WHAT BEGAN as an isolated case of a global regulator bungling some very basic UK filing rules has morphed into something altogether more troubling for the body responsible for setting international accounting standards. The International Accounting Standards Board (IASB) has had a difficult start to 2014.
Tensions between the IASB, responsible for setting international reporting standards (IFRS) in more than 100 countries, and European policymakers have been simmering for some time. Those tensions exploded into open hostility following revelations around the UK filing record of the IASB’s oversight body, the IFRS Foundation, which provided its critics with the ammunition they had been waiting for.
The global standard setter now finds itself under intense scrutiny after European politicians raised “serious concerns” about its governance, accountability, transparency and potential conflicts of interests among its members in light of a compliance foul-up regarding regulatory filings at Companies House in the UK.
However, acrimony between the IASB and EU pre-dates the filing problems, as do questions over the quality of the body’s compliance procedures. The first hint that the IFRS Foundation might have ‘compliance issues’ emerged with the release of its 2011 annual report in which it revealed it was being investigated by HMRC over compliance with employment tax obligations.
The Foundation put the estimated bill for the non-compliance at £460,000. With the release of its 2012 annual report, the Foundation announced that it had cut its provision to cover the HMRC investigation into the taxation of staff and secondees from other parts of the world by £290,000 to £170,000.
“We have, as in keeping with any international organisation, complex staffing with secondments from around the world. It is understandable that HMRC would want to know more about that,” says a spokesperson from the IASB. “All the investigations have been completed, mostly in our favour. Our financial statement this year will show 80% of the original provision has been unwound.”
Nevertheless, the damage to the organisation’s apparently spotless reputation was done, and worse was to follow.
The IFRS Foundation, in common with the US standard setter FASB, enjoys a not-for-profit status in the US. Its primary corporate registration is in Delaware, although it is also registered in the UK as an overseas company. This means it has to comply with Companies House procedures that include reporting details of its directors.
In February, the IFRS Foundation admitted it had failed to inform Companies House “on a timely basis” that certain directors had their positions at the organisation terminated.
In some instances, Companies House was informed about the termination of the Foundation’s directors many years after the action had taken place. Under the Companies Act 2006, UK companies are required to notify Companies House within 21 days when directors’ positions are terminated.
Paul Volcker, the well-known US economist, stepped down as chairman of the IFRS Foundation on 31 December 2005. However, documents were not published on Companies House until 7 February 2012.
“In a few limited cases, such notifications were not provided on a timely basis,” Yael Almog, executive director at the IFRS Foundation, wrote in an open letter published on the IASB’s website as part of a rebuttal to newspaper claims that the IFRS Foundation has a “chaotic and potentially illegal filing record” that contravened its own rules. “In 2012, we introduced new procedures that corrected these historic anomalies and I can confirm that the list of directors is fully up to date as of 31 December 2013."
“I do not believe that our filings have ever been ‘chaotic’. I also make the point that the Foundation has no responsibility for UK company law, and therefore cannot have broken its own rules,” Almog wrote.
However, a subsequent review of its filing history unearthed more irregularities, forcing the Foundation to clarify lines of responsibility and introduce various checkpoints to ensure that notifications are filed on time. In a follow-up statement on 25 February, the Foundation confirmed that the problem existed.
Almog admitted that, although filings in respect of current directors are now in order, “we have identified additional historic filing shortcomings that are inconsistent with our initial public response”.
Her statement continues: “Over the course of 2011 and 2012, the Foundation became aware that the particulars of its directors had not been updated since its initial registration of a place of business in the UK in 2001, and that retiring trustees who were original members of the executive committee had not been removed from the Companies House register.”
Ammo for opponents
Europe's politicians used the filing debacle as a handy stick with which to beat the IASB, while suggesting the reporting irregularities were “unacceptable for a recipient of EU funding”, which accounts for about a third of the body’s total contributions.
MEPs Sharon Bowles and Dumitru Stolojan demanded answers from the European Commission’s internal market’s commissioner Michel Barnier. In a letter seen by Financial Director's sister publication Accountancy Age, the MEPs called for the vote on the Foundation’s new funding package to be suspended until concerns over its reporting failings were addressed.
Barnier replied that he shared their “concern”. He asked Commission staff “to further investigate the issues”.
However, Barnier’s language is decidedly loose and has failed to satisfy the IASB’s most ardent critics. Indeed, Syed Kamall, MEP for London and an outspoken critic of IFRS accounting rules, wants the EC to launch an independent investigation into the IFRS Foundation. “They need to be as transparent as they can and be open to a review and investigation,” Kamall tells Financial Director.
Kamall, who was part of a group of MEPs who questioned whether IFRS is compatible with European company law, wants to see an investigation that is “similar” to Philippe Maystadt’s review of Efrag, a European advisory group on international accounting standards.
Maystadt, a former president of the European Investment Bank , was tasked last year by Michel Barnier with finding ways to improve the governance of the European bodies involved in developing IFRS. In his report, which formed part of a broader debate on accounting standards, Maystadt recommended reorganising Efrag to increase its legitimacy with a view to strengthening the EU’s influence in international accounting standard-setting.
