Understanding the Consequences of Accounting Standards in Europe: The Role of EFRAG

Abstract

The global financial crisis has accelerated the need for standard-setters to demonstrate that they understand the effects of the accounting standards they are setting. Within a European context, the endorsement process and the ultimate adoption of new and amended International Financial Reporting Standards into European Union law demand that there is evidence to support the assertion that such standards will improve financial reporting. Our analysis is anchored in the ideology theory of regulation which provides a compelling case for effect analysis to underpin the standard-setting process. For that process to work effectively, a number of key actors need to engage in the process. Accordingly, the aim of this paper is to analyse the potential role of those actors in the standard-setter's analysis of effects. It is argued that there is a significant role for academic research to play in that process and that intermediaries, such as European Financial Reporting Advisory Group, can serve to bring research to the attention of the standard-setter. However, addressing the current disconnect between standard-setters and accounting researchers is not straightforward and we propose various strategies for how that relationship could be improved. We argue that these changes may lead to an improvement in the efficiency and effectiveness of the standard-setting process.

Acknowledgements

We are grateful to the participants in the IAAER Conference ‘Accounting Renaissance’ (Venice, 2011), to the two peer reviewers and to the editor, Lisa Evans, for their useful comments and suggestions.

Notes

^†All views expressed are those of the authors and not necessarily represent those of EFRAG.

See Zeff  (1978) and Buijink  (2006).

We note that whilst the IASB is not a regulator in the strict sense, as it cannot require the application of its standards and it does not have any mechanism to enforce their use, for the purpose of discussing the various regulation theories we use the term ‘regulation’ in a broad sense as other authors do (see, for example, Kothari et al., 2011) to refer to the organised production of accounting standards by private standard-setters.

See Leuz and Wysocki (2008) for a more extensive discussion.

The public interest and the capture theories were seen as alternative theories of regulation in the late 1970s (see Pelzman, 1976). The ideology theory arises later as a consequence of the observed behaviour (see for example Kalt and Mark, 1984).

Kothari et al. (2011) conclude that one implication of this theory is that competition instead of convergence among standard-setters increases the quality of the output.

In that sense, as Brown (2010) points out, the standard-setter is not proactive, they are reactive. It can be argued that the a priori beliefs of standard-setters that make them decide to change or to issue a new standard are related to the information perspective.

Equivalent bodies have been established in Asia-Oceania and Latin America. As a result of the ongoing convergence process, the USA (principally through the FASB) has been at the table representing their regional interests for some time.

We consider cost–benefit analysis as equivalent to effect analysis in this context. A limitation of using the cost-benefit terminology is that it does not really fit with the public interest objective. As Sunder (2010) points out when we quantify and talk about prices, it is not clear that the benefit of reducing a cost as a cost for one party is a return for another party, and reducing costs does not result in creating a ‘better world’.

For instance, on its recent revenue recognition proposals, the IASB received 973 letters from constituents and for its hedging proposals it claims to have met with over 2000 practitioners in six continents.

The 12 voting members of TEG are selected from throughout Europe and come from a variety of backgrounds. The chairpersons of some of the national Standard-setters are non-voting members of TEG (UK, France, Germany, Italy), and representatives of the European Commission, ESMA and the IASB attend TEG meetings as observers. The EFRAG has full-time technical staff (secretariat) to provide TEG members all the assistance in the preparation of documents during the process and for supporting proactive work.

The Supervisory Board appoints the TEG members and looks primarily into the qualifications of the TEG candidates in terms of knowledge and experience and endeavours to ensure a broad geographical balance, together with experience from preparers, the accounting profession, users and academics (www.efrag.org).

For example, Sunder (2010) discusses potential adverse effects of globally uniform accounting standards on the accounting profession and on accounting academia.

In fact, this is not new. It was argued in the early papers about harmonisation and it has been the highlight in recent research papers which analysed accounting properties before the adoption of IFRS in Europe.

Excluding the costs any amended that contracts gives rise to.

Brüggemann et al. (2010) and Pope and McLeay's (2011) study presents a review of the most recent research on consequences of mandatory IFRS adoption in Europe.

See Schipper (2010).

See, for example, Pope and McLeay (2011) and Alvarez et al. (forthcoming).

For example, EFRAG and the Institute of Chartered Accountants in Scotland have recently issued a call for researchers to bid for grant funding to undertake a literature review on ‘how capital providers use financial statements’. Other bodies, such as the Autorité des Normes Comptables, have commissioned academic research to support the standard-setting process.

See, for example, Walton (2010).