The European IFRS Endorsement Process – in Search of a Single Voice

Abstract

We analyse the creation and development of the European Financial Reporting Advisory Group (EFRAG), a key part of the EU endorsement mechanism for International Financial Reporting Standards (IFRS), which was probably the first example of a dedicated IFRS endorsement system. We discuss the historical background to the EU approach and we analyse how EFRAG evolved over its early years up to the Maystadt reform. Our analysis addresses its remit, its operational structure and financing and the key decisions made in the endorsement process over this period. We find that while national standard-setters had a limited role in the early stages, and EFRAG had limited resources, over time the pressure to find more resources and to try to achieve a unified voice in the creating of international standards have resulted in national standard-setters playing an ever-greater role. Nonetheless, a single voice for Europe is not likely to be attained

Keywords:

• IFRS
• EFRAG
• EU
• IASB

Acknowledgements

We are grateful to Robin Jarvis, Araceli Mora and other participants at the European Financial Reporting Research Group Workshop at the University of Fribourg in September 2016 for helpful comments. We are also grateful to EFRAG for their authorisation and moral support for this project, and to all our interviewees, especially to Stig Enevoldsen and Françoise Flores, for their cooperation and frankness. We are grateful to Saskia Slomp, (EFRAG director) for her diligence in checking facts, and for the helpful advice of referees. We also acknowledge with thanks financial support from the Open University to cover transcription costs and some travel.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 It should be noted that of the 140 jurisdictions surveyed, 24 do not require the use of IFRS for domestic companies, but permit their use.

2 Karel Van Hulle was the head of accounting at the European Commission, for approximately 20 years to 2004, as Stig Enevoldsen, a founder member of the EFRAG TEG and chairman from 2003 to 2013, told us

he knew everyone in the accounting department in Europe, he could go anywhere and be received  … and give presentations, negotiate, and he got the IFRS regulations in place, he seduces, manipulated politicians, governments, everyone in Europe and made it happen.

3 This was a voluntary meeting of representatives of European institutions and organisations interested in financial reporting, set up by Dr Van Hulle. It was intended to help forge a consensus in improving financial reporting

4 Brown and Tarca (2005) examine the development alongside the use of IFRS of enforcement mechanisms intended to ensure consistent application.

5 The fundamental mechanism for making laws in the EU is that the Commission has the sole right to initiate proposals, and the Council of Ministers (of member states) is the final authority for approving legislation. This means that change is difficult to achieve and time-consuming because proposals are modified by refusing to accept them as issued and negotiating compromise. The commitology procedure was developed to address this by allowing the insertion of a specialist committee of permanent representatives of member states to interact with the Commission on specific, narrow-scope changes. The Accounting Regulatory Committee is an example of this procedure. For a fuller discussion see Walton (2009).

6 According to Camfferman and Zeff (2006) this was the name given to the European Accounting Study Group, formed in 1996 as an initiative of the Netherlands auditors’ professional body. It consisted of the five main European delegations to the IASC board: France, Germany, the Netherlands, the Nordic Federation and the UK. They met with the European Commission to discuss the positions they should take at the board meetings.

7 Sir David Tweedie later described the endorsement mechanism as ‘byzantine’ (Street, 2014: 311). He said: ‘The IASB hardly understood it; there were all sorts of barriers.’

8 This was intended to further involve the larger national standard-setters, and was to verse the pro-active activities of the organisation.

9 The German standard-setter had problems of its own and did not contribute until 2012.

10 Currently EFRAG statutes require a two thirds majority to reject or approve an IFRS.

11 Some people say that it was this vote that caused the TEG majority rules to be changed to a two thirds majority for either endorsement or non-endorsement.

12 The only change has been that until recently it was generally the chairs of each of the bigger standard-setters who attended, whereas under the post-Maystadt organisation, the four representatives of national standard-setters are named individuals from their technical teams who now exercise voting rights, and their chairs are members of the EFRAG board.

Additional information

Funding

This work was supported by Open University.