Parliament to challenge international accounting standards

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EXCLUSIVE / MEPs later this month will ask the European Commission to overhaul auditing standards for European companies and banks in a move likely to challenge the accounting profession and stir US-European relations.

At stake are the standards accountants apply when they test the financial health of Europe’s banks and companies.

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.

But MEPs are dissatisfied that IFRS failed to assist auditors in predicting the major banking and corporate collapses that precipitated the financial crisis in 2008.

They believe that the International Accounting Standards Board (IASB) – a global body that writes the IFRS – is overly influenced by the accounting profession, and that the standards have become complicated and opaque.

Europe’s voice is not being heard

MEPs also believe that Europe’s voice is not being properly represented in the global standards. 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 group is failing to hold the IASB to account. 

Lawmakers are also annoyed that the United States, which retains a strong influence on the IASB, has not itself adopted the IFRS.

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.

US is creating standards, but does not use them

The report did not even say whether a transition to IFRS is 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.

At an exchange of views on 2 May in the Parliament, British MEP Syed Kamall (European Conservatives and Reformists) aired proposals to amend the instruments through which the IASB and EFRAG are funded by the 2014-2020 budget.

The two bodies will receive €60 million together, but Kamall’s wants the Commission to re-examine the roles of EFRAG and the IASB. That would effectively mandate the Commission to undergo an investigation into whether the standards are working, and make recommendations for change.

Development could impact auditing and trade deal

EURACTIV understands that a potential amendment would receive broad cross-party support and is highly likely to be adopted in the plenary session before the summer.

Such a development could alter the way accountants do their work, and – if the standards change – the way that Europe’s businesses and banks are accounted.

That 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.

It could also impact on the ongoing US-EU negotiations for a free trade agreement establishing the world's largest economic partnership. One sticking point in those negotiations will involve convergence of professional standards, and any alteration to Europe’s relationship with IFRS – especially in the context of strong US influence of the IASB – will be controversial.

Richard Martin, the Association of Chartered Certified Accountants’ (ACCA) head of corporate reporting, said: “The objective of global standards remains a good one which will benefit Europe and the global economy generally as it tries to recover. The era when convergence with the US dominated work at IASB is now ending and that will help to focus on the needs of its existing constituents in Europe and elsewhere. There is of course debate about particular standards that the IASB has been developing – particularly those dealing with issues evident after the financial crisis – and that is healthy. At this point there is also debate about how European influence in the development of IFRS can be better organised. Both of these strands will be developed at a discussion on 8th May we are organising at the European Parliament.”

From January 2005, the EU has been subject to the International Financial Reporting Standards set down by the International Accounting Standards Board. The process of incorporating them into EU law has been going on since 2002.

  • 20-23 May: MEPs strongly expected to adopt recommendation to ask Commission to take a fresh look at the international financial reporting standards (IFRS)

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