Chapter 2: Globalisation and the Internationalisation of Financial Reporting Standards
2.6 The emergence of the IASB and its ascendance in the era of globalisation
The IASC, the predecessor of the IASB, was an insignificant body during the 1970s that transformed to become an internationally recognised and influential accountant standard- setter in capital markets. It was established in 1973 to harmonise accounting standards globally, superseding the few national boards that had previously influenced the development of accounting practice. International mergers and acquisitions during the 1960s and the emergence of multinational companies arguably increased the demand for a common international language of accounting to serve capital markets. The IASC was set up primarily at the instigation of the British accountancy profession; begun by Henry Benson, a British chartered accountant, it was sponsored by the professional accountancy bodies and auditing firms in nine countries23 as a counterweight to the harmonising ambitions of the European Commission (Zeff, 2011). The British accountancy profession wanted to promote standards that would be more aligned with the Anglo-Saxon approach to accounting, to prevent the European Union from imposing continental European statutory control that would conflict with the more flexible relationship between corporate management and auditors in the UK (Hopwood, 1994, p. 243). The IASC’s standards were gradually revised to reflect the Anglo-
23 These countries were Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the UK and the USA)
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Saxon approach to financial reporting, while the traditional approach taken by countries of Continental Europe was utterly ignored. The IASs were seen as a ‘Trojan horse’, bringing UK accounting standards and practices; meanwhile, accounting bodies could benefit by participating in a joint international standard setting projects (Nobes, 1994).
The IASC Foundation is a private company located in the US state of Delaware, a place regarded as the world's most secret financial location (Diamond & Diamond, 2002). In 2001, it changed its name to the IASB as part of its restructuring and the new IASB assumed standard setting responsibilities. It also announced that the IAS would be henceforth known as the IFRSs. According to Whittington (2005, p. 153) the development of the IFRSs has arisen in response to demand from capital markets and not as a result of specific political initiatives by governments. According to the IASB’s proclamations, the main objectives of the Foundation are ‘to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards’ (IFRSF, 2013a). Advocates acknowledged the benefits of privatisation and the implementation of neo-liberal economic models under the public discourse of globalisation, emphasising the need for comparable financial reporting (Zeff, 2011). Zeff (2011) argues that governments participated at a later stage when forced to take a position over the IFRSs.
The IASB’s success and political empowerment according to Martinez-Diaz (2005, p. 3), can be attributed to two focal junctures; the endorsement of IFRSs by international bodies, such as the European Commission, in 1997-2000 and the restructuring and endorsement of the IASB by the hegemonic securities market regulator, the US Securities and Exchange Commission (SEC). The establishment of the IFRSs was supported by and required the mobilisation of underlying capital market institutions, such as the OECD (Organisation for Economic Co-operation and Development), the countries involved in the GATT (General Agreement on Tariffs and Trade), the WTO and the UN (United Nations). In 1981, the World Bank, the UN, the OECD, and other market participants formed the IASC’s Consultative Group (Véron, 2007). The World Bank played an important role in persuading emerging economies to converge or adopt the IFRSs. It conducted Reports on the Observance of Standards and Codes (ROSC) recommending the adoption of IFRSs by public interest entities (Zeff, 2011). In 1990, the US Financial Accounting Standard Board (FASB) and the EU attended meetings of the IASC in an observational capacity (Véron, 2007).
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The second reason for the IASB’s ascendance lies in the legitimacy it gained as an epistemic community, based on its specialised technical knowledge. It was able to convince companies and national regulators that it was capable of offering superior standards to other (inter)national financial reporting alternatives (Martinez-Diaz, 2005). The diffusion of IFRSs was promoted by governments and large international accounting firms on the grounds of its superior technical expertise, unrivalled quality of service and unique understanding of market needs (e.g., Daly & Schuler, 1998; Zeff, 2006). Another important factor in the expansion of IFRSs was the exercise of political force by the large audit firms (Big Four),24 who attempted to play a key role in the international political and economic system. IFRSs were a valuable tool for opening national markets and overcoming local resistance (Zeff, 2011).
Through the introduction of the IASB’s standards political and economic changes were codified and implemented in a rapid and unchallenged manner, due to its transnational private authority structure (Perry & Nửlke, 2006). This was achieved through the hybrid system of intra-national institutions and states and the containment of intra-capitalist and intra- imperialist antagonism. Nonetheless, the IASB’s functions still serve as the arena wherein developed states and other actors from the corporate sphere and accountancy profession can compete and regulate according to rules set by the most powerful global economies. There are two major actors attempting to dominate international financial reporting; the European actors and state apparatuses through the EU capital constellation and the Anglo-Saxon actors and state apparatuses, like the SEC and the FASB. Both aim to play an important role in determining the future of global financial reporting, against a backdrop of persistent conflicts of interest among their states and the clear predominance of an American hegemony.
24 The ‘Big Four’ are the largest international accountancy and professional services firms offering services such as auditing, assurance, advisory, tax, corporate finance, etc. The Big Four are Price Waterhouse Coopers (PwC), Deloitte, Ernst and Young and KPMG.
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