IFRS in National Regulatory Space: Insights from Sweden

Abstract

Based on two empirical cases, this paper illustrates and comments on the complexities of implementing and enforcing International Financial Reporting Standards (IFRS) in a national setting. The paper sheds light on the difficulties that arise in the local regulatory space when IFRS requirements start to shape national accounting legislation and regulations. The findings suggest that the investor focus and requirements for managerial judgement of IFRS can pose two problems. Firstly, an extended influence of IFRS creates tension with established institutions that have developed in the local accounting tradition. Secondly, local organisations can respond strongly to new IFRS regulations and their potential implementation, even if the contradiction with local practice bears no immediate economic consequence to them. The study contributes to the contextualisation of financial accounting in national culture by highlighting the different understandings and uses of IFRS by actors involved in the Swedish regulatory space.

Keywords:

• IFRS
• regulatory space
• national regulation
• accounting change

Introduction

A key interest in financial accounting literature is the question of how accounting regulation, and changes in regulation, affect accounting practice. Literature suggests that the International Financial Reporting Standards (IFRS) lead to high-quality financial statements only in the presence of strong enforcement systems (Brown et al., 2014; Christensen et al., 2013; Daske et al., 2008). Improved quality is documented in terms of reduced earnings management (Burgstahler et al., 2006; Ernstberger et al., 2012) and reduced cost of capital (Daske et al., 2008; Li, 2010). Additionally, researchers study specific standards to show the effects of changed regulation (see, e.g. Marton & Runesson, 2017). While there is strong evidence that enforcement plays an important part in the mechanisms that drive accounting practice, only a few studies (see, e.g. Ernstberger et al., 2012; Hitz et al., 2012) step away from cross-national comparisons in favour of the complexities of implementation and enforcement of standards at the national level.

It is important to study the complexities of national settings in relation to policy formulation, implementation, and enforcement, because the effects on organisational accounting behaviour are ‘filtered’ through a complex system of different regulating, endorsing, and assuring bodies that are bound to their national context with a specific accounting history and culture. There exists multiple evidence that national culture, often based on Hofstede’s (1984) cultural framework or the GLOBE’s (2004) extension thereof, influences the behaviour of individual actors, creating variation in IFRS implementation and practice (e.g. Prescott & Vann, 2015). Therefore, cross-national comparability is conditioned by national variations of IFRS implementation and enforcement. Additionally, existing evidence suggests that the cultural context also influences the institutions active in it and that these institutions in turn affect national accounting. Investigating the relationship between institutions, culture, and accounting, Cieslewicz (2014, p. 526) concludes:

The findings of this study imply that efforts to improve accounting internationally do well to recognize that accounting in a given nation is linked to the nation's supporting institutions, which in turn are influenced by the national economic culture of those who maintain them. Thus, changing financial reporting practices, improving auditing, adopting management accounting innovations from foreign sources, or addressing corrupt accounting practices can be expected to entail much more than formal adoption of standards, principles, or innovations.

There is much more to be learned about how a national context interacts with IFRS, particularly as IFRS also shape national legislation and accounting regulations to varying degrees, creating additional complexity and variation in the different EU member states (see André, 2017, for an EU-wide overview and Marton, 2017, for Sweden).

The influence of IFRS on national regulation and the consequences thereof are of particular interest for this study. Leaning on Harrison and McKinnon’s (1986) model of accounting change, we argue that the pronouncements and amendments of IFRS are intrusive events that trigger response events in the national context, both regarding national regulation and accounting change. As the ultimate goal of new policy formation is to create accounting change in the form of improved reporting quality and comparability of financial information, it is important to understand these national responses.

This study therefore aims to illustrate and comment on the complexities of implementing and enforcing IFRS in a national setting. Specifically, the study highlights the difficulties that can arise in the local regulatory space from a Swedish perspective when IFRS requirements start to shape national accounting legislation and regulations.

The concept of regulatory space (Hancher & Moran, 1998; Young, 1994) serves as a metaphor to create a frame around the political, legal, and cultural attributes that describe the national context and accounting changes therein. Various authorities, actors, and regulations inhabit this space, existing next to each other. It is within this space that accounting change can be triggered. Therefore, this paper first describes the Swedish regulatory space (including underlying national culture) and proceeds to illustrate the complexities in which this filter works in relation to organisational behaviour.

Sweden as a setting is interesting for this investigation because it has a long tradition of orienting national regulation towards IFRS. As early as the 1980s, Swedish standard-setters considered International Accounting Standards (IAS) in designing Swedish standards. Additionally, for decades Swedish courts have used the International Accounting Standards Board (IASB, previously International Accounting Standards Committee or IASC) Conceptual Framework to analyse accounting issues. IFRS have high legitimacy in the Swedish regulatory space. Consequently, IFRS affect Swedish accounting far beyond consolidated financial statements for listed firms, as mandated by the EU.

We illustrate the complexities that arise in the national regulatory space through the strong IFRS orientation using two empirical cases. Both illustrations stem from the financial sector, because this sector must follow additional regulations, creating a more complex regulatory space, and because IFRS are especially influential in this sector in Sweden. Case 1 presents the difficulties that arose in relation to the enforcement of IAS 39 Financial instruments: Recognition and measurement in connection with the Swedish HQ bank (which was closed following regulatory action). Case 2 exemplifies how organisations – specifically mutual insurance companies – can become active in shaping the standard-setting process by getting involved before the standard (IFRS 17 Insurance contracts) is fully developed or endorsed, or both.

We conclude by commenting on the Swedish system, its strengths and weaknesses regarding enforcement of standards, and the tensions brought into the local regulatory space with the introduction of IFRS. While the described regulatory space and the illustrated complexities are specific to Sweden, the overall conclusion that contextualisation is important to understand the mechanisms of accounting change is also relevant outside Sweden. The regulatory space in other EU member states, for example, differs to varying degrees; particularly regarding the depth to which IFRS moved into local regulation (André, 2017). It is therefore essential to continue to do research in this area to help researchers, standard setters, and practitioners to anticipate the outcomes of policy formation and enforcement in different contexts, and to contextualise concepts like harmonisation and comparability.

The remainder of the paper is structured as follows. In the next section, we explain how we approach the topic of national regulatory complexity and its relation to accounting change, suggesting that the change model of Harrison and McKinnon (1986) builds a helpful starting point in such investigation. Then, we define the Swedish regulatory space by elaborating on its cultural roots and accounting traditions as well as the involved actors and regulations. After giving an overview of the context we go on to illustrate the complexities that can arise when the local context responds to intrusive changes with the help of two empirical cases. We conclude by commenting on the findings and their relevance for Sweden and other EU countries.

Approaching the Subject

Even after 15 years of mandatory IFRS adoption and over 30 years of harmonisation, there are still fundamental differences in how listed companies in different countries apply IFRS. This is because IFRS leave room for accounting choices that are to be understood in a national context (Nobes, 2011). Firms in continental European countries are generally expected to report more conservatively than firms in the US, UK, or Australia. Hjelström and Schuster (2011) show that both national accounting traditions and management incentives play a central role in accounting choice in Sweden. They present examples where managers found ways to interpret standards to their own benefit, defending their views to auditors based on arguments embedded in a conservative accounting culture. Managers aimed to bring reported figures closer to their existing management control information practices or to protect sensitive information like, e.g. in-house projections of expected future cash flows used for impairment testing.

