towards the US GAAP. Thus, in 1995, the European Commission announced a significant change to its policy on accounting harmonisation in the publication ‘Accounting Harmonisation: a new strategy vis-à-vis international harmonisation’. In 1998, Germany adopted rules that gradually allowed companies to move to the US GAAP or the IFRSs on a voluntary basis.
The 2001 Lamfalussy process altered the legislative and rule-making procedures for developing and enforcing EU financial rules. In order to improve accountability in regulation procedures, EU policy makers adopted the US (or UK) model of public consultations and systems that ensure transparency (Posner, 2010). Within this political context, the European authorities took a significant step during the Lisbon European Council (2000) towards achieving an integrated European capital and financial services market; the EU Council announced its revised strategy, that listed companies in the EU should be required to adopt IAS in their consolidated statements by 2005, to ‘ensure that securities can be traded on EU and international financial markets on the basis of a single set of financial reporting standards’ (EU Financial Reporting Strategy: The Way Forward 2000, Commission of the European Communities, paragraph 7 cited in Haller, 2002). The EU’s commitment to the IASB attracted the world’s attention and changed the former perception of IFRSs as merely voluntary standards (Camferman & Zeff, 2007).
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