On the IASB’s construction of legitimacy – the case of the agenda consultation project

Abstract

As an expertise-based private standard-setter, the International Accounting Standards Board (IASB) needs to work continuously to maintain its position as the uncontested rule-making authority of financial reporting in the international regulatory arena. The present paper analyses how the IASB constructs legitimacy in interaction with its constituents. We focus on the specific case of the IASB’s agenda consultation in 2011/2012 as this project was explicitly introduced by the IASB to promote its legitimacy. We carry out a comprehensive study of the agenda consultation that takes into account all board meetings, comment letters and public board activities. We show that the consultation activities in this project were used by the IASB to pronounce its user (investor) orientation, which, however, might be formal rather than substantial, and to integrate a loyal circle of constituents further. It is also shown that the IASB increasingly tried to portray agenda-setting (and standard-setting) as an objective and evidence-based procedure that resonates with constituents’ demands, although it might in fact enlarge the discretionary leeway of IASB (and staff) members.

Keywords:

• agenda consultation
• IASB
• legitimacy
• standard-setting

Acknowledgements

We are grateful to Deborah Anderson, Michael Bourne (IPA discussant), Kees Camfferman, Yasmine Chahed, Dominic Detzen, Christian Engelen, Carsten Erb, Markus Grottke (EAA discussant), Roland Königsgruber, Christoph Kuhner, Richard Pucci and participants at the EAA Annual Congress in Tallinn (2014), the VHB-Pfingsttagung in Leipzig (2014), the EUFIN Workshop in Regensburg (2014), the Workshop on Politics of Accounting Standard Setting and Regulation at the Vrije University Amsterdam (2014) and the Interdisciplinary Perspectives on Accounting conference in Stockholm (2015) for their comments on the manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Cf. http://www.reuters.com/article/2013/10/14/us-accounting-iasb-idUSBRE99D0KU20131014. Ultimately, the IASB decided to take up prudence as a qualitative characteristic in the Exposure Draft to the conceptual framework (cf. IASB 2015, par. 2.18). Whether this decision was due to the pressure from the European Parliament is beyond the scope of this paper and might be addressed in future research.

2. Note that these instruments are not limited in their use solely to maintaining standard-setting authority, for example, with regard to the EU. Instead, these instruments also serve to foster the IASB’s chances of being adopted by the US Securities Exchange Commission as they address the very points of criticism frequently raised in the US (summarised e.g. by Kaya and Pilhofer 2013).

3. Dingwerth (2007) provides an analysis of transnational governance, carries out in-depth case studies with regard to the World Commission on Dams, the Global Reporting Initiative and the Forest Stewardship Council and discusses the context-specific balance struck between effectiveness and democratic legitimacy in these transnational organisations.

4. Notably, such an approach is also familiar from the history of US financial reporting. Both the Committee on Accounting Procedure and the Accounting Principles Board issued opinions on accounting topics without any formal agenda process. This is also referred to as the ‘fire-fighting approach’ (Gore 1992, p. 14).

5. The following criteria were to be considered by the IASB when making agenda decisions (IASC Foundation 2006): (a) the relevance to users and the reliability of the information provided, (b) existing guidance available, (c) the possibility of increasing convergence, (d) the quality of the IFRS to be developed and (e) resource constraints.

6. As a consequence, lobbying of agenda-setting by preparers or auditors, which has been a concern regarding the FASB (Johnson and Swieringa 1996, Howieson 2009), was not a major issue for the agenda formation of the IASC/IASB. Nonetheless, in addition to the public organisations mentioned in the text, there were other institutions, such as the World Bank, that exerted some influence on the choice of topics on the IASC/IASB’s agenda (national standard-setter, interview).

7. For the list of CLs, cf. IASB (2012b). One comment letter (CL 210) was eliminated from our analysis because pages were missing in the file available on the IASB website, which left us with a sample of 247 CLs.

8. Our categorisation largely follows the approach by Jorissen et al. (2012, 2013). Concerning the assignment to regions, European organisations such as the European Financial Reporting Advisory Group (EFRAG) were assigned to the European level, while internationally operating organisations, like the Big4, were deemed ‘international’.

9. Note that the survey results by Gassen and Schwedler (2010) reveal that investors prefer fair values for financial instruments, but for all other assets, they usually prefer historical cost to non-market-based estimates of fair value which apparently is in notable opposition to the view promoted by the CFA Institute (e.g. CFA Institute 2007).

10. The information on the participants in the public roundtables was taken from IASB (2012h,i,j,k,l,m).

11. A few non-profit organisations sent CLs to the Request for Views. One comment by the Publish What You Pay coalition is noteworthy as it criticised the IASB quite harshly (CL135, p. 2):

There have been many extreme frustrations with the process both in terms of the time taken to elaborate new standards and also in ensuring that the comprehensive needs of the full range of user groups of financial statements are given due consideration.

12. Two further aspects that were deemed important by constituents were highlighted in the revised Due Process Handbook: the importance of the conceptual framework was acknowledged and some modifications were made with respect to post-implementation reviews.

13. The following criteria are mentioned (IFRS Foundation 2013b, par. 5.4): (a) whether there is a deficiency in the way particular types of transactions or activities are reported in financial reports, (b) the importance of the matter to those who use financial statements, (c) the types of entities likely to be affected by any proposal, including whether the matter is more prevalent in some jurisdictions than others and (d) how pervasive or acute a particular financial reporting issue is likely to be for entities.

14. As the IASB states that ‘[n]ot all research will lead to a standards-level project’ (IASB 2012m, p. 10), constituents might direct their limited resources to the ‘wrong’ research projects which never lead to a final standard, and thereby miss the opportunity to influence the actual standards.

15. In addition, the IASB mentioned two ‘other activities’ on which it wanted to work (IASB 2012m): Islamic transactions and instruments and the ‘disclosure forum’.

16. In the feedback statement (IASB 2012m), it is explained that a total of 80 outreach meetings, 9 conferences and 12 investor targeted outreach meetings were held. As there is no detailed information available on these events, apart from the five public roundtables, we cannot assess whether our concern in the text was mitigated by the other events which took place.

17. Only one CL written by a user was in favour of taking on a project on agriculture. Furthermore, in the additional investor outreach, agriculture was assigned a low priority (IASB 2012a).

18. The third project that the IASB decided to place on its agenda based on the consultation was the topic of separate financial statements: the use of the equity method. The feedback statement explains this choice by referring to Latin American constituents’ desire for this project. We found four CLs from Latin America arguing in favour of the more general project equity method (which reflects more support than from any other region for this project). Strikingly, the public debates centred on the other two issues of agriculture and rate-regulated activities, while the equity method was not discussed.

19. Note that the technical language used by standard-setters in their documents suggests that standard-setting is an objective exercise (also cf. Young 2003, Halliday et al. 2010).