Prior literature focuses on listed companies, which is not surprising considering IFRS's strong investor focus. However, in many countries, IFRS also have started to shape national accounting regulations in areas like banking oversight, although such areas are explicitly excluded from the scope of IFRS (IASB, 2018, paragraph 1.10). There is a lack of knowledge on how this influence on local regulatory space plays out in practice. It seems natural that high-quality standards like IFRS gain legitimacy also in a national context. Therefore, several countries, including Sweden, use these standards as a guide outside of their original purpose (i.e. adopting IFRS not only for investment and credit decisions (IASB, 2018) but also, e.g. for banking oversight). While the decision to merge local regulations with IFRS is understandable, the consequences of this integration are relatively unknown.

From a theoretical point of view, Harrison and McKinnon’s (1986) framework of culture and accounting change can serve as a starting point to investigate the consequences of such IFRS harmonisation at the national level. According to this framework, regulatory space is a social system in which change is described as ‘a succession of events which produce transformation of the system under study’ (ibid., p. 238–239). Change usually starts with an intrusive event, i.e. an event that acts as a change stimulus and often comes from outside the system but may come from within if groups or individuals in the system act innovatively. These intrusive events contradict existing patterns of practice and therefore trigger response events. Response events are ‘visible evidence of transformation of the system's patterns’ (ibid., p. 239). Each change in the system will be the result of several distinct response events that directly transform the system. Consequently, intrusive events, like the mandatory adoption of IFRS, cannot act directly on the system but will trigger several response events that may, in turn, create change. Culture has an important role in this change. Harrison and McKinnon (1986) argue that culture both influences the norms and values in the system as well as shapes the behaviour of groups and individuals within one system and across neighbouring systems. Transferring this framework to the Swedish regulatory space, we understand, for example, the Swedish stock market with connected IFRS enforcement and stock exchange regulations of listed companies as one system that stands next to several neighbouring systems in the Swedish regulatory space. We present a detailed overview in the next section.

We argue that this view on accounting change is particularly helpful because it does not consider the national culture and the national regulatory space as environmental factors but as part of the overall regulatory space. The important role of the national context in creating accounting change puts focus on responses within and across neighbouring systems that are all related to accounting practice and enforcement. This opens the view for an understanding that neighbouring systems can influence how IFRS are practised in listed firms and vice versa. In Sweden, even the neighbouring systems are strongly influenced by IFRS requirements (Marton, 2017).

Defining the Swedish Regulatory Space

This section defines the regulatory space of Swedish accounting to appreciate the complexities and system responses to regulatory changes connected to IFRS (described in the next section). The intrusive event discussed in the first case (Case 1) is the mandatory adoption of IFRS in the EU in 2005. Case 1 discusses the closing of the Swedish HQ bank, which was partly based on an accusation of accounting fraud. The case was the first instance in Sweden after the mandatory IFRS adoption that was severe enough to be taken to court. The case shows the difficulties of enforcing IAS 39 in the local court system. The intrusive event discussed in Case 2 relates to the development and issuance of IFRS 17 by the IASB. Specifically, we illustrate how the intention to apply IFRS 17 for mutual insurance companies in Sweden created tensions with existing accounting traditions that were strong enough for these companies to become active in lobbying against the standard both at national and international levels even though there was no imminent economic risk involved for these companies.

Culture and accounting tradition play an important role in understanding these tensions. Therefore, we begin by providing an overview of the Swedish context, followed by an overview of the regulators and regulations that inhabit the Swedish regulatory space.

Swedish Culture and Accounting Traditions

In this section, we give a short overview of the key cultural characteristics to understand the cultural roots of the Swedish regulatory space. We focus on how these cultural roots find an expression in the accounting traditions and practices that are relevant to understand the local complexities and tensions created through IFRS (for an extensive overview of the Swedish cultural heritage, see e.g. Holmberg & Åkerblom, 2007).

Based on the GLOBE (2004) study and the Hofstede Insights (2019) website, Sweden combines institutional collectivism with being an individualistic and egalitarian society. The apparent contradiction of simultaneously being collectivistic and individualistic can be understood in terms of differences in the focus of the measures. The Swedish population combines a high reliance on collective societal action with an individualistic approach to human interaction.

Institutional collectivism is defined as ‘the degree to which organizational and societal institutional practices encourage and reward collective distribution of resources and collective action’ (GLOBE, 2004) and indicates a concern for the collective rather than the individual in relation to collective action and the distribution of rewards. The strong focus on the collective and consensus are remainders of a Swedish ideology that tried to take a ‘middle-of-the-road’ strategy between socialism and capitalism from the 1930s onward (Holmberg & Åkerblom, 2007, p. 33). Additionally, the Swedish population strongly relies on the collective and social norms to avoid uncertainty about future events (GLOBE, 2004). However, this need for norms and structure is not expressed in state regulations or strong legal enforcement (Hellman, 2011; Brown et al., 2014). Instead, the Swedish population has a reductionist view on rules, believing that ‘there should be no more rules than necessary’ (Hofstede Insights, 2019). Rather, social order is maintained through collective and implicit social norms.¹

Simultaneously, the individualistic characteristics of the culture show that Swedes are self-reliant with few family ties, giving high value to a balance in personal and work life. In essence, the Swedish population expects their societal duties to be fulfilled by paying taxes,² reflecting a high level of trust in the collective social system to distribute wealth evenly (Warner-Søderholm, 2012). Additionally, Swedish culture builds on strong, often tacit social norms that maintain the social order through collective governance.

In this study, particularly the trust in collective social governance, and lenience towards regulation and enforcement influence the accounting context and relevant regulatory space. Additionally, some of the old ‘middle-of-the-road’ characteristics between socialism and capitalism (Holmberg & Åkerblom, 2007) are still evident in a favourable view towards cooperative ownership structures for business ventures. Although the financial markets and a focus on shareholder value have entered Sweden, bringing with them an ideological shift towards a new economy, Sweden is also characterised by a long-standing tradition of cooperation between the state and the market. Cooperative ownership structures for business ventures, like the mutual life insurance companies from Case 2, therefore are still important in Sweden and widely accepted.

In relation to economic culture and accounting, these fundamental cultural characteristics influence the norms and values in the Swedish regulatory space both directly and through the institutions therein. Institutions in this respect include entities, like the financial supervisory board or the district court, but also institutionalised practices and accounting traditions, like how IFRS are interpreted in organisations and courts. Therefore, the fundamental cultural characteristics find an expression in the ways in which accounting is regulated, practised and enforced. Regarding the two empirical cases presented in this study, four aspects of economic culture and accounting tradition are of particular interest (for a historical overview, see Jönsson & Marton, 1994).

