The Unaccountable Setter of Accounting Standards

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The following was first published yesterday on the blog of the Task Force on Financial Integrity and Economic Development. It is by Julian Boys, who is an economic justice policy volunteer at Christian Aid. He wrote it after attending the International Accounting Standards Board meeting on 19 October that considered the possibility of introducing country-by-country reporting for the extractive industries. You’ll note he does not rate its chances, and offers more than adequate explanation for their reticence:

Twenty besuited men and women shuffle and blink around a large conference table at 9 am in the heart of the City of London, with almost panoramic views from their fourth floor room. To the unknowing eye this might seem like the start of yet another corporate board meeting. Yet these people hold power not only over the future of a company, but the lives of literally hundreds of millions of people living in poverty around the world.

This is the International Accounting Standards Board’s (IASB) October meeting, and the first item on the agenda is its ‘extractive activities’ project. The IASB discussed the comments received on a discussion paper it commissioned, which explored the possibility of a new international financial reporting standard for the extractives industry.

Many mining, oil and gas companies operate in poverty stricken and unstable developing countries. It has long been suggested that the lack of transparency around these industries facilitates massive corruption — companies are not required to declare the payments they make to governments, so these governments cannot be held accountable for the revenue they receive.

Christian Aid and the Publish What You Pay coalition are calling for a country by country financial reporting standard, which encouragingly was included in the IASB’s discussion paper. This would require companies to declare, for every country in which they operate, the profits they make and the payments made to governments. Although a seemingly innocuous and technical adjustment, a country by country reporting standard would empower governments, civil society and ultimately poor people across the developing world.

If civil society organisations in the South had access to this kind of information, they could ensure payments to governments were spent effectively on public service provisions that would transform the lives of the poor. Yet unfortunately the IASB does not recognise civil society as a valid user of financial reports. In fact, it does not even have a clear definition of what a financial report is, a point raised by several board members that day. This is somewhat worrisome for an organisation mandated to come up with new financial reporting standards.

The IASB’s Conceptual Framework for Financial Reporting is the closest thing to a definition, and it counts only ‘investors, lenders and other creditors’ as users of financial information. This is despite the fact that the IASB’s constitution explicitly states that its purpose is to develop financial reporting standards in the public interest.

The IASB wields a disproportionate level of power over a huge number of people around the world, yet is mostly funded by voluntary contributions from companies and accounting firms. It is no surprise that it considers these organisations to be its principle stakeholders, and looks after their interests first.

Around the table at the meeting, the board considered the costs and benefits of a country by country reporting standard entirely from the perspective of investors and companies. Many investors have made clear that this information would be useful to them, since much risk occurs at the level of the country in the form of political stability. And many companies have admitted that they collect the necessary information anyway, and it would not be too costly to compile it for a financial report.

Yet still it seems that unless the needs of government and civil society are considered by the IASB, a country by country reporting standard is unlikely. Political pressure is necessary to force the IASB to realise the values enshrined in its constitution and recognize governments and civil society as legitimate users of financial reports.

The International Accounting Standards Board could change the well being of hundreds of millions if not billions of people by introducing country-by-country reporting.

It refuses to do so. You have to wonder why. Except that John Kay gave a clue, yesterday, in the FT. Writing about regulatory capture he said, under the title “Better a distant judge than a pliant regulator”:

Regulatory capture is the process by which the regulators of an industry come to view it through the eyes of its principal actors, and to equate the public interest with the financial stability of these actors. Sometimes such capture is overtly corrupt, as when regulators are in the past or present pay of the corporations they oversee. The largest contributors to congressional campaign funding are heavily regulated industries such as financial services, pharmaceuticals and energy.

But the most common form of capture is honest and may be characterised as intellectual capture. Every regulatory agency is dependent for information on the businesses it regulates. Many of the people who run regulated companies are agreeable, committed individuals who are properly affronted by any suggestion that their activities do not serve the public good. Few members of the public, by contrast, ever make contact with a regulatory agency; almost always, they are less well informed than the professionals who deal with regulatory issues. It requires a considerable effort of imagination to visualise that any industry might be organised very differently from the way that industry is organised now. So even the regulator with the best intentions comes to see issues in much the same way as the corporate officers he deals with every day. You require both an abrasive personality and considerable intellectual curiosity to do the job in any other way. And these are not the qualities often sought, or found, in regulators.

That’s the problem at the International Accounting Standards Board.

A few of us have dared to see that world could be different.

But they’ve been captured by the principal actors as they see them — the Big 4 and their clients — from whose ranks they come.

That’s the inherent failing of self regulation — so much a part of the failed model of capitalism that now needs replacing — writ large.

But that won’t stop us.