In the wake of yesterday’s UK Parliamentary Commission on Banking Standards’ panel session, International Accounting Standards Board (IASB) chairman Hans Hoogervost has defended the role of IFRS in the banking crisis.
"A uniformed accounting language makes it much easier to detect inconsistencies on standards application and to do something about it" Hoogervost said at a conference held at City University’s Cass Business School in London.
The parliamentary commission that assesses the culture of the UK banking system yesterday heard evidence from experts to determine whether or not the IASB’s standards played a role in the banking crisis.
The IASB faced significant criticism with some experts pointing the finger at IFRS as a major factor in helping banks to understate losses in their books at the height of the financial crisis.
Bournemouth University professor of accounting Stella Fearnley said the panel should examine the role of the IASB and its "persistent denial" that IFRS helped precipitate the banking crisis.
"We recommend that as a matter of urgency, a reliable definition of distributable profits appropriate for use by UK companies and banks reporting under the IFRS regime should be prepared by the Financial Reporting Council with legal backing," Fearnley said.
University of Essex professor of accounting Prem Sikka labelled the position taken up by accounting standard setters, accounting firms and the accounting industry in general during the current crisis as "disturbing".
"Their mantra is that accounting rules have had no impact on the crisis. This bizarre argument does not explain why if accounting is so insignificant do companies and accounting firms spend lot of time producing financial statements or dominate the production of accounting standards through the IASB and other standard setters," Sikka questioned.
Uneven IFRS compliance in Europe
According to a joint report by Cass Business School and Ernst & Young launched today, there are considerable variations on IFRS compliance across Europe suggesting there is scope for further improvement in the application of global standards.
The report focused on IFRS impairment disclosures and found that high-quality reporting is more common in companies operating in countries with a stronger regulatory environment.
Hoogervost said that consistent application is not the primary responsibility of the IASB although it took great interest in the report’s findings.
The IASB chairman reminded that Europe’s decision in 2005 to adopt IFRS led it into the unknown as no one had tried to apply the same set of accounting standards across "such an enormous range of economies and cultures."
Hoogervost said critics of IFRS state that as long as uneven application and enforcement around the world persist there is no point in adopting global accounting standards but he dismissed this argument and warned that without global standards there is no chance for global comparability of financial statements.
The IASB chairman also mentioned that a recent study by the US Securities and Exchange Commission found that of the thousands of issuers it reviewed, 50% of them made restatements during 2010.
"That goes to show that even in a sophisticated capital market with a national GAAP made for a national economy you can still see challenges with consistent application of standards," Hoogervost remarked.
Parliamentary Commission on Banking Standards
International Accounting Standards Board
Cass Business School