The first aspect concerns Sweden's affinity towards IFRS and their far-reaching influence in the Swedish regulatory space. Swedish financial markets are international, and due to the relatively small size of the economy, markets are also dependent on international investments. Global free trade was and is one of the cornerstones of growth, and Swedish companies were quick to understand that representation in international markets is vital (Holmberg & Åkerblom, 2007, p. 34). Swedish regulators and businesses, therefore, are positive to multilateral cooperation and harmonisation, creating a need for international financial reporting comparability. Furthermore, the attitude towards regulation is expressed in a shared understanding that there should be no more regulation than necessary. For example, for a long time, Sweden had only one set of accounting rules for all firms and in all situations. With the advent of IFRS, a leading global set of standards, Sweden quickly introduced IFRS into its regulatory space. In accordance with the cultural attitude towards regulation, Sweden not only introduced IFRS into the realm of the stock exchanges but also into many different kinds of regulation. IFRS are used, for example, in banking oversight and influence accounting for legal entities. The Swedish cultural roots must be appreciated where both regulators and practitioners are used to ‘make do’ with regulations in collective agreement to understand this far-reaching influence of IFRS in the Swedish regulatory space. During the IFRS adoption, Swedish standard-setters most certainly were aware that IFRS are not intended for banking oversight or legal entity accounts. However, IFRS are a set of standards that are agreed upon internationally by many actors. Consequently, the standards are generally viewed as high-quality standards in Sweden even though there are signs that the standards are not always optimal in the local Swedish context (see, e.g. Carrington et al., 2015). In accordance with the cultural roots, with a view that there should be no more regulation than necessary, IFRS form the basis for much of Swedish standard-setting, even beyond consolidated financial statements as required by the EU IFRS/IAS Regulation. Compared to other European countries, IFRS concepts and measurement requirements, therefore, have a far-reaching influence in the Swedish regulatory space. As Cases 1 and 2 show, this IFRS harmonisation of regulations leads to tensions, because the ideological foundations of IFRS can stand in conflict with the Swedish accounting traditions and the enforcement systems developed over time.

A second and related important aspect for this study is the conservative and creditor oriented Swedish accounting tradition, which potentially creates challenges for the enforcement system regarding the investor-focused IFRS. Like many other European countries, historically, Sweden has had a strong link between financial reporting and taxation. Tax effects were removed from consolidated financial statements only since the early 1990s, and Sweden introduced a formal distinction in regulatory requirements for listed and unlisted firms only by 2005 (following the adoption of the EU IFRS regulation). Consequently, Swedish accounting is traditionally characterised as creditor oriented and tax-driven (Hellman, 2011). Particularly in Case 1, this tension between a need for conservatism with a focus on financial stability expressed in the views of the banking oversight authorities, and the more risk affine shareholder value foundations under IFRS becomes problematic.

A third aspect is the role of the legal system and enforcement. Swedish citizens expect the collective to uphold individual rights. The Swedish law and the Swedish court system are fundamental to uphold and protect individual rights, an expression of uncertainty avoidance deeply rooted in Swedish culture (Holmberg & Åkerblom, 2007, p. 42). However, compared to other countries, Sweden builds on ‘soft’ regulation and legal enforcement (cf. Hellman, 2011; Brown et al., 2014). The lenient attitude towards regulation and enforcement finds expression here. Legal enforcement and punishment are executed less strongly than in countries like the US or the UK, often using tacit social norms and social punishment through collective governance to uphold societal order. The Swedish population trusts in the collective. In the accounting context, this cultural heritage creates a situation where legal enforcement of accounting fraud, for example, becomes difficult because legal enforcement is more restricted than in other countries. The restricted nature of the legal enforcement system is evident in Case 1. While the enforcement of IFRS in the financial markets is the responsibility of the financial supervisory authority (FI or Finansinspektionen) and the Stockholm Stock Exchange (SSE), the ultimate enforcement bodies are the criminal and civil law courts. In the Swedish legal system, particularly in criminal law, the protection (and prosecution) of the individuals and their actions are in the foreground. Case 1 shows the complexities of enforcing IFRS in the Swedish context, where the interpretation of IFRS requirements is strongly linked to the cultural roles and institutionalised practices of the different actors.

Finally, the fourth relevant aspect is the role of the state and particularly the tradition of cooperation between the state and the markets. Cooperative ownership structures of business ventures are seen as positive and are still important in Sweden. Therefore, the mutual life insurance companies that are relevant in Case 2 have a relatively strong position in the Swedish insurance market. The Swedish mutual life insurance model stems from a period after the Second World War when the left-wing parties ruled Sweden. These parties wanted to limit profit maximisation in banking and insurance. Consequently, the Swedish Insurance Company Act of 1948 implemented a ‘fairness principle’ that obligated these institutions to balance the payments of the policyholders with their benefits fairly (Alm et al., 2008). Earlier, this principle was interpreted such that all premiums earned by the insurance companies were to be paid out as a bonus to the policyholders. Later, this policy changed until in 1982 the Swedish parliament issued a bill that prohibited the distribution of profits to the owners of life insurance companies. Presently, Swedish mutual insurance companies are owned by policyholders, where the policyholders are collectively entitled to all profits, but no profits are distributed to them (ibid, 2008). This historical heritage is particularly relevant for Case 2, where the regulatory space comes into tension because IFRS regulations carry a different understanding of shareholder and shareholder's equity than the traditional Swedish understanding. The tensions included in Case 2 are an expression of the important role of institutionalised norms and values in the cultural context. This is because the conflict is, essentially, independent of the financial consequences for the involved parties. The conflict solely builds on a mismatch of traditions and ideology.

These four aspects build the cultural context for the Swedish regulatory space. Accordingly, this context plays an important part both in the formation of the actors within the regulatory space and in their reasoning concerning regulatory action. Building on Harrison and McKinnon’s (1986) framework, the analysis section highlights the conflicts and problems arising from the different system responses and negotiations in reaction to the introduction of IFRS in the Swedish regulatory space. Before that, the next section gives an overview of the relevant regulators and regulations involved in the negotiations and tensions in the presented cases.

Regulators and Regulations

A regulatory space is defined through the authorities, regulations, and events inhabiting the space. In this section, we present the authoritative actors and their regulatory pronouncements and guidance. After that, we present examples of two intrusive events and connected response events. Table 1 summarises the regulations, regulators, and enforcers that pertain to the financial sector in Sweden.

Table 1. Swedish regulatory space for the financial sector.

	Consolidated financial statements, listed firms	Consolidated financial statements, unlisted firms; Legal entities, both listed and unlisted
Laws regulating accounting	EU IAS/IFRS Regulation (1606/2002/EC)	Swedish financial reporting act, ÅRL
Accounting standards followed	IFRS, issued by the IASB and endorsed by the EU	Ordinances (FFFS) issued by FI that closely follow IFRS, with some exceptions based on ÅRL and Swedish tax regulation^a
Enforcement of accounting regulation	Stock exchanges, under authority delegated from FI^b	FI (which also carries out financial supervision in banking and insurance)

^aThere are no exceptions pertaining to financial instruments and insurance contracts.

^bAs of 2019, enforcement is carried out by the Securities Council.

The Swedish regulatory space has laws (legislation), ordinances, standards, and recommendations (for a full overview, see Marton, 2017). The central authority that issues regulatory texts is the Swedish parliament (Riksdagen) for the legislation and the financial supervisory authority FI for specific accounting regulations for the financial sector. FI also plays a central role in enforcement, which becomes particularly relevant for Case 1 in this paper. We present a detailed description of accounting enforcement in Sweden below. Before that, we briefly introduce the various accounting requirements that are relevant for different types of firms (i.e. listed, non-listed, and financial sector firms).

Starting with legislation, Table 1 presents the financial reporting act (ÅRL or Årsredovisningslagen). ÅRL regulates the recognition, measurement, disclosure, and format of financial statements. ÅRL was originally based on the 4th and 7th Directives (78/660/EEC, 83/349/EEC), but was recently updated to agree with Directive 2013/34/EU, for financial statements. There are specific versions of ÅRL for banks and insurance companies, such as Directive 86/635/EEC Accounts of banks and other financial institutions, and Directive 91/674/EEC Accounts of insurance undertakings. As there is a link between financial reporting and taxation, income tax regulation indirectly affects financial statements (e.g. some forms of accounting measurement are prohibited).

