International Accounting Standardisation: Is Politics Back?

Abstract

In the absence of political legitimacy, international accounting standardisation is founded on procedural and substantial legitimacies, which have been challenged by the current financial crisis. This paper represents a critique of this built up legitimacy. It demonstrates in particular that whilst due process is admittedly a transparent procedure, it is one in which only those players with major financial and intellectual resources can participate. It also highlights the weakness of the theoretical foundation, in particular agency theory and the theory of efficient markets, on which the conceptual framework of the IASB rests. This critical study of the foundations of the legitimacy of the IASC/IASB enables us to understand the extent of recent political intervention in a field that had previously been abandoned.

Whilst international accounting standards did not trigger the crisis, some observers have said that they accelerated and even amplified it, mainly as a result of their pro-cyclical nature. This explains why, in October 2008, the international standard-setter was suddenly called to order by the European Union who requested it to urgently amend its Standards IAS 39 ‘Financial Instruments’ and IFRS 7 ‘Financial Instruments: Disclosures’. This intervention by a political organisation is all the more remarkable since international accounting standardisation seemed to have been definitively handed over to specialists from the IASC/IASB, a body which had declared itself to be the international standardiser.

The crisis therefore strongly undermined the legitimacy of the international standardiser. This raises the question of whether we are about to witness the return of politics in a field, which is, in reality, highly political. This possible return is indicated not only by the pressures successfully exerted on the international standardisation body by the EU and the G8 but also the recommendations made to the IASC/IASB by the new G20 and the publication in France of reports of a political, highly critical nature, devoted to the recent evolution of accounting standardisation.

In this paper, using a reflexive, critical approach, we question the legitimacy of the IASC/IASB with the aim of evaluating the extent of the political recommendations made to it. It is clear that the legitimacy of an accounting standardisation body is fundamental since it conditions the legitimacy of the standards it issues, accounting practice itself and in the end, the confidence of users in the financial statements of companies. But this legitimacy is not innate. It is not natural or pre-existing. As we shall see, it is constructed and managed.

In the first section, we will examine, and try to specify, the foundations of the IASB. In the second section, we will demonstrate the fragility of these foundations, a fragility that existed before the crisis but which the latter exposed more clearly. Lastly, in the third section, we will attempt to see if recent interventions of political organisations in the international accounting standardisation process have challenged the international standardiser and if they herald the return of politics.

Acknowledgements

This article has been previously published in the French journal “Comptabilite´-Contrôle-Audit (2010, Normalisation comptable internationale: le retour du politique?, CCA, 16 (3), pp. 153–176) and is reprinted in English with the permission of the publisher. The authors would like to thank the two anonymous CCA revisers whose constructive comments proved invaluable.

Notes

For further details on the concept of legitimacy, cf. Laufer and Burlaud (1997).

The word ‘political’ should be understood here in its etymological sense, meaning that which concerns the government of men, res publica.

To simplify considerably … There do exist major differences between the different countries who supposedly apply the same accounting model, for example, between Great Britain and the USA and Germany and France.

These are mainly the following: Association francophone de comptabilité (AFC), European Accounting Association (EAA) and International Association for Accounting Education and Research (IAAER). The AFC was not represented in the National Accounting Council any more than in the Autorité des normes comptables (ANC); admittedly, academics have been part of the standardisation body but as individuals or representatives of a stakeholder.

Maβgeblichkeitsprinzip in Germany.

Shortened title of a book by Pierre Garnier (1947): La comptabilité, algèbre du droit et méthode d'observation des sciences économiques (Paris: Dunod).

We must note in passing that Islamic finance makes the same claim to universalism as ‘Western’ finance. Cf. on this subject: Causse-Broquet, G. (2009) La finance islamique, 215 pp. (Paris: Ed. Revue Banque).

Assessment of the management practices of the directors through financial information is also mentioned in EC Regulation n° 1606/2002 of the European Parliament and Council, Art. 3.2.

Prices on the financial markets, of course.

The anticipation of the players triggers phenomena of self-realisation on the financial markets, cumulative phenomena that are at the root of independent speculative bubbles in the ‘real’ economy.

A major difference between the Regulation and the Directive should be pointed out. The 1978 Directive mentions a true and fair view of the assets, that is to say a legal concept defined by the Civil Code (Article 544 of the French Civil Code stipulates that ‘ownership is the right to enjoy and use things in the most absolute manner, provided that this use is not forbidden by law or by the regulations’) whilst this idea is omitted from the Regulation since the IFRS do not refer to this idea (they do not define an asset as property) the definition of which comes under national law.

The IASB is, as regards the need for transparency, in full agreement with the statements made by politicians and broadcast by government and inter-governmental organisations. On this subject, see: United Nations Conference on Trade and Development (2009). As we have already mentioned, transparency is also needed for the validation of the theory of efficient markets.

The word ‘just’ has a double meaning. It originally designated conformity with divine law. It took on a secular meaning in the thirteenth century, taking on a moral sense, to express the concern for equity. In the fourteenth century, the word also took on the meaning ‘exact’. In French, a measuring device is also said to be ‘juste’. In English, the word ‘fair’ seems to leave no room for doubt; the word has a moral sense, it means ‘loyal’, ‘equitable’, ‘impartial’, ‘honourable’, ‘honest’.

See also: Chatelain-Ponroy and Lévy (2007).

See also: AGEFI, ‘Les normes comptables à l'agenda du G20. – Accounting standards on the G20 Agenda’, 26 March 2009. ‘Whilst in 2007, according to the IMF, only 6% of assets were estimated using fair value, this percentage is growing. These estimates using internal model based on non-observable market data are thought to be becoming more frequent.’

Christian Noyer (Governor of the Banque de France): ‘Economic and Financial Crisis: Post-G20 Prospects’, Hong Kong, 11 June 2009.

For France, it really is a return since accounting standards (the Plan Comptable Général – PCG) were drawn up by the National Accounting Council which was a ministerial department in charge of the economy and finances. Today, the Autorité des normes comptables – Accounting Standards Authority, an independent agency founded on 22 January 2009, within which specialists are playing a major role, formally only has the power to put forward proposals, since the standards must be approved by ministerial decree.

By way of example: the net income? of the Société Générale increased by 1.5 billion Euros, that of Deutsche Bank by 845 million Euros and that of Natixis by 310 million Euros.

The Monitoring Board, a sort of monitoring committee for the IASCF, is made up of representatives of the European Commission, the International Organisation of Securities Commissions (IOSCO), IOSCO's Emerging Markets Committee, the Japanese Financial Markets Agency and the Security and Exchange Commission (SEC).