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June 14, 2008

Monitoring group a step closer as stakeholders call for balance

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.

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 

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