In addition to the laws discussed, there are further legal requirements, differing for the type of firm and the type of financial statements. With the introduction of Regulation (EC) 1606/2002 (the IFRS/IAS Regulation) in 2005, some firms are mandatorily or voluntarily exempt from most requirements in ÅRL. Entities with securities traded on regulated markets (listed firms) must follow the IFRS Regulation instead of ÅRL in consolidated financial statements. In individual financial statements, Swedish firms must follow ÅRL (or the specific versions of ÅRL for banks or insurance companies) and are not allowed to follow the IFRS Regulation. There is a link between financial reporting and taxation in legal entities. The Swedish legislator does not want IFRS (as endorsed by the EU) to affect Swedish income taxes and therefore, does not allow full IFRS for individual financial statements (Marton, 2017). However, for the financial sector, IFRS are relevant for all financial statements, i.e. for listed and unlisted, consolidated, and individual financial statements (see elaborations below). This omnipresence of IFRS requirements in the local regulatory space, especially in the financial sector, is of particular importance for the understanding of our two cases.

Banks and insurance companies are subject to additional regulation by FI. The ordinance FFFS 2008:25 sets requirements for financial reporting in banks and FFFS 2015:12 applies to insurance companies. Both ordinances have the general requirement that banks, and insurance companies should follow IFRS (as endorsed by EU) as closely as possible (within constraints of ÅRL and tax regulation), which means IFRS are followed to a high degree. Specifically, for both financial instruments and insurance contracts, full compliance with IFRS is required in both consolidated and individual financial statements. The specific versions of ÅRL for banks and insurance companies do not limit the use of IFRS for financial instruments and insurance contracts, and for those areas, financial reporting and taxation is not linked. For instance, financial instruments are measured in accordance with IFRS 9 Financial Instruments (IAS 39 before 2018). In Case 1, for the 2009 financial year, IAS 39 was applicable for financial instruments and financial statements at all levels. In consolidated financial statements, IAS 39 was required through the IFRS Regulation (the Swedish HQ bank was listed at the time). In individual financial statements for the parent company and its subsidiaries, IAS 39 was required through FFFS 2008:25. In Case 2, the insurance case, if FI were to follow its general reliance on IFRS, IFRS 17 would become mandatory for all insurance companies following EU endorsement.

Enforcement of financial reporting differs by the type of firm and the basis of financial reporting regulation. Primarily, Swedish courts handle three types of cases. Firstly, taxation cases are the most common type. These are cases involving disagreements between a firm and the tax authorities. They have relevance for financial reporting because of the link with taxation. Secondly, there are cases of fraud in a broad sense (cf. discussion of fraud in Hartmann et al., 2018) and other crimes related to financial reporting. These cases involve the prosecution of individuals by a state prosecutor. In Sweden, the economic crime authority (EBM or Ekobrottsmyndigheten) is specialised in investigating and prosecuting crimes that include those related to financial reporting (and other ‘economic’ crimes). Thirdly, there are civil cases between firms and their stakeholders. Aggrieved parties are often investors in the firm or other transacting firms, for example, in mergers and acquisitions. Through these types of cases, courts delimit acceptable accounting practices in Sweden. Note, however, the difference in parties that are intended to be protected in the different types of cases. Taxation cases protect the state's ability to collect taxes. Criminal cases protect the public against crimes, but also take careful consideration of the rule of law that protects the individual, including the defendants. In a criminal court, individuals are tried. Therefore, there is little room for judgement of principles in a criminal law context and the legal text is interpreted literally. Civil cases protect the stakeholder that files the suit and any conviction is closely linked to the compensation of the damage occurred (both financial and other damage). Causality between the damage occurred, and the defendant's activity (both individuals and legal entities can be tried in civil court) is an important aspect of a court ruling in civil law. The Swedish court system has three levels, and each level brings increasing strength of precedence. Judgements in district courts can be appealed to a court of appeals. Ultimately, cases can be referred to the Supreme Court, but only if that court grants a permit.

In addition to courts, listed and financial firms are subject to additional enforcement of financial reporting. The IFRS Regulation resulted in Sweden initiating authoritative enforcement of listed firms in 2007 (cf. Brown et al., 2014; Christensen et al., 2013). FI was given the task of carrying out this enforcement. While FI has ultimate responsibility, it delegated the actual enforcement activities to the SSE for the period 2007–2018 (relevant in Case 1), and to the Securities Council from 2019 onwards.

In the financial sector, consolidated financial statements in listed firms are enforced by the SSE. In contrast, all other financial statements (consolidated in unlisted firms and legal entities) in banks and insurance companies are directly supervised by FI. Supervision of financial firms is a broad activity, but part of it is the enforcement of financial reporting. While the enforcement of financial reporting in listed firms (by SSE) is focused on investor protection and only applies to consolidated financial statements, the supervision of financial firms has the broader objectives of consumer protection and ensuring financial system stability and apply to both consolidated and individual financial statements.

Auditing is another form of monitoring of financial reporting in business entities. In Sweden, except the smallest, the financial statements of all other firms must be audited. Auditing in Sweden is regulated by the inspectorate of auditors (RI or Revisorsinspektionen, former Revisorsnämnden or RN), a government authority. RI authorises and supervises the work done by qualified auditors. In the latter role, RI also enforces audit regulation and the quality of audits.

In the two cases presented below, based in the banking and insurance industries, FI has a strong influence on financial reporting, in its dual role as accounting standard-setter and enforcer. It is the introduction (Case 1) and update of IFRS (Case 2) that are exogenous intrusive events, and they become intrusive because of FI's reliance on IFRS.

Illustrations of Local Complexity

While the prior section describes the regulators and regulations that inhabit the Swedish regulatory space, in this section we illustrate the consequences of the strong IFRS influence within this space. In both cases, we focus on specific response events that illustrate a problematic consequence for accounting change. Discussing all system responses to the mandatory IFRS adoption would not be feasible here. Instead, we provide insights into how the use of IFRS over and above consolidated financial statements of listed companies, as intended by the IASB, can create regulatory challenges. Before presenting the two cases, the next section presents an overview of the collected material and the research methods used for the illustrative cases.

Research Method

The descriptions and discussions of the cases are mainly based on the analysis of documents.

For Case 1, the HQ bank case, we collected data from publicly available documents. The documents used include the judgements from the Stockholm district court (SDC) (SDC, 2016, 2017), the FI report that motivated the withdrawal of the banking license and related other licenses (FI, 2010), the SSE's decision on disciplinary action against HQ bank (SSE, 2011), RI's review of the audit (RN, 2011), and HQ bank's annual reports for 2007–2009. The substantial resources afforded to the HQ bank case enabled us to gain extensive data from these documents, including an understanding of the underlying assumptions that the different authorities draw on when deciding on IFRS compliance. Especially the judgements from the SDC for both the criminal and the civil trial contain details on the arguments put forward by both the prosecution and the defence, and the plaintiffs and defendants. Both sides in the cases had substantial resources available to develop their arguments. The judgements also show the arguments of the court itself in its development of the judgement. We did not study the internal discussions within HQ bank in the preparation of financial statements, nor the communication between HQ bank and the auditor. However, the substantial documentation of the court cases enables us to exemplify how professional authorities like FI and the prosecution had difficulties understanding the accounting regulations and the relation between different regulations. In addition, one of the authors took part in the legal proceedings as an accounting expert witness, which gives an additional dimension to our abilities to interpret documents with complicated technical detail. Meanwhile, through reliance on written documentation, we were careful not to let preconceived opinions about the case affect the analysis.

