Lack of trust

The European Commission has demanded fundamental changes to the governance arrangements of the International Accounting Standards Board, which would see Europe becoming much more powerful in determining future standards.

Trustees of the International Accounting Standards Committee Foundation (IASCF) would cease to be self-appointed if reforms proposed by the European Commission were adopted, with more trustees coming from the European mainland.

The latest move by the European Commission (EC) is an attempt to deal with the underlying conflicts which led to months of argument and muddle over the introduction of international accounting standards. This relates to the use of fair value in the treatment of financial assets and liabilities as well as portfolio hedging, which eventually led to the Commission adopting a modified version of IAS 39.

In a letter to the IASCF, in response to its consultation process on its own proposed governance reforms, the EC suggested five key modifications. One would be that trustees no longer select and appoint their own successors. In future, says the EC, a larger proportion of trustees should come from jurisdictions where IASs have been, or are being, adopted. The role of trustees should be strengthened, argues the EC, so that they more closely monitor the work of the IASB. Funding of the IASB should move away from voluntary contributions from accounting firms and listed companies, so that the risks of conflicts of interest are reduced. And there should be a larger required majority among trustees, so that disputed standards are less likely to be adopted.

The IASCF had hoped it had resolved the problem of conflicting international interests by issuing proposals that would have increased the diversity of membership of the Committee, reducing the influence of the US and UK. But the Commission's response shows that serious tension remains at a time when the IASB was hoping to concentrate on getting international standards adopted in the US and Japan.

Richard Martin, ACCA's head of financial reporting, said: 'I'm sure there is a lot of frustration [at the IASB]. They have spent the last four years trying to get things sorted out with Europe, but this is still rumbling on. But it is the EU's adoption of international standards which has put IASs on the map and encouraged many other places to say we must get on and do something. I can't imagine that without those steps from the EU that the Japanese would have been making these moves towards adopting IAS.'

ACCA has submitted its own comments on the governance consultation, urging that: 'It is unacceptable for certain parts of the world (notably Africa and South America) to be ignored' in the appointment of trustees. The letter from ACCA went on to stress that the mix of trustees should not only consider the world's capital markets, but also a wider definition of economic activity given that IFRS is increasingly being adopted by companies operating outside the main capital markets. ACCA also argued that the International Federation of Accountants (IFAC) should continue to have the right to nominate five trustees, rather than allocating a number of trustee positions to the big accountancy firms.

Like the European Commission, ACCA called for an end to self-selection of trustees, given the move internationally to greater transparency and accountability among regulatory bodies. 'The continuation of self-selection will be unacceptable to many stakeholders,' said ACCA. The IASCF declined to comment on the European Commission's letter - published on the IASB website, at www.iasb.org/docs/2005-itc/cl66.pdf - which was discussed at the Foundation's March meeting. Progress is being made regarding the controversial IAS 39. A meeting of the IASB has discussed a modified version of the standard to settle concerns over the reliability of valuation mechanisms for assessing the fair value of financial assets and liabilities, which seems to draw general support. However, the treatment of portfolio hedging remains unresolved.