IASB must modernise, says incoming chief

THE INCOMING HEAD of the International Accounting Standards Board (IASB) has said that the standard setter needs to become more open and better represent the interests of all its country members.

Speaking on the opening of a two-day European Commission conference on financial reporting and auditing, Hans Hoogervorst (pictured), who will succeed the IASB chairman, Sir David Tweedie at the end of June, said that international accounting-rule setters needed to remain independent from business, while remaining sensitive to legitimate business concerns about new financial reporting rules.

The IASB has been criticised for being unaccountable and distant from the concerns of business. However, Hoogervorst, a former Dutch finance minister, said that the IASB was reviewing its governance structure as part of an effort to become more open.

“It’s very important that we develop a governance structure that is more inclusive,” he told delegates at the Brussels conference. “At all costs we should avoid the perception that IFRS [International Financial Reporting Standards] is dominated by a small group of nations.”

Hoogervorst outlined a number of ways to strengthen the IFRS including ensuring that the process for developing accounting standards is clear and open and that the IFRS Foundation – an independent, not-for-profit private sector organisation – should be accountable to users of accounting standards.

The conference also discussed the ever controversial topic of fair value accounting rules. Critics of fair value accounting say it worsened the financial crisis by forcing banks to value assets at current market rates when the assets had plummeted in value and there was no real market for them.

In a question to the conference speakers, Iain Richards, of Aviva Investors, suggested that although fair value accounting rules had not been the root cause of the financial crisis the rules had played a role in exacerbating the bubble.

Hoogervorst defended fair value, saying that financial services firms who had committed to using fair value rules “came out of the crisis a lot better than other firms”, because the were able to “get rid of poisonous assets at a much earlier stage”.

Asked whether governments’ accounting methods should be subject to same intense scrutiny applied to the private sector, Hoogervorst admitted that the “norms of IFRS” were applied far more stringently in the private sector than the public sector. He added that much of the recent sovereign debt crisis in Europe could have been avoided if governments had been forced to show more of their “off-balance sheet liabilities” in their accounts.

Meanwhile, delegates were warned about the changing role of accountants; and the possible damage this could do to the profession and its clients.

Michel Prada, former chairman of Autorité des Marchés Financiers,
France, said he was concerned about the trend for accountants to focus on future risks faced by a client, in addition to their traditional “boring but reliable role” of certifying that information in a company’s accounts gives a true and fair picture of the company over the course the reliability of information in a of a year.

“Do not ask too much of accounting,” said Prada. “There is a real need for financial analysis and macro-economic analysis but you can’t dream of an accounting system giving you the right answer [for all of these financial demands].”

Conference speakers reiterated the vital role of IFRS in helping to improve financial transparency and helping avoid a future banking crisis. However, the US has still to commit to introducing IFRS.

Arthur Lindo, senior associate director and chief accountant, at the US Federal Reserve Board, said that he was “hopeful” that the US would “move diligently towards some form of IFRS in the near future.”

He said that it was important for financial regulators and accounting standard setters to work more closely in the future.