For Case 2, the mutual insurance companies, we collected several types of publicly available documents that were issued in the formation of the standard. Swedish legislation, governmental investigations, governmental propositions, and regulations from FI provided data on the local regulatory space, including conceptualisations of mutual insurance companies in the Swedish context. Documents from the IASB show the ideas and concepts that form the basis for IFRS 17. Additionally, we had several conversations (non-audiotaped) with representatives of the association for the insurance industry and with representatives of several insurance companies who were knowledgeable in the area of mutual insurance companies and the Swedish life insurance industry. We also were allowed to participate in some of the central meetings about IFRS 17. We were present at a meeting between the IASB and the insurance association as well as at six meetings between Swedish insurance companies, the insurance association, and FI, where IFRS 17 and its consequences were discussed. These conversations and meetings enabled us to understand the complex matter in-depth and to interpret the different motives and events that form the basis of the negotiations between the different actors.

We analysed the documents to prepare the case illustrations, through systematic triangulation and comparison of how they present the motives, interpretations, and tensions between actors, regulations, and accounting practice in the particular setting. The analysis was not based on the use of coding software. Instead, the analysis builds on repeated reading and comparison of the documents and our observational notes to develop the different interpretations of the accounting standards (Case 1), and the negotiations and different arguments used in assessing the role and consequences of a standard in the making (Case 2). This analysis then built the basis for the illustrations that are included in the next section, describing the essence of the cases, and giving the reader an impression of the complexities involved.

Case 1: The Case of the HQ Bank

This case describes the events in relation to the Swedish HQ bank (Hagström & Qviberg) that was closed through disciplinary action in 2010. Founded in 1990 as a stock brokerage firm, the firm gradually expanded. It was listed on the SSE in 1999, and HQ bank (HQ) (with commercial banking activities) was created in 2006.

In 2010, FI accused HQ of serious deficiencies in the measurement of their trading portfolio (mainly index-options) and for taking irresponsible risks. Consequently, FI revoked the bank's license for banking business and related other licenses. FI argued that the bank had reported an erroneous financial position in their 2009 financial statements by significantly overvaluing its trading portfolio (FI, 2010, p. 3). The decision attracted substantial attention in Sweden because it was the first example of a breach against the EU IFRS Regulation that was serious enough to be brought to the courts. The case was taken up both in criminal and civil courts and in each instance of trial, the court came to a different conclusion about whether the valuation practice was compliant with IAS 39 or not. FI also requested RI (the inspectorate of auditors) to review the audit process in a disciplinary investigation of the audit partner regarding the clean audit opinion of 2009. RI found that the audit had been correctly performed, confirming the auditor's opinion that HQ's measurement method was compliant with IAS 39, and issued only a minor reprimand for a weakness in the documentation. Figure 1 summarises the different events in relation to HQ's measurement practice.

Figure 1. Overview of events in the HQ case.

In the criminal trial at the SDC in 2016, the bank's board members, the CEO, and the bank's auditor were acquitted of all charges (SDC, 2016). Consequently, even though FI, in its role as banking supervisor, found the bank to be non-compliant with IAS 39, SDC did not find a criminal error by the defendants in its interpretation of the standard. In the civil trial in 2017, the measurement practice was found to be non-compliant with IAS 39 (SDC, 2017).³ However, the court did not find the defendants responsible for damages because the financial damage to the bank's shareholders was linked to the closing of the bank rather than to false reporting by the management. According to the court, losses were caused by poor business decisions, not by the reflection of the business in the financial statements. The civil case did not go to the courts of appeal because the different parties came to a settlement outside the courts. As we discuss below, the different interpretations about HQ's compliance with IFRS relate to the different settings in which these interpretations take place.

In the measurement of index options, the version of IAS 39 that applied in 2009 left substantial judgement to the preparer and auditor of the financial statements. Therefore, we describe IAS 39 as principles-based in this particular case. The specific incidences of judgement, and the positions taken by different actors, are summarised in Table 2 (for a more detailed discussion of measurement issues, see Hartmann et al., 2018).

Table 2. Actors’ responses to issues that require judgment in the measurement of index options in IAS 39.

	Use of market quotes	Use of valuation model (e.g. Black-Scholes)
Actors	Is there enough market activity to allow use of market quotes for identical instruments? [A]	Is there enough market activity in similar instruments to use implied volatility? [B]	Can historical volatility be used, with possible adjustment for estimated market expectations? [C]
HQ	No	No	Yes
FI	Yes	Not relevant question, since market quotes for identical instruments should be used	Not relevant question, since market quotes for identical instruments should be used
SDC, criminal case	No	No	Yes
SDC, civil case	No	Yes	Not relevant question, since implied volatility in similar instruments should be used

Note that the responses by the actors reflect the most material instruments. For example, HQ used markets quotes for identical instruments for some instruments. Also, in the civil case, SDC applied implied volatility to a material selection of instruments. A general principle in IAS 39 is that observable market data is preferable to preparer estimates. Therefore, if useful market quotes for identical instruments (column [A]) are available, a valuation model cannot be applied. Further, if implied volatility is available (column [B]), estimates (column [C]) cannot be used. In all situations, market data is subject to an activity threshold. In other words, the judgement of the different actors differed in relation to the perceived market activity in relation to the most material instruments – or similar instruments – in HQ's portfolio.

The case is multi-faceted, but from an accounting perspective, it is particularly interesting for two reasons. Firstly, the case illustrates the complexities arising from a far-reaching influence of IFRS, even in areas like banking oversight. The different subsystems in the Swedish regulatory space – stock markets, banking oversight, and legal systems – became linked in the enforcement of IFRS. Due to their societal roles and traditions, the interpretation of principles-based standards like IAS 39 varied strongly across the actors, creating an enforcement tension that had no ultimate solution for establishing accounting fraud. Secondly, the case suggests a mistake by the enforcement body FI to draw on IFRS to legitimise its decision to close the bank even though the risk management of the bank was the main underlying reason. In the criminal case, the court did not support FI's interpretation of IAS 39 (SDC, 2016). We argue that the mistake by the FI was framed by its role as financial sector supervisor with a focus on conservative accounting and financial stability. In our view, FI underestimated the complexity of IAS 39 with its room for managerial judgement regarding fair value measurement of index-options. FI and its regulatory activities, therefore, hold a central role in this case. On the one hand, FI's decision to require accounting that is close to IFRS for all banks, including in individual financial statements and consolidated financial statements of non-listed banks, was a response to the mandatory adoption of IFRS that was framed by the cultural view on the role of regulation. As explained in the section on Swedish culture, Swedish regulators favour harmonised solutions where there should be no more regulation than necessary. Using IFRS in different regulatory contexts, therefore, seems a natural consequence. On the other hand, FI's regulatory action in relation to the HQ case can be understood as a response event that follows the adoption of IFRS in banking regulation because FI interpreted the regulations of the standards very conservatively, according to their social role and traditions.⁴

The trigger that brought FI to withdraw the bank's licences was primarily linked to the risk management of the bank and was, therefore, linked to the banking system and Basel II regulations. Before the closing of the bank, FI and HQ had an intense dialogue for several months about the bank's excessive risk-taking and their risk management. Although HQ was too small a bank to have a significant impact on the financial stability of the state or the financial system, FI's opinion was that the excessive risk-taking by the bank set a bad example for other banks and disciplinary action was therefore necessary. However, in their statement on the withdrawal of the licences FI decided not only to substantiate their decision with reference to the risk management but also chose to argue that the bank had severely overstated its trading portfolio. Considering the measurement error calculated by FI (based on quoted market prices), the authority argued that the bank had not fulfilled the capital requirements set up in Basel II. It turned out later that FI might not have fully grasped the requirements of IAS 39 because both the criminal and the civil court agreed with HQ's judgement that markets were not sufficiently active to use quoted market prices.

