VideoSix years ago, the International Accounting Standards Board took over as an international standard-setter, using its U.S. counterpart as a model — except for one key difference. Unlike the Financial Accounting Standards Board, which has the Securities and Exchange Commission on its back, the IASB acts autonomously.
Critics repeatedly have called the lack of IASB oversight into question, but particularly in recent months after the SEC made two proposals that would raise IASB's stature in the United States by allowing companies listed there to use International Financial Reporting Standards.
To address concerns about the IASB's governance, the board's trustees are creating a monitoring body whose members would include securities regulators who would approve trustee appointments and review the group's budget. Currently, many view the IASB as freely issuing the equivalent of European law without formal scrutiny.
At the same time, the oversight the IASB's standards receive once approved by the board and put into practical use varies by the many regulatory bodies that review companies' financial statements. They vary from country to country, even though more than 100 countries are either using the standards or are in the process of converting to them.
An official call for the creation of an IASB monitoring body came from several regulatory sources earlier this month. In their joint statement, the SEC, the European Commission, the Financial Services Agency of Japan, and the International Organization of Securities Commissions (IOSCO) said an overseer would give the board and its trustees more accountability while also "enhancing public confidence in IFRS."
To be sure, public confidence is shaky. The application of IFRS has been inconsistent thus far, as some countries have refused to adopt the IASB-blessed version of the standards in favor of the version mandated by the European Union. This have put into the question the fate of the FASB/IASB convergence project and IASB's future as the official global standard-setter.
Once IASB issues a new standard, it's up to individual countries whether to adopt it. In the European Union, which mandated that its countries use IFRS starting in 2005, each standard goes through additional rounds of scrutiny by the European Commission and the European Parliament. Within IASB's umbrella, the standards also go through an implementation review by its International Financial Reporting Interpretations Committee, which rarely issues guidance.
The variant opinions on IFRS and other securities matters has raised the possibility of a consolidated, supranational securities regulator. However, observers tell CFO.com that notion could be a pipe dream.
The Committee of European Securities Regulators (CESR) was created six years ago to coordinate the enforcement efforts of the regulators and advise the European Commission on securities issues. One of CESR's tasks is to promote a uniform interpretation of accounting rules, which it does through enforcement-coordination sessions to make sure the European regulators don't start sharing disparate understandings of standards.
However, while CESR provides input to IASB, before and sometimes after standards are issued, as well as to the European Commission, it does not have any authority to mandate the use of IFRS, nor can it directly influence the independent standard-setter, notes Paul Koster, chairman of the CESR-Fin, which coordinates the enforcement and endorsement of Europe's financial reporting standards.
In addition, 24-year-old IOSCO acts with similar intent but on a much larger scale than CESR by including the securities regulators of the United States, European countries and others.
SEC chairman Christopher Cox has credited IOSCO with helping to build a "seamless global market." However, the group of regulators is unable to take on the role of an international regulator, he said. "Market regulation will remain a national affair for the foreseeable future — if for no other reason than that our legislative mandates require as much," he said during a speech at an IOSCO conference earlier this month. IOSCO serves as a "think tank" for reaching "international consensus on regulatory ideas and philosophies," he added.
According to former SEC commissioner and Cooley Godward Kronish partner Roel Campos, the European Commission would like a global European regulator to be formed, "but that's not going to happen soon." It's unlikely the sovereign nations that make up the European Union, for instance, would ever agree to give up their historical authority over their securities markets, he told CFO.com.
In the meantime, "the European Commission doesn't have a specific enforcement tool other than the bully pulpit," he says. In other words, the EC instead uses its authority to share its views with regulators through a third-tier group, such as CESR.
Agreeing with Campos' view is Nigel Sleigh-Johnson, head of financial reporting at the Institute of Chartered Accountants in England & Wales. "I don't see any sign that a single pan-European securities regulator is on anyone's agenda or is very likely to become a reality," he told CFO.com. He says he doesn't expect the regulatory landscape to change significantly and expects that the collaboration of regulators through IOSCO and CESR will continue to "ensure that enforcement decisions on IFRS are broadly consistent across jurisdictions."
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