Let’s bring down the IFRS Foundation! (you go first…)

“IFRS could be stripped of accountancy watchdog role”, says the title of a recent article in the UK Telegraph newspaper.

According to the writer, Louise Armitstead, the IFRS Foundation “has been severely criticized by MEPs (Members of the European Parliament) for poor governance structures, a lack of transparency and its ‘close links to the accounting industry’.” These MEPs are threatening that the Foundation’s funding might be cut off in a year’s time; one speaker says avoiding this depends on “sufficient reform to prevent conflicts of interest, which will bring about much-needed trust and scrutiny on how these highly influential public bodies operate.” Another says: ““I am not convinced that it was right for the EU to outsource standard-setting to what is, in effect, a private sector body funded by public money.” Apart from its structural concerns, the EU has deeper worries about the standards’ fundamental content, including their ability to give a “true and fair view,” their approach to prudence and related concepts, and their ability to provide adequate comparability.

The article also notes that in 2013 “a group of British investors wrote to Michel Barnier, the EU’s internal markets commissioner, warning him that the accounting rules were harming shareholders and destabilizing the economy,” and that the Foundation was recently embarrassed when various statutory filing omissions came to light. The embarrassment in this case was compounded when the Foundation had to amend its original statement on the matter, forlornly acknowledging “additional historic filing shortcomings that are inconsistent with our initial public response, which was based on the best information available at the time.”

On the band wagon?

In the Telegraph article, a Foundation spokesman says: ““The foundation takes seriously any such concerns and has already begun planning its constitutionally-required five-year review of its structure and effectiveness, to be undertaken during 2014, and we welcome any proposals to improve aspects of our work.” That’s just as well, as it sounds like it’ll be getting any number of them, not least from an EU review to take place this year.

In Canada, we’ve made a pretty big collective commitment to IFRS, so anything that might potentially affect its stability and credibility has to be relevant to us. But although I criticize aspects of IFRS as much as anyone (well, not quite anyone), I’m not personally drawn to this particular band wagon. I don’t doubt that processes in the IFRS Foundation have often fallen far short of what they should have been; I’ve never known a regulatory or standard-setting-type organization (and I’ve had a chance to get a moderately good look at the insides of a few of them) that didn’t regularly fall short of its own rhetoric and grandstanding. Such organizations are overflowing with human fallibility and neurosis, with baffling internal structures and procedures, and they can easily be sent off course by changes in the internal culture (a single wrong person in a high-ranking position can often clog the entire flow of human achievement). So I don’t doubt there’s plenty to be fixed, but I don’t think there’s any point getting all pious and apocalyptic about it (certainly not regarding the filing errors, which don’t seem central to the Foundation’s core purpose and importance, and aren’t fundamental to the EU’s concerns).

With the best will in the world, it’s hard to see how the EU would best address its concerns by stopping the “outsourcing” and in some undefined way handling standard-setting itself, given the practical difficulties that would entail. Even on this very subject, the EU arguably fumbled its all-important review before it even began, by having to rescind the contract it originally granted to carry out much of the work, after conflict of interest charges were raised. I don’t know if those charges were fair or not, but the incident suggests that there won’t be any smooth stairway to heaven here.

Generating a camel

I imagine some of the poor IFRS Foundation staff must tear their hair out over allegations of “lack of transparency,” as it certainly looks like they try (although if you ask me, they spend too much time on vacuous self-promotion, failing to sustain an appropriately intelligent tone). And as for whether the Foundation has “poor governance structures,” I imagine you could ask ten governance “experts” and not get any consensus on what would be “good governance” for such an idiosyncratic organization. And, you know, this isn’t a bank or a mining company. Standard-setting is primarily an intellectual process, dependent on the skill and focus of the people making the decisions and those supporting them. “Governance” in its usual sense, of overseeing the rules and processes and customs that define the organization and managing the related risks, isn’t necessarily key here. The more of it you add to the standard-setting process (and I’m not sure how many more oversight bodies, advisory councils and suchlike people think the structure could usefully bear), the greater the risk of embodying the old cliché about the committee convened to design a horse that ends up generating a camel, or more likely, that gets clogged up and never generates anything at all.

Which also points to another strange aspect of all this – that most preparers and investors would likely be perfectly happy, or else indifferent, if the Foundation, wrecked by poor governance and all the rest of it, never managed to deliver on any of its big current projects. The area of specific concern most often cited in all this is that of recognizing loan loss provisions under IAS 39, and its perceived role in exacerbating the 2008 financial crisis, but that doesn’t seem to translate into particular enthusiasm for the fix of IFRS 9, or into a sense of urgency in getting it implemented, and thus tackling the ongoing risk we’re presumably still living under in the meantime. On the other hand, it doesn’t seem to translate into a push for any particular alternative either. Perhaps this is another kind of failure by the Foundation, that it’s allowed the progress on specific battlefields to be clouded by the murkier war over its conceptual framework.

I don’t mean this to sound at all complacent. The IFRS Foundation deserves to feel plenty of heat; in some areas, perhaps, more than it actually is feeling. And it’s a bit worrying how easily the current fire might spread out of its control…

The opinions expressed are solely those of the author

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