FI claimed that HQ had overstated their index-option portfolio by 632 MSEK. The authority argued that there were observable market quotes that should have been used for the measurement, while HQ had used a Black–Scholes valuation model. Consequently, FI calculated the error as the difference between the reported fair values and the market quotation of the options. FI calculated this way because IAS 39 states that quoted market prices must be used for the valuation if active markets exist. However, HQ argued that although markets for their trading portfolio existed, they were not active from an IAS 39 perspective, at least not for long maturities that made up a large portion of HQ's portfolio. In HQ's opinion, quoted market prices would have misstated their value. HQ's argument about the activity of the market was confirmed in both the criminal and civil courts and was also shared by the accounting experts involved, including RI. The court negotiations instead revolved around the use of the valuation model itself, particularly about the expected volatility of the underlying index.

In the criminal trial, the court had to make a literal interpretation of IAS 39, with very restricted room for interpretation, because of the strong legal protection afforded to individuals by the rule of law. Essentially, the criminal court found the defendants not guilty because IAS 39 explicitly allows the use of a valuation method like the Black–Scholes model for measurement in case of inactive markets. It is interesting to note that the prosecution's arguments in the criminal trial clearly show how difficult it is to understand IFRS, and the complex fair value measurements in the subsystems involved that now must handle IFRS. The prosecution in the criminal trial first tried to argue in accordance with the FI ruling, i.e. by claiming that the markets were active. This argument was not successful. Additionally, the prosecution had pleaded for accounting fraud in the sense of faulty bookkeeping, which in Sweden is linked to the bookkeeping act (BFL). However, BFL excluded measurement issues and was not applicable in this case. The plea was therefore rejected for technical reasons. Ultimately, the arguments used in the trial revolved around the calculation of estimated volatility and whether all valuation inputs were observable market data (allowing HQ to recognise day-1 gains and losses).⁵ In the civil case, on the other hand, there was more room for judgement of the law that also in other contexts, builds on principles and their interpretation. Thus, the court decided that the valuation model had not been applied correctly, and an error of 492 MSEK was calculated. The decision was based on a careful analysis of the trading activity in individual index options (SDC, 2017). Consequently, the calculated error differed substantially from FI's estimate, which was based on market quotes without consideration of market activity. However, the court also decided not to award the plaintiffs any damages, as there was insufficient causality between the accounting error and investors’ losses. Instead, losses were caused by losses in the index options, regardless of how they were measured in the balance sheet. There was no appeal to the ruling as the parties agreed to a settlement outside of the courts.

These discussions suggest that, although it might be unclear whether the measurement practice was compliant or not in the HQ case, it is reasonable to assume that FI's explanation provided in the motivation for withdrawal of HQ's licenses was based on a misinterpretation of the IAS 39 requirements. At this point, it is important to remember that FI acted in its role as financial supervisory authority, an expert in banking regulations like Basel II. The enforcement of IFRS in Sweden related to the stock exchanges was delegated to these exchanges, the experts in IFRS. However, these subsystems influence each other in Swedish regulatory space. Therefore, the SSE did not challenge the decision of FI and just followed the conclusion that HQ had misrepresented their financial position, issuing a fine for the bank.

In essence, the case suggests that, while FI might have had ample reasons for closing the bank, its reference to IFRS was misplaced. This mistake happened, we argue, because FI wanted to legitimise its disciplinary action through IFRS, which was perceived as a strong ground for argumentation. However, it turned out that the principles-based nature of IFRS was a challenge for these different subsystems, both regarding the understanding of the requirements and the complex valuation issues as well as in relation to the different interpretations of the standard text that are framed by the different roles of these institutions in the overall regulatory space.

In summary, we aim to illustrate that this case shows the symptoms of an overuse of IFRS in the Swedish regulatory space that has its roots in the high legitimacy of IFRS in Sweden. The intrusive event that lies at the bottom of this case is the mandatory adoption of IFRS for the consolidated financial statements of listed companies in Sweden. IFRS come with a clear investor focus and are meant for financial reporting in securities markets. As described above, in Sweden, IFRS are viewed as leading to a high quality of financial information in general. As regulatory response FI, in its role of banking oversight, therefore issued regulations that require all banks, listed and non-listed, to follow IFRS in both the consolidated and individual financial statements.⁶ Through this regulation, IFRS therefore, also are relevant in banking oversight, which is a distinctly different system with different aims compared to stock markets. While securities exchange oversight in Sweden closely follows the IASB's market logic of investor protection and fair market valuation, banking oversight aims to protect the financial stability of the state and financial system, and to promote consumer protection. Banking oversight also builds on additional regulation like the international banking standards in Basel II that refer to a banks’ capital and risk management. Markets and the banking sector, therefore, traditionally are neighbouring systems that can have close links, e.g. in the case of listed banks, or be more loosely coupled. However, in Sweden, IFRS requirements traverse these systems because FI decided to make them mandatory for all banks. Concerning Case 1, this regulatory situation was unable to change the accounting practice of the bank in favour of less risk-taking in their valuations. Additionally, the system was able to punish the bank's misbehaviour, but at the cost of closing the bank rather than changing its practice while still in operations, which most likely would have been better for the bank's clients.

Case 2: The Case of Swedish Mutual Insurance Companies

This case describes the response of the association for Swedish insurance companies (SF or Svensk försäkring) and the individual mutual life insurance companies to the development and issuance of IFRS 17 Insurance Contracts. IFRS 17 was issued in May 2017, but even before that much of the content of the standard was known through exposure drafts and the public nature of IASBs standard-setting process. As noted above, the policy of FI is to implement IFRS to the extent possible under the restrictions in ÅRL and tax regulation. For insurance contracts, if FI were to continue this general policy, IFRS 17 would be implemented in full after EU endorsement, not only in consolidated financial statements for listed firms (based on the IFRS/IAS Regulation) but also in individual financial statements, and consolidated statements in unlisted firms (based on FI regulation).

The context of this case differs from Case 1, as there is still no standard-setting conclusion for the Swedish context. IASB issued IFRS 17 with an intended implementation date of 1 January 2021. However, the standard received some criticism, leading the IASB to issue an amended standard in June 2020, with an implementation date of 1 January 2023. The EU suspended the endorsement process for IFRS 17 and is currently considering the amended standard.

Central to the understanding of this case is that IFRS 17 significantly differs from traditional Swedish insurance accounting in its view on equity. In mutual life insurance companies customers are both policyholders and owners. Consequently, there are no shareholders that act as residual claimants outside the group of policyholders. The view in IFRS 17 is that all funds that are ultimately payable to policyholders are insurance liabilities, regardless if they are currently claimable by policyholders. Implementation of IFRS 17 in Swedish mutual life insurance companies would, therefore, result in balance sheets with virtually no equity.

