SEC, Others to Oversee Global Accounting

The trustees of the International Accounting Standards Board agree to have a collection of global regulators peering over their shoulders.
Marie LeoneJanuary 30, 2009

A new oversight board has been formed to review the work of the trustees of the International Accounting Standards Board.

As a result, the IASB trustees will be publicly accountable to the newly formed monitoring board, which will comprise key members of the U.S. Securities and Exchange Commission, the International Organization of Securities Commission, the European Commission, and the Japan Financial Services Agency. The Basel Committee on Banking Supervision has been designated as a “formal observer” and will send representatives to the IASB trustee meetings.

The trustees are the governance organization that oversees the IASB policies and procedures, as well as approves appointments and reappointments to the standards-setting board. The relationship between the IASB and its trustees is modeled after the U.S. Financial Accounting Standards Board and its governance group, the Financial Accounting Foundation. However, the international board has more autonomy than its U.S. counterpart, as it does not have an equivalent of the SEC looking over its shoulder. By establishing the new monitoring board, the IASB is moving closer to the American model by providing an extra layer of governance.

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The monitoring board will work with the trustees and the IASB to move corporate accountants toward one set of global accounting standards. And while the monitoring board will be expected to safeguard the trustee bylaws, it must do so without “impairing the independence of the standards-setting process,” according to the memorandum of understanding the trustees and monitoring board members signed.

Autonomy is a particularly sensitive subject at the IASB, as the group’s independence came into question in November after board members bent to the will of European politicians and bypassed due process to ease fair-value accounting rules. The IASB dispensed with its usual comment period and rushed out a rule change to allow financial institutions to reclassify loans as a way of avoiding marking those assets to market. By eschewing fair-value accounting, banks would be able to avoid losses generated by a drop in asset value.

IASB members claim they acted quickly to head off the European Union, which was threatening to pass a law that would loosen fair-value rules without also requiring additional controls and disclosures. The EU justified its threat by saying that American corporations had a competitive advantage over European companies because the IASB rules did not give companies the same flexibility to transfer the assets out of the fair-value category.

Since pushing through the rule change, the IASB has admitted that it caved in to political pressure on that one issue, but vowed not to back down in the future. At an industry conference held in December at New York’s Pace University, IASB chairman David Tweedie said the board will take a tougher stance in the face of political pressure in 2009. He asserted that going forward, the IASB and FASB will move in “lock step” to stop politicians from hijacking the standards-setting process by claiming that one region of the world has an advantage over another in terms of accounting rules.

Further, Tweedie said the IASB has suggested to its trustees a constitutional amendment to allow a fast-track, standards-setting process for emergency situations, such as the current credit crisis. The trustees have issued a discussion paper on the need for emergency due-process procedures. The public comment period for that proposal ends on March 31, and the trustees will follow up with roundtable discussions on their preliminary conclusions during the third and fourth quarters of 2009.

The trustees agreed to meet with the monitoring board at least once a year, and will prepare a written annual report to update the board on their activities.

Separately, the trustees also agreed to expand the IASB from 14 to 16 members, and to formalize guidelines to ensure members are geographically diverse. By July 2012, the IASB will include 4 members from the Asia/Oceania region, 4 from Europe, 4 from North America, 1 from Africa, 1 from South America, and 2 appointed from any area, subject to maintaining overall geographic balance.