Memo to the IASB: get your act together or else

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The 'High-level Group on Financial Supervision in the EU' has published its Report that makes 18 detailed recommendations to strengthen supervision of the EU's financial institutions and markets. The report addresses:

  • how to organise the supervision of financial institutions and markets in the EU
  • how to strengthen European cooperation on financial stability oversight, early warning, and crisis mechanisms; and
  • how EU supervisors should cooperate globally.

Throughout the Report, accounting is cited as one of the causes of the current global financial crisis. The Report urges that the IASB or supervisors set limits on mark-to-market accounting:

To ensure convergence of accounting practices and a level playing-field at the global level, it should be the role of the International Accounting Standard Board (IASB) to foster the emergence of a consensus as to where and how the mark-to-market principle should apply – and where it should not. The IASB must, to this end, open itself up more to the views of the regulatory, supervisory and business communities. This should be coupled with developing a far more responsive, open, accountable and balanced governance structure. If such a consensus does not emerge, it should be the role of the international community to set limits to the application of the mark-to-market principle.

The following is Recommendation 4 of the Report:

Recommendation 4: With respect to accounting rules the Group considers that a wider reflection on the mark-to-market principle is needed and in particular recommends that:

  • expeditious solutions should be found to the remaining accounting issues concerning complex products;
  • accounting standards should not bias business models, promote pro-cyclical behaviour or discourage long-term investment;
  • the IASB and other accounting standard setters should clarify and agree on a common, transparent methodology for the valuation of assets in illiquid markets where mark-to-market cannot be applied;
  • the IASB further opens its standard-setting process to the regulatory, supervisory and business communities;
  • the oversight and governance structure of the IASB be strengthened.

There’s only one thing I can argue with: civil society also needs to be represented since the stakeholders they represent are also key users of published financial information and as such should be represented in the regulatory process.