Based on the cultural heritage, expressed in The Swedish Insurance Company Act from 1948 (see elaborations in ‘Swedish culture and accounting traditions’), Swedish insurance accounting tradition makes a distinction between funds that are guaranteed to policyholders and non-guaranteed funds. In current practice, the insurance liabilities for guaranteed benefits are covered by technical provisions to prepare for the cost to fulfil the insurance obligations. Although the non-guaranteed portion represents a residual that could be claimed by the policyholders, these funds are shown as ‘consolidation fund’ in equity, because their primary use is to cover the company's potential deficits on an aggregate level (Alm et al., 2008). This understanding is also mirrored in the Swedish solvency regulations where the consolidation fund is eligible as equity capital. Culturally, this understanding of profits and profit distribution is anchored in the fairness principle included in the insurance company act. As elaborated in the culture section above, the fairness principle states that the policyholders’ payments should be fair with respect to their benefits. This fairness principle, developed over time, led to a distinction between guaranteed funds and non-guaranteed funds. While the guaranteed funds are understood to be a fair profit distribution, the non-guaranteed funds are retained in the insurance company to secure financial stability. Consequently, to show these funds as liabilities in the financial statements is considered unfair. When it became clear that Swedish mutual life insurance companies risked losing their reported equity, both SF and individual insurance companies started lobbying efforts with the aim of being able to continue to show reported equity. SF started discussions with both the IASB and FI.

There are at least four possible solutions to the issue. Firstly, Swedish mutual entities could be converted to stock companies, where shareholders would be considered residual claimants, allowing companies to report equity in their balance sheets. Secondly, IFRS 17 could be amended to allow equity in mutual insurance companies. Thirdly, FI could decide to exempt mutual entities from the application of IFRS 17. Fourthly, IFRS 17 could be implemented as is, and mutual entities could accept to report balance sheets with no equity. The aim of SF's lobbying effort was either to make the IASB change IFRS 17 or to convince FI not to require IFRS for mutual entities, i.e. SF worked for solution two or three. The first and fourth solutions were not acceptable to SF. The reason why none of the four solutions was immediately acceptable to all parties involved is that there were four different and partly conflicting perspectives at play in the case.

The first solution, to abandon the mutual insurance structure, is problematic in the Swedish context because such alternative cooperative structures are considered favourable by both the state and the consumers. Although globalisation has put some pressure on the sector, mutual entities have managed to succeed and expand in the last few decades. The Swedish pension system, for example, partly builds on pensions paid and collectively organised through agreements between unions and employer organisations, and mutual insurance companies often manage the pension plans specified in these agreements.

The second alternative, to include an exception in the IFRS for mutual insurance companies, is not acceptable to the IASB because of its efforts to create consistency throughout the standards. The foremost aim of the IASB is to assure conceptual consistency in the standards issued. Therefore, the IASB was unwilling to make an exception to the idea that any fund to which policyholders have a contractual right is an insurance liability, even if the contractual right is residual. The IASB explains and reaffirms its view in the amended BC (Basis for Conclusion) to IFRS 17, which was issued after the lobbying efforts by SF.

‘The Board reaffirmed its decision that IFRS 17 should not include any specific requirements or exceptions to requirements in IFRS 17 for entities that issue insurance contracts under which the most residual interest of the entity is due to a policyholder because:

1. a core principle of IFRS 17 applicable to all entities is the requirement to include in the fulfilment cash flows all the expected future cash flows that arise within the boundary of insurance contracts, including discretionary cash flows and those due to future policyholders;

2. if entities were required to account for the same insurance contract differently depending on the type of entity issuing the contract, comparability among entities would be reduced; and

3. a robust definition of entities to which different requirements would apply would be difficult to create.’ (IFRS 17, BC269B)

The third solution, an exception for mutual entities in IFRS 17 at the national level, relates to the coherence in local regulation. The legitimacy of IFRS in Sweden led FI to require a high degree of conformance with IFRS for all firms in the financial sector (i.e. banks and insurance companies) in both consolidated and individual financial statements. Given the strong influence of IFRS in Sweden, and a general goal to harmonise with the rest of the world, this choice is not surprising. Even though it would be possible to make an exception for reporting of insurance contracts in mutual entities, it would potentially be costly for FI. Allowing an exception for one type of firm in one area could open up for many additional requests for exemptions from IFRS. It is doubtful if FI has the resources to issue specialised Swedish accounting standards for banks and insurance companies.

Finally, the fourth solution, that mutual entities could accept to report balance sheets with no equity, stands in conflict with the accounting tradition of the Swedish mutual insurance entities. These entities want to report positive equity in their balance sheet. It is important to understand that this view does not stem from any immediate financial risks for the organisations, as the consolidation fund is still eligible as available equity under solvency regulations. The introduction of IFRS 17 would not affect solvency regulation. Thus, there would be no immediate cash flow or other financial effects of not reporting any equity. Still, mutual entities claimed that it would be difficult for them to continue operating as life insurance companies if they could not report equity. This opinion, therefore, stems more from a cultural habitat rather than economic rationality, which leads to the view that reporting non-guaranteed funds as liability conflicts with the fairness principle of the Swedish insurance model.

The discussion about how to handle the introduction of IFRS 17 in Sweden is still ongoing. As the EU halted its endorsement process, the implementation of IFRS 17 in the Swedish insurance industry is also delayed. However, if the EU endorses the amended version of IFRS 17, the most likely scenario is that FI will make an exception for mutual entities so that they can report positive equity. This case is particularly interesting because it shows a strong reaction of the organisations, although there is no immediate economic risk involved. Rather, the new standard is in conflict with the existing accounting tradition in the sector.

In more theoretical terms, the issuance of IFRS 17 can be understood as an intrusive event that became problematic in the Swedish regulatory space because of the original chain of events after the mandatory adoption of IFRS. Like in Case 1, FI's initial response was to reaffirm its commitment to continue making IFRS mandatory for all insurance companies, including individual financial statements and consolidated financial statements for non-listed firms.

The issuance of IFRS 17 then triggered a chain of response events because mutual entities believed the new way of reporting did not reflect their business reality. The case illustrates how strong the influence of cultural understandings and accounting tradition can be, even in the absence of financial consequences of new reporting requirements. Conversations and meetings with industry representatives confirmed that there was a strong opinion that the IFRS 17 representation was ‘just wrong’ or ‘does not make sense’ because ‘it is equity’.⁷ An important response event was the meeting between the insurance association and the IASB. The association representative, upon reflection after the meeting, believed that it was imperative to speak ‘their language’ to lobby the case. However, it also became clear that there would be little chance to influence the regulation at this level because, from an IASB perspective, although IFRS 17 does not explicitly exclude mutual insurance companies it is not designed for them either, particularly not for individual financial statements.

In Sweden, the discussions with FI are still ongoing. At this level, the companies and their association lobbied much stronger, intending to convince FI to amend its regulations to exempt mutual insurance companies from the application of IFRS 17. As noted above, this is likely to be successful if the EU endorsement of IFRS 17 continues.

