London - The trustees of the International Accounting Standards Committee Foundation have begun deliberations on an increasingly political review of its constitution.
Up for debate are such crucial international issues as the number and balance of trustees, the treatment of small and midsized enterprises, and the background balance of International Accounting Standards Board members.
The foundation, which oversees the IASB, began its constitutional review process in 2003, as mandated by its constitution. In November of 2004, the foundation's constitutional review committee issued 10 recommendations and several questions for public comment, and in March of 2005, the committee began its deliberations.
The trustees expect to make a few changes to the IASC constitution to address certain concerns that have arisen since the committee's founding in 2000. The changes are intended to express more clearly the trustees' responsibilities, expand their geographical and professional backgrounds, emphasize the need for broader consultation and liaison, and to make explicit note of the special needs of small and midsized entities and emerging economies.
But some say that the changes could lead to a politicization of the international standard-setting process. Some of the proposed changes hint at an international struggle for stronger regional representation in the IASC and the IASB.
Rebecca McEnally, vice president for advocacy at the CFA Institute, fears that some of the proposed changes are not necessarily aimed at improving standards.
"We are concerned about this, very concerned," McEnally said, without specifying any particular part of the proposal. "We believe that accounting standards should be neutral, determined solely by what best reflects the underlying economics of a transaction or event, not what the possible effects of telling that truth might be, and that a requirement for achieving this is that the standard-setters be free of undue pressures that don't achieve this objective."
A comment letter submitted by Big Four accounting firm Deloitte called for the foundation to be more transparent and accountable, and it criticized the proposals for not considering more constituent suggestions.
"[T]here continues to be a danger that the IASB will appear not to give sufficient consideration to comments from constituents, and may be perceived to be failing to recognize fully the practical application and auditability issues relating to the implementation of its standards," the Deloitte letter warned. "As a consequence, the independent nature of the IASB's standard-setting role stands in danger of losing support."
The Deloitte letter, however, offered little in the way of specific objections and recommendations. Its only specific objection was to a proposal that the composition of the foundation trustees be replaced by some kind of jurisdictional or geographical distribution.
The proposal recommended expanding the number of trustees from 19 to 22 to broaden geographical representation, particularly from the Asia and Oceania regions and from emerging economies.
The current four trustees mandated to come from the "Asia/Pacific" region would be increased to six from "Asia and Oceania." The number from "other areas," selected to achieve overall geographic balance, would be increased to four, from three.
The constitution committee declined a suggestion that a number of representatives be specified for Latin America, but indicated that the foundation would, as a matter of policy, continue to support Latin American representation.
Comment letters overwhelming supported a proposal to loosen the constitutional restriction on the professional backgrounds of trustees. The proposal recognizes the importance of a balanced set of backgrounds, but does not specify how many should be from the preparer, auditor, investor and other user communities. It would require, however, that at least two members be professionals from prominent international accounting firms.
One proposal would extend one foundation objective, "to promote the use and rigorous application of those standards," to include the phrase "taking account of, as appropriate, the special needs of small and medium-sized entities and emerging economies."
The purpose of the expanded objective would be to produce standards that are less complex and more accessible to smaller, less-sophisticated accounting departments and to accountants whose native language is not English. The committee recognized that these entities have "special needs."
In a letter, Financial Executives International joined the call for more accessible standards.
"While we agree with this objective [of a single set of high-quality international standards], we believe that recent standard-setting activity has not always produced standards that are understandable," the FEI's letter stated. "Over the last 10 years, the demands on technical competence have steadily increased to the point where many otherwise capable accountants are not confident that they can apply the requirements of new standards without outside assistance from subject matter experts."
The correspondence went on to say that "further movement of the accounting literature in the direction of complex, hard-to-apply principles is not sustainable."
"Those special needs largely stem from [small and midsized enterprises'] lack of resources and the wide variations in financial infrastructure and hence capacity to implement complex accounting standards written primarily for large multinational corporations," the proposal stated.
Several comment letters acknowledged those special needs, but objected to the constitution singling out any specific sectors for special treatment.
The foundation opted not to address a call for standards applicable to the not-for-profit and governmental sectors, but the document did indicate an intent to address this issue at a later date. It was felt that the current constitution would allow the setting of standards for not-for-profits, but that the IASB lacks the resources to do so at this time.
The foundation also decided not to propose a change that would permit or require the trustees to approve the IASB technical agenda. The board, the trustees said, should remain independent on all technical issues.
By a narrow margin, the trustees decided not to propose modifying the number of members on the board or to change the number of part-time members from the current two. The trustees acknowledged, however, that the issue is controversial and far from clear-cut, and that constituents should therefore continue to provide opinion and input.
The trustees proposed relaxing the background requirements for IASB members, but the idea met resistance in comment letters. CPA Australia, the major public accounting organization in that country, supported the relaxation, but asked that the emphasis on member selection be dedicated to the users and preparers of financial statements.
"As these are often the most difficult category of membership to fill, we recommend that the minimum number of members in each of these categories be maintained," the organization's comment letter stated.
The trustees proposed deleting a constitutional requirement that seven IASB members have formal liaison responsibilities with national standard-setters. Liaisons would still be required, but not in a specific number.
A prohibition against the IASB including voting members of national bodies was tentatively struck down, and the concept of "national bodies" was expanded to include "other official bodies concerned with standard-setting," such as the European Financial Reporting Advisory Group.
The Financial Accounting Standards Board did not offer a comment letter. FASB spokesperson Steven Getz explained that, "FASB feels that it works closely enough with the IASB that the trustees know its views. Those views include that they maintain technical competency in the IASB and that that continue to be a criterion for appointing board members, and that the process not be under political pressure or influence."
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