The importance of striking a balance between retaining the
independence of the International Accounting Standards Board
(IASB), while ensuring the accountability of its oversight body,
was one of the key messages to emerge from the International
Accounting Standards Committee Foundation (IASC) constitution
review roundtables in London recently.

The trustees of the IASC have sped up the process on two issues
raised in their current five-year review, which is due to be
completed by the end of 2009. The foundation plans to finalise
decisions on the creation of a monitoring group and the composition
of the IASB by October, so changes can be implemented by the start
of next year.

The four roundtables were 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).

The monitoring group was proposed after the EC, the Financial
Services Agency of Japan, the International Organization of
Securities Commissions (IOSCO) and the US Securities and Exchange
Commission jointly called for oversight of the IASC due to the
increasing use and influence of IFRS worldwide.

Independence concerns

Unanimous support emerged at the roundtables for the creation of
the group, which would oversee the governance and accountability of
the IASC; however the exact duties and composition of the group
were brought into question.

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By GlobalData

Consensus emerged on the importance of ensuring 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,” he
said. “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.”

IMF senior financial sector expert Kenneth Sullivan said the
IASC needs to clarify further the role of a monitoring group. “It
is an important issue and more dialogue is needed,” he said.

Christian Krohn, director of regulatory policy for the
Securities Industry and Financial Markets Association, a global
industry trade group, said: “For us the key is independence. It is
key for us that the IASB is, and remains, completely independent in
setting accounting standards and disclosure requirements for global
capital markets.”

The standard setting process must not be susceptible to
interference from the political process, commercial interests or
regional or national bias, Krohn added.

The IASC’s current proposal has the monitoring group comprised
primarily of securities regulators, however some participants
suggested stakeholders such as investor groups and bank regulators
should be included.

UK Financial Reporting Council chief executive Paul Boyle said
the proposed monitoring group was 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.

Ray DeAngelo, the managing director for the member and society
division of the Chartered Financial Analyst Institute, a global
body, said a notable omission from the monitoring group was any
direct representative of investors in capital markets.

Committee of European Securities Regulators (CESR)
representative Javier Ruiz said CESR would like to be represented
in the monitoring group, and Michel Maila from the International
Finance Corporation suggested other regulatory stakeholders such as
the Basel Committee on Banking Supervision and insurance regulators
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
such as CESR, the Basel Committee and insurance regulators 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”. There was danger in
two directions, Cearns warned. The first was the potential of
seizing up the decision making process and the second was the
possibility of “options creeping in”, making standards weaker.

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

A question on quality

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, spoke for the majority when he 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.

IOSCO’s Sophie Baranger said the proposed composition of the
IASB had evoked concern among some IOSCO members.

“At the IOSCO there was some sensitivity about the potential
representation of various parts of the world. Some of them that had
not been mentioned directly were considering that was not very
fair,” she said, citing South America, Africa and the Middle East
as examples.

Part-time members

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.

While some participants, including DeAngelo, supported few, if
any, part-time members due to concerns about high work load and
independence issues, accounting industry figures called for
part-time members to be retained in order to ensure recent, or
current, technical experience on the board.

Mazars & Guerard partner Michel Barbet-Massin said it was
“paramount members have recent practical experience”.

European Federation of Accountants (Fédération des Experts
Comptables Européens – FEE) deputy president Hans van Damme agreed
with the importance of part-time board members. He pointed out that
if someone has been on the board for two five-year terms and was
also in standard setting before then, their technical practice
experience could be ten to 20 years outdated.

“[This scenario] could be worrying for people using the
standards,” he said.

IASC chair Gerrit Zalm said more part-time members means less
capacity and more influence from staff. “Board members should be
involved with standard setting, not just staff,” he said.

■ IASC FOUNDATION

 
Proposed composition of monitoring group
 
• the responsible member of the European Commission
 
• managing director of the International Monetary Fund
 
• chair of the International Organization of Securities Commissions
(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 EU

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

■ 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