To summarise, this case illustrates that IFRS were brought into a subsystem of Swedish regulatory space that has different prerequisites than securities markets focused on investors. The far-reaching influence of IFRS creates problems with traditional structures and understandings that can lead to strong responses from the local context. Furthermore, it shows that global harmonisation of accounting practices cannot consider local particularities such as mutual insurance companies. The organisational form of mutual entities is not as important in most other countries. In Sweden, however, these companies traditionally have a strong position in the life-insurance industry as Swedish society has a favourable view of their governance structure. Meanwhile, the overall reflection of the insurance association was that the future of the mutual insurance company structure in Sweden is uncertain if this regulation is implemented in its current form. The full consequences of IFRS 17 are still unknown. Nevertheless, this case clearly shows the important role of national culture and local accounting traditions. Only by taking the local context into account, can we fully appreciate how the integration of IFRS into national regulatory space can become problematic, creating system reactions that challenge authorities and regulations.

Concluding Comments

Our illustrations suggest that national culture plays an important role not only in the behaviour of individual actors, as suggested by prior literature with a focus on cultural dimensions (e.g. Tsakumis, 2007), but also in the wider regulatory space. While there is some evidence that institutions are framed by their cultural context (Cieslewicz, 2014), this paper contributes with a specific explanation of a particular cultural context and its practices of IFRS implementation and enforcement.

Overall, the paper suggests that, in times where IFRS become more influential in the local regulatory space, the accountability, comparability and relationship between financial reporting and organisational behaviour need to be understood in the context of that local regulatory space. Specifically, the study illustrates how IFRS with their investor focus and requirement for managerial judgement can pose problems in two ways. Firstly, IFRS carry a strong legitimacy claim and the promise of international connectivity to investors, motivating smaller countries with limited standard-setting resources to consider IFRS as a guide for other regulations. This creates tension with the established institutions that have developed over time in the local accounting tradition. In the Swedish context, the enforcement of IFRS compliance became problematic in relation to the HQ case because the accounting standards were introduced in a context different from stock markets, namely financial supervision, and legal enforcement. While this particular enforcement structure is specific for Sweden, the overall conclusions are likely to be relevant in other EU member states. Particularly in countries where the previous national GAAP (generally accepted accounting principles) differed substantially from IFRS, can similar enforcement struggles and cultural tensions be expected. If IFRS shape local regulations, which potentially bring existing institutions into tension, dilemmas and unforeseen consequences may follow. The Swedish case can exemplify such consequences for other countries when deciding to allow a strong influence of IFRS in the national context and to adopt IFRS regulations in different national regulatory subsystems over and above stock exchange regulations. Both Case 1 and Case 2 exemplify how IFRS can stand in tension with local institutions and institutionalised practices.

Secondly, Case 2 illustrates how local organisations can respond quite strongly to new IFRS regulations and their potential implementation in Sweden even if the contradiction with local practice bears no (direct) economic consequence. As accountants, we tend to focus on cases were new standards create economic variation, in markets or for organisations. However, other aspects also must be considered. In the case of the mutual life insurance companies, the new regulation contradicted with the way these organisations perceived their business and their understanding of faithful representation. These organisations, therefore, did not disagree with the fundamental idea of faithful representation included in the IASB conceptual framework. However, their understanding of the concept differed because of their Swedish accounting traditions. Although the issue of mutual entities might not be relevant in many countries, this case indicates that objections can arise and organisations can start to engage with the standard-setting process for different reasons, not only economic. Regulators, therefore, do well in considering such concerns when deciding about the depth in which IFRS should be implemented in local regulatory space. Exemptions from rules always have the downside of creating a precedent for future cases that, in large amounts, create a risk of incoherence of the regulatory system. Understanding the local context, therefore, can help to anticipate and forestall such events.

As Cieslewicz (2014) explains, to create accounting change in the sense of improved financial accounting practice requires us to recognise the role of a nation's supporting institutions. The accounting change framework by Harrison and McKinnon (1986) is one way of approaching such complexity. Our illustrations, using this framework, contribute to further understanding of how the implementation and change of IFRS can be viewed as intrusive events from the national perspective and how responses to these events create both regulatory and accounting action. Our cases also show that regulatory action will not always lead to a change in accounting practice. Gaining a more detailed knowledge about the local European settings therefore benefits both standard-setters, market participants, and managers. We acknowledge that it might not be feasible for the IASB to consider local consequences in full in their standard-setting process. However, an increased understanding of the settings is likely to enrich the discussions and may enable the standard-setter to foresee unwanted consequences in the implementation of the standards. Most certainly, a better understanding of the interrelations between the different national regulatory systems will help institutions like FI to better assess the wider consequences of their regulations. Furthermore, an explanation of the different requirements, assumptions, and consequences helps market participants and managers to understand the complexities and to incorporate them into their dialogue.

Acknowledgements

The authors would like to thank the participants of the 14th Workshop on European Financial Reporting for their constructive feedback on an earlier version of this paper and the anonymous reviewers for their helpful comments.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Note that Hofstede Insights (2019) finds a low extent of uncertainty avoidance while GLOBE (2004) finds a high score for uncertainty avoidance. This seems contradictory at first but can be explained by the different definitions of uncertainty avoidance. Hofstede Insights’ (2019) definition is focused on the extent to which a culture feels threatened by ambiguous or unknown situations, while GLOBE (2004) defines uncertainty avoidance as ‘the extent to which a society, organization, or group relies (and should rely) on social norms, rules, and procedures to alleviate unpredictability of future events’. Hofstede Insights (2019) explains the low score with a Swedish lenience towards regulation and enforcement. Consequently, we interpret these findings in the light of the Swedish trust in the collective that is dominant in both culture studies. Swedish society strongly relies on social norms and rules, rather than legal enforcement, to alleviate unpredictability of future events. This explains the low score of uncertainty avoidance in the Hofstede Insights (2019).

2 The high level of taxes in Sweden reflects the extensive responsibility taken on by the state and local governments for collective services like, e.g., pension, education, and elderly care (Holmberg & Åkerblom, 2007, p. 42).

3 The difference in court judgements regarding compliance was based on different interpretations of the standard concerning the calculation of volatility of future cash flows (see Table 2 for an overview of the different judgements).

4 This study considers the mandatory IFRS adoption in Sweden as the original intrusive event in this case, as IFRS represent a conceptualisation of accounting that disagrees with pre-existing Swedish accounting tradition. Even if the mandatory adoption was five years before the disciplinary action, the HQ case was the first case in Sweden of such severe regulatory action, setting a precedent case for the enforcement of IFRS in Sweden.

5 We do not further discuss the role of EBM here, the specialty investigator and prosecutor of economic crimes in Sweden, as they share the views of the prosecution in the trial.

6 FFFS 2008:25 and FFFS 2015:12 follow IFRS to the maximum extent possible within Swedish legislation. With respect to financial instrument valuation and disclosure, banks must follow IFRS in full.

7 Of course, it is possible that the mutual insurance companies see indirect financial consequences of not reporting equity, such as hesitation by customers to buy new policies. However, in the interviews, the company representatives expressed their concerns by saying that reporting no equity would simply be ‘wrong and unfair’.

Appendix. List of abbreviations

ÅRL: Financial Reporting Act (Årsredovisningslagen)

BFL: Bookkeeping Act (Bokföringslagen)

EBM: Economic Crime Authority (Ekobrottsmyndigheten)

FFFS: Ordinances from FI (FI:s författningssamling)

FI: Financial Supervisory Authority (Finansinspektionen)

HQ: HQ Bank (Hagström & Qviberg)

RI: Inspectorate of Auditors (Revisorsinspektionen, former Revisorsnämnden, RN)

SDC: Stockholm District Court

SF: Association for Swedish Insurance Companies (Svensk försäkring)

SSE: Swedish Stock Exchange