Accounting convergence threatened by EU drive

The Financial Times ^ | 4/4/2010 | Rachel Sanderson in London

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The European Union’s new internal market commissioner has proposed reforms to the body that sets international accounting rules, infuriating accountants and potentially scotching fragile hopes of global convergence.

In an apparent power grab by Brussels, Michel Barnier has suggested future funding of the International Accounting Standards Board might depend on whether it bows to political pressure from the European Commission to make changes to its governance.

Mr Barnier’s suggestion, made at a meeting of top accountants and regulators in London, stunned the global accounting community by raising questions about IASB independence during a period of crucial talks to establish an international set of accounting rules.

The Group of 20 most industrialised nations last September pledged support for a single set of high quality accounting standards to improve capital flows and cut down on cross-border arbitrage in response to the financial crisis. However, achieving consensus is proving increasingly difficult.

Crucially, many European policymakers believe prudential regulators should be more involved in IASB governance so that accounting can be used as a tool for financial stability.

But accountants and business leaders – particularly in the US and Japan – argue that accounts should not be the subject of regulatory intervention but should focus on providing an accurate snapshot of a company’s value.

During an increasingly tense meeting on future funding for the IASB, Mr Barnier said that “the two issues of financing and governance can be linked”.

“We want to see more issuers – more banks and more companies – and more prudential regulators represented on the governing board [of the IASB],” he said.

Mr Barnier went on to say that it was “premature” to expect the EU to increase its annual £4.3m ($6.5m) budget contribution for the IASB. Moreover, Brussels intended to reconsider its funding annually.

Senior accountants said Mr Barnier’s salvo could bring Brussels into conflict with the US and Asia and derail the convergence process.

More than 110 countries, including most of Europe and Asia, use the International Financial Reporting Standards drawn up by the IASB. US companies continue to report under Generally Accepted Accounting Principles while regulators consider whether to endorse IFRS.