Accounting rules warning

One of Europe's largest professional associations of accountants has warned the EU that it risks scuppering attempts to create a single, global set of accounting rules.

It said political interference from some of the EU's national governments in the work of the International Accounting Standards Board (IASB) risked alienating the US, Japan, Australia and China, which would see the IASB as the creature of the EU.

The G20, the group of developed and developing countries, has repeatedly called for a global harmonisation of accounting standards, arguing that it would help economic recovery.

Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, said that some of the EU's national governments were guilty of “political interference” in the work of the IASB, the body that sets standards used by companies in more than 100 countries, including all the EU's member states.

He said this interference had harmed the IASB's image in non-European countries that use its standards, and could make it harder to convince the US to sign up to them. The US is the largest economy in the world that does not participate in the IASB.

Izza said: “Countries such as China, Japan, Australia, Singapore – all reasonably substantial capital markets – look at how the IASB is responding to European political pressure and are saying ‘hey, what about us?'.”

He said that European governments risked being seen in the US as the IASB's “political masters”, making the authorities in the US less willing to give up their own standard-setting regime.

Harmonised international standards would be a “great prize”, Izza said. “We have almost got to the stage where it is in reach.”

Improving confidence

Leaders of the G20 governments said last month that the IASB and its US equivalent, the Financial Accounting Standards Board, should “redouble their efforts to achieve a single set of high- quality, global accounting standards” that would then be managed by the IASB. They set a deadline of June 2011. Supporters of a single set of standards say it would improve market transparency and investor confidence, and prevent firms being placed at a competitive disadvantage to rivals that use less exacting standards.

But finance ministers from EU countries, notably France's Christine Lagarde, have been pressing the IASB to speed up a planned reform of its standard on recognition and measurement of financial instruments, arguing that the current version exacerbated the financial crisis.

Lagarde and others have argued that the current standard places too stringent a requirement on companies (particularly banks) to value assets according to their current market price, so that balance-sheets degraded rapidly as the financial crisis escalated.

They criticised the IASB for being too slow to acknowledge the problem, and for lagging behind the US Financial Accounting Standards Board in introducing changes.

Investors have expressed concern, however, that EU pressure could lead to a revised standard that allows companies to conceal the true state of their finances. The IASB expects to publish an important part of the revised standard in November.

“It is a really retrograde consequence of this crisis that independent standard-setting has become such a political football,” Izza said.

He said, however, that the US also has to demonstrate that it is serious about convergence. He noted that the US has been granted representation within the IASB governance structure and that pressure will grow for this to be revoked unless progress is made “in a reasonable timeframe”.

“The US cannot string the IASB along indefinitely,” Izza said.