The EU have got it wrong – stakeholders do matter

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I got a remarkably quick response to my recent blog on a conversation I'd had with EC officials suggesting that stakeholders are of no concern in the process of approving IFRSs in Europe. As my respondent pointed out this claim is wrong - under EU law. That law is here. The key extract is from Article 3 on page 3. It says:

The international accounting standards can only be adopted if:

- they are not contrary to the principle set out in Article 2(3) of Directive 78/660/EEC and in Article 16(3) of Directive 83/349/EEC and are conducive to the European public good and,

- they meet the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.

Working through this, what we're calling for is consistent with Article 2(3) of Directive 78/660/EEC which says:

3. The annual accounts shall give a true and fair view of the company's assets, liabilities, financial position and profit or loss.

Directive 83/349 requires that consolidated accounts share this quality of truth and fairness. Curiously, this may be reason for rejecting IFRS 8. The dual reporting that it allows may breach this requirement, but I'll ignore that for now.

But note what comes next. A standard must be "conducive to the European public good". Nothing says that this relates solely to financial markets, and I cannot see how anyone could interpret it that way. In which case a broader context must be appropriate, which must relate therefore to a) the public and b) Europe. The public are stakeholders. The reference to Europe allows the EU to be non-convergent from IFRS. Indeed, it requires it when appropriate.

Since we have also shown that IFRS 8 is bad for shareholders because the stewardship of management is impaired, we also meet that criteria.

But most specifically, it does not matter if we do not. Stakeholders do have rights in this matter. The European Commission says so. They do so in this submission to the IASB which addressed their concerns about the IASB's governance structure and in which they say:

Public interest (including financial stability) aspects are currently not reflected in the governance structure or in the due process of the IASB. The potential impact of new accounting standards on markets', investors' and other stakeholders' behaviour should be analyzed before new standards are adopted.

This was written in 2006. The EC made clear that stakeholders were to be considered in IASB processes at that time. It therefore follows that they must be considered in EC considerations on IFRS 8 right now. Stakeholders do count, after all.