This article is part of our special report European Corporate Reporting.
SPECIAL REPORT / The European Commission is set to issue by the end of the year new regulations on accounting standards, overhauling the current standards body and meeting European Parliament concerns that Europe has become a lackey for US influence in the sector.
Europe adopted International Financial Reporting Standards (IFRS) in 2005, which were designed to be a common benchmark for business affairs so that company accounts could be compared across international boundaries.
The European Financial Reporting Advisory Group (EFRAG) was established in 2001 to provide input into the development of IFRS and to provide the European Commission with technical expertise and advice on accounting matters, but Parliament believes the EU is failing to make its voice heard on the global stage.
MEPs believe that the International Accounting Standards Board (IASB) – a global body that writes the IFRS – does not adequately reflect Europe’s voice in the global standards. Lawmakers are also irked that the US, which retains a strong influence on the IASB, has not itself adopted the IFRS.
US has gone its own way on audit standards
The US Securities and Exchange Commission (SEC) released a proposed roadmap in November 2008 and reaffirmed its commitment to one global set of accounting standards in a statement released in February 2010.
But in July 2012 the SEC issued a final report on the relation of the IFRS to the US reporting standards, which included no decision as to whether IFRS should be incorporated into the US financial reporting system, or how such incorporation should occur.
The report did not say whether a transition to IFRS was in the best interests of US capital markets and US investors.
“It seems ridiculous that the US is funding and creating the standards they do not use themselves,” said one parliamentary source on condition of anonymity.
In March 2013, Michel Barnier, the commissioner for internal market and services, mandated Philippe Maystadt – a former Belgian finance minister – to examine ways of reinforcing the EU's contribution to IFRS.
Maystadt published his report last week (11 November) and this will now feed into a proposed amendment of the EU regulation applying the IFRS, scheduled to be published at the end of the year.
Maystadt report points the way forward
The report identified three options for strengthening the European Union's influence in international accounting standard-setting: reorganising the current EFRAG to increase its legitimacy and representativeness; transferring the tasks handled by EFRAG to the European Securities and Markets Authority (ESMA) or creating a new agency of the European Union.
For various reasons including speedy implementation, Maystadt favoured the first option.
Barnier said that implementing the report would allow the EU to better organise itself to ensure that the needs of its markets were fully taken into account in the international accounting debate, admitting that these have “excessively focussed these last few years on the objective of convergence with the US accounting standards."
The Commission is likely to back Maystadt and amend the structure of EFRAG, since the other options – including the creation of a new agency – seem unrealistic.
“This option [a new agency] would ensure full control of the process by public authorities and reinforce communication and cooperation between Member States, European Union and European stakeholders. However, given the current budgetary context and the legal and practical implementation formalities, the option was deemed possible only in the longer term,” Ugo Bassi – the Commission’s director of capital and companies – told EURACTIV in an interview.
“I hope that much of what he has recommended will be implemented as quickly as possible to ensure that the European interest is properly protected,” said British MEP Syed Kamall (European Conservatives and Reformists), who threatened in May to amend the instruments through which the IASB and EFRAG were funded by the 2014-2020 budget if MEPs demands over changes to the system were not met.
Kamall sounded a word of warning, however, adding: “That said, his review does not look at the content of some specific standards, and that is why I will continue to urge the Commission to look at whether specific IFRS need to be overhauled.”
Who will control future EFRAG?
The devil of the Maystadt report lies in the details over how precisely EFRAG might be reformed. Andrew Buchanan, the global head of IFRS with auditing and consultancy firm BDO, said it is crucial that technical expertise remains to the fore.
“Under the Maystadt proposals an advisory board which currently makes final decisions would be changed and a newly appointed general assembly would appoint a supervisory board with decision-making powers,” Buchanan explained.
“It is not yet clear whether the idea is that the new board would be a political body, or whether technical expertise would be a key criteria. I would favour the latter,” he added.
“Some of his suggestions to strengthen EFRAG’s influence over IFRS will require more elaboration of the detail,” said Richard Martin, head of Corporate reporting at ACCA, the Association of Chartered Certified Accountants.
Any changes would be closely watched in the banking sector, where accounts are under close scrutiny at the moment, amidst suggestions that banks are failing to reflect the true position of their exposure to bad loans.