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June 30, 2008

Seeking the right balance

Finding a balance between the independence of the International Accounting Standards Board and the accountability of its oversight body was one of the messages to emerge from an International Accounting Standards Committee Foundation constitution review round table recently. Carolyn Canham reports.

The trustees of the International Accounting Standards Committee (IASC) Foundation have sped up the process on two issues raised in their current five-year review. The foundation plans to finalise decisions on the creation of a monitoring group and the composition of the International Accounting Standards Board (IASB) by October, so changes can be implemented by the start of next year.

Four round table were held as a final check with stakeholders before the foundation drafts its recommendations. Participants included representatives from firms, national standard setters, securities regulators, investor groups, the World Bank and the International Monetary Fund (IMF).

Unanimous support emerged at the round table for the creation of the monitoring group, which would oversee the governance and accountability of the IASC. However, the exact duties and composition of the group were brought into question.

Consensus emerged that the IASB retain its independence and avoid becoming politicised. Concerns were raised about the level of involvement of the monitoring group and the foundation was asked to set clear parameters. Paul Lee, a member of the UK-based Corporate Reporting Users’ Forum, summed up a common perception: “I acknowledge the political necessity of setting this up. However, I am nervous there may be an expectation it would have influence over the IASB and the IASB’s agenda, and that would be troubling.”

Christian Krohn, director of regulatory policy for the Securities Industry and Financial Markets Association, said it was crucial the IASB remains completely independent in setting accounting standards and disclosure requirements and that the process is not susceptible to political interference, commercial interests and regional or national bias.

The IASC’s current proposal has the monitoring group comprised primarily of securities regulators, however some participants suggested other stakeholders should be included.

UK Financial Reporting Council chief executive Paul Boyle described the group as a curious mix of international, regional and national standard setters. “I would like you to articulate the principles on how they were selected,” Boyle asked.

Committee of European Securities Regulators (CESR) representative Javier Ruiz said CESR would like to be represented in the monitoring group. Michel Maila from the International Finance Corporation suggested regulators from the banking and insurance sectors should be included.

IASC Foundation chair Gerrit Zalm maintained that stakeholders such as investors must be involved but not within the monitoring group. “It is purely for public accountability, so it should only be public officials,” he said. Zalm warned additional participants would bring the monitoring group to ten members, which “for a lean group is already a bit fat”.

Expanding the IASB

The proposed changes to the composition of the IASB would add two new board members – bringing the total to 16 – and ensure geographical diversity (see below).

There was some vocal criticism to extending the board’s membership to 16, with many stakeholders suggesting 14 was already too many to work efficiently. Institute of Chartered Accountants in England and Wales financial reporting committee chair Kathryn Cearns said she found the prospect of 16 members quite troubling. Cearns warned increasing membership could seize up the decision making process and open the possibility of “options creeping in”, weakening the standard setting process.

Zalm stood firm on the proposed increase to 16 members, saying it would allow for geographic reach and flexibility.

The proposed geographic spread of board members was also criticised, with participants warning it could prevent the most suitably qualified candidates being selected. Leo van der Tas, global technical director of IFRS services for Ernst & Young, said: “It is logical to have some sort of geographic spread so people know they are being heard, but quality comes first, and then representation.”

There were, however, several voices in support of a geographically-balanced membership. European Financial Reporting Advisory Group chair Stig Enevoldsen defended having board members with diverse backgrounds so they could understand the various nuances and transactions around the world. International Organization of Securities Commission’s (IOSCO) Sophie Baranger said the proposed composition of the IASB had evoked concern among some IOSCO regions, citing South America, Africa and the Middle East.

The IASC also suggested flexibility regarding part-time IASB members. At present, two of the 14 members must be part-time, however the draft proposal recommends there could be between zero and three. Mazars & Guerard partner Michel Barbet-Massin called for part-time members to be retained to ensure recent, or current, technical experience on the board.

■ IASB  Proposed composition of a 16-member board   • Four members from North America   • Four members from Europe   • Four members from the Asia/Oceanic region   • Four members from any area, subject to maintaining overall geographic balance   Note: The IASC Foundation proposes this be the normal, not mandatory, composition of the board

Source: IASC Foundation   ■ IASC FOUNDATION Proposed composition of monitoring group   • The responsible member of the European Commission   • Managing director of the International Monetary Fund   • Chair of the IOSCO emerging markets committee   • Chair of the IOSCO technical committee; or the vice-chair or designated securities commission chair in cases where either the chair of an European Union securities regulator, commissioner of the Japan Financial Services Agency (JFSA), or chair of the US Securities and Exchange Commission (SEC) is the chair of the IOSCO technical committee   • Commissioner of the JFSA   • Chair of the US SEC   • President of the World Bank   Source: IASC Foundation

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