How much criticism do the IASB and the IFRS Foundation really deserve?

“Industry criticizes quality of IASB, IFRS Foundation’s Work” announces the headline of a recent article on the Investment & Pensions Europe website. The article explains:

• “Commentators responding to a public consultation on the effectiveness of the International Financial Reporting Standards (IFRS) Foundation have slammed the quality of the global rulemaker’s work….
• In a formal comment letter, the Institute of Chartered Accountants of England & Wales wrote: “It seems significant resources have been dedicated to fixing problems that should have been identified during the standard-setting process.
• “Again, this may indicate further improvements can be made to the board’s due process.”
• Alongside the damning verdict on the IASB’s efforts, critics also slammed its interpretations committee and processes as “slow and unresponsive” and prone to making too many short-term changes to standards.
• The comments come despite a major bid in recent years by the Foundation and the board to address the committee’s past failings.
• In a summary of the feedback received by the board and the Foundation, staff told the IASB’s 16 March board meeting: “Many respondents, however, commented on the Board’s approach to finalising the issue of a Standard.”
• The board’s critics, it emerged, want it to pay more heed to quality control during the final stages of publishing a standard.
• They said this new focus would help to encourage consistent application of standards.
• Critics also claimed the board tended to publish a standard only to issue a flurry of editorial corrections, minor amendments and interpretive guidance.
• Staff wrote: “These respondents thought such amendments hurt the credibility of the Standards and [failed to] provide an incentive for preparers to take an early start in implementing the Standards.”
• Some respondents also believed the board and its interpretations committee were too willing to amend IFRSs rather than allow preparers and their advisers to exercise judgement.
• In addition, there were claims the IASB had got its priorities wrong by focusing on the development of new standards rather than on drafting and checking them….”

Well, I certainly don’t have any special interest in defending the IASB or any specific aspects of its process, and the problems that arose in the final stages of some major projects speak for themselves. But this hell-and-damnation summary strikes me as a bit much. I don’t know of any major area of standard-setting or intellectual consensus-reaching, whether it be governmental or regulatory or anything else, where finished products regularly roll off the assembly line in flawless shape – human structures just aren’t that coherent (despite our claims and illusions). And, no less than any of them, standard-setting for financial reporting requires juggling so many balls that it’s a miracle it works as well as it does. To the extent it doesn’t work so well, piously-expressed scorn isn’t going to do much to help. Because, frankly, just about every aspect of the process is – almost by definition – hopelessly exposed to multi-sided criticism. For example, given all the years of wailing about the inadequacy of current lease accounting and its detrimental effects on decision-making, it’s arguably a scandal that it took this long to fix it – and that, even after the fix has been arrived at, we still have to wait for years to access the benefits of it (given the 2019 implementation date). Does anyone seriously think that this glacial pace somehow coexists with a fundamental recklessness about quality control and drafting and checking? And yet, if and when a consensus emerges in favour of some future amendment to the standard, as it most likely will, it’ll no doubt be brandished as evidence of exactly that. And where will that get anyone?

If I were a member of the IASB, I wouldn’t exactly feel I’d been put in my place by the force of the ICAEW’s “slamming”. For instance:

• “We have heard a number of possible explanations for these problems. Some suggest that they are indicative of something awry with the IASB’s due process that is preventing the board from getting it right first time, while others argue that the board is a little too content to tinker with standards to meet calls for change from vocal constituents. In any case, the Trustees might consider why it has been necessary to issue so many narrow-scope amendments. It is possible that some of the issues that have resulted in amendments could have been better dealt with in other ways, perhaps by publishing an interpretation, making changes via the annual improvements process or simply deferring the matter until post-implementation review. There is also the option of simply allowing those preparing financial statements to exercise their professional judgement. The issues are not straightforward, but further analysis seems advisable.”

This is hollow pontificating, snidely telling tales on what “some” say about this and “others” say about that, but offering nothing except flagrant evasion and internal contradiction (what’s the annual improvements process if not an example of “tinkering” with standards), unwilling to advocate even timidly for one course over another. Of course, for every commentator who might advise “simply allowing” (!) a high degree of professional judgment and living with the consequences, there’s another who would pounce on the diversity of practice arising from such a philosophy as evidence of IFRS’s shortcomings. Fortunately, as we’ll see in a future post, some of the other responders to the consultation process (comments were to be received by November 30, 2015) had more to offer. But the IASB and the Foundation might be tempted to conclude that they’re living the old cliché – that when you’re getting flack from all directions, it sometimes just means you’re occupying more or less the right spot in the middle. Uncomfortable as it may be…

The opinions expressed are solely those of the author