The EC is already introducing measures to ensure the IASB is democratically accountable and avoids conflicts of interest as part of a funding package agreed earlier this month, while the IASB has begun planning an internal review of its structure and effectiveness, to be undertaken during 2015, and has held five separate reviews into its governance, structure and operations since its formation in 2001.
EU parliament debated that funding proposal on 12 March before voting heavily in favour of the package the following day. At stake was €43m (£35.5m) of taxpayer money over six years for the Foundation, the Public Interest Oversight Board, which oversees international audit, ethics and education standards for the accounting professions, and the EU’s own accountancy quango, Efrag.
But, in his address to Parliament, Syed Kamall asked whether it was “right for the EU to outsource standard-setting to what is in effect a private-sector body, funded by taxpayers’ money”. Worryingly for the Foundation, the party-list system for EU elections means that Kamall, a eurosceptic Conservative, is certain to return to Brussels after the May EU elections, bringing back with him, his talk of taxpayer money.
Meanwhile, Sharon Bowles warned in a post-vote statement that the funding is no blank cheque. “We have, for the first time, shone a light on how bodies such as the IFRS Foundation and Efrag are constituted and governed, which has not made for pretty reading,” she wrote. “Any potential conflicts of interest have to be weeded out, and, if they are not, the Parliament has shown it has the power to withhold funding, which sends a powerful message.”
However, Kamall went on to ask how the EC will make sure the IASB meets certain conditions attached to its receipt of EU funding. In a question tabled with fellow MEPs Sven Giegold and Wolf Klinz, Kamall asked the commission to explain what reforms it will introduce to ensure that the work of the IASB is democratically accountable, and that the global accounting standard setter takes appropriate steps to avoid conflicts of interest.
“Could the commission explain what reforms it will introduce to ensure that the work of the IASB – its recruitment processes and activities, its interaction with non-public sector entities and non-IFRS jurisdictions – is fully transparent and democratically accountable?” the MEPs asked.
In view of the requirement that Efrag and the IASB should “take all appropriate steps to avoid conflict of interests, including disclosure requirements adapted to the function and responsibilities of the different categories of staff employed by these organisations”, the MEPs asked the EC to confirm how it “intends to ensure that these organisations have done so, within what timeframe it expects these organisations to have put in place those steps and how this information will be made available to the public”.
Meanwhile, discontent with the standards themselves has also been bubbling away in some investor quarters.
These hitherto private frustrations became public late last year when an investor group sought a legal opinion to support their view that the IFRS framework contained “substantial legal flaws” and that certain outcomes from IAS 39, the accounting standard that governs how banks provision against loan losses, are contrary to the true and fair view.
That claim has since beeen dismissed as 'misguided' by UK policymakers. The Department for Business (BIS) said it had "given serious consideration" to claims that accounts prepared using IFRS could be incompatible under UK and European law, and that it was "entirely satisfied that the concerns expressed are misconceived".
At the same time various quarters have called for a return to prudence. A specific reference to the phrase was removed from the IASB’s conceptual framework in 2010 to clear the way for the concept of neutrality in financial reporting. The FRC has since publicly called on the IASB to reintroduce an explicit reference to the notion of prudence, stewardship and reliability in the framework, though it also defended the legality of IFRS.
And the IASB also faces challenges at a standards level. US counterpart FASB has largely walked away from any attempt to reach a converged insurance standard on a project that never was, officially, a convergence effort. On lease accounting, the March joint board meeting revealed that, while the IASB and FASB may have agreed on the principle of putting lease obligations onto balance sheets, they can’t quite agree what to do with them on the income statement. Officially, this is still a convergence project.
But it is on the financial crisis-related topic of financial instruments accounting that the IASB is exposed. The two boards have failed to arrive at a converged solution not only on classification and measurement – where they can at least claim to be superficially converged – but also on the critical issue of impairment. The way forward is unclear, although IASB chief Hans Hoogervorst has publicly suggested that one option could be to bridge the gap through disclosure.
Jeroen Van Doorsselaere, a director with Wolters Kluwer Financial Services, told Financial Director that practical concerns remain regarding the application of IFRS9: “Not all parts of IFRS 9 are finalised and a lot of problems have arisen due to the fact that it is combining the old with new standard on the topic of macro hedge accounting, giving rise to problems like classification and measurement of the different components.”
Speaking about its work on IFRS 9, an IASB spokesman said: "Where we have ended up on impairment and hedging is generally supported and therefore considered to be a successful outcome to what was always going to be a complex and difficult international standard-setting process."
There is, however, one bright spot on the horizon: revenue recognition. Yes, says Andrew Watchman, the global head of IFRS with Grant Thornton, although the new IFRS is delayed, the end is in sight: “It has taken a lot longer than predicted but these projects can drag. The important thing is to take the time required to get it right.”
Of course, revenue recognition is a controversial subject, if only because everyone has revenue, but that very generality has made it less susceptible to industry lobbying, Watchman believes. “With leases there is a body of opposition to putting more leases on the balance sheet. No matter which way the boards twist and turn, they are not going to win over support for any model that has that outcome among those who are opposed to it,” he explains. If only corporate governance were as easy.
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