Michel Prada tells Accountancy Age that criticism of IFRS Foundation governance structure is 'unfair'
THE CHAIRMAN of the IFRS Foundation is in a strident mood, as he responds to criticisms about the organisation’s governance, transparency and lack of democratic accountability. Talking to Accountancy Age, he labels the attacks “unfair”.
Michel Prada, chairman of the body which oversees the work of global accounting standard setter the IASB, says complaints about its governance structure, which emerged following an administrative mistake at Companies House earlier this year, are “difficult to understand”.
“I know of no other organisation with such a transparent governance structure; it is unfair to criticise the governance itself,” Prada explains.
The IASB, responsible for setting international reporting standards in more than 100 countries, found itself at the centre of political storm earlier this year after European policymakers seized upon the organisation’s poor record of filing director changes at Companies House in order to raise “serious concerns” about its governance, accountability, transparency and potential conflicts of interests among its members.
Prada describes the foundation’s failure to inform Companies House on a timely basis that certain directors had their positions at the organisation terminated as “much ado about very little”.
“It was an unfortunate administrative mistake,” he says, adding that the organisation has “reviewed its internal controls and governance” and is fully compliant with UK filing rules.
Nevertheless, the situation quickly morphed into a wider debate about how the standard setter is run. Opponents within the EU suggested the reporting irregularities were “unacceptable for a recipient of EU funding” – though the European parliament eventually voted heavily in favour of a €43m (£35.5m) package of taxpayer money, which accounts for about a third of the body’s total contributions.
Sharon Bowles, a former MEP and outspoken critic of the IFRS Foundation, claimed the way bodies such as the IFRS Foundation are constituted and governed did not make for “pretty reading”.
While Prada says he takes the criticisms being made “very seriously”, he argues that the organisation has a robust governance structure, which includes a monitoring board and a standard setting board with technical independence.
“It is never perfect but consider how we are organised. We try to bring together governance, technical independence, public interest,” he says.
Indeed, Prada has previously described accounting standard-setting as a “messy, controversial, unpopular business” and claimed the IFRS Foundation has had to earn its legitimacy from the extent of its governance, of its consultation process and the transparency of its activities. For instance, its board meetings are broadcast live and available to view on its websites.
“Transparency means that everything is on display, warts and all. Can you imagine the board meetings of your own organisation being open to the public? Where every board paper is published on your website?
“Where politically sensitive discussions between board meetings take place with observers sitting on your shoulder, one row back from the board table and the discussion webcast in real time around the world,” he said in a speech at the DRSC, the German standard setter.
The EC is already introducing measures to ensure the IASB is democratically accountable and avoid conflicts of interest as part the funding package agreed earlier this year, 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.
A philosophical issue
Using funding as a way to try and influence the IASB is nothing new for the EU. Before the governance issue emerged, European parliament had previously tried to make EU contributions to the IASB contingent on the IASB updating the way it sets international reporting standards.
Chiefly, policymakers urged the IASB to include a specific reference to the concept of prudence in the framework that underpins the way it sets IFRS. A specific reference to the concept of prudence was dropped by the IASB in 2010 in favour of the concept of neutrality. The move has proved controversial with investors and politicians questioning the wisdom of its removal and former chancellor Lord Lawson describing it as a “stupid thing to do”.
Hans Hoogervorst, chairman of the IASB, has so far resisted pressure to re-insert prudence into the framework, and has argued that the basic tenets of the concept remain intact and visible throughout IFRS.
The European parliament has long since retreated from what Hoogervorst described as its “highly worrisome” attempts to influence the IASB, but the clamour for prudence to be reinserted into the IASB’s conceptual framework is growing from quarters outside of the EU. The FRC believes prudence should be explicitly acknowledged in the framework.
The standard setter is currently reviewing the framework and according to its consultation paper, “it remains open to question, however, whether the framework should specifically refer to prudence and what precisely prudence means”.
However, in a clear sign that the IASB will likely bow to pressure and reinstate the clause, Prada, who is not involved with the technical aspects of the IASB’s work, says the board is “not very far” from reaching a decision.
“I am a little bit uncomfortable that these philosophical issues are instated for other issues. People think true and fair view a ‘prudent’ approach, and if it is easier to make people comfortable by reintroducing a philosophical concept, then why not,” Prada concludes.
According to the IASB’s May board meeting update, which took place after Accountancy Age spoke with Prada, the standard setter has tentatively decided to reintroduce prudence into the conceptual framework.