The
European Commission has issued a report offering
suggestions on how the E.U. could have a more active role in setting
international accounting standards in a world where more and more non-E.U.
countries are adopting IFRS and the IASB acknowledges the major of influence of
FASB positions even though the United States has no intention of adopting IFRS in the
foreseeable future. The report, prepared by Phillpe Maystadt at the behest of
Commissioner for the Internal Market Michel Barnier, centers on a transformed
European Financial Reporting Advisory Group (EFRAG) as the vehicle for
enhancing E.U. influence on international accounting standard setting.
A former Belgian Finance Minister and President of the European
Investment Bank, Mr. Maystadt was named a Special Adviser to Commissioner
Barnier with the role of reinforcing the E.U.’s contribution to IFRS.
The report concludes that EFRAG is currently an imperfect
vehicle for the job because it is a technical body composed of experts mainly
from the private sector, with no mandate from the Member States. While ideally
EFRAG should be Europe ’s voice in the
accounting debate, noted the report, it is a technical committee with views that
do not always take appropriate account of broader policy perspectives, such as
market stability and shadow banking. In addition, the influence of EFRAG is
weakened by tense relations with the national standards setters of the largest
Member States, which wish to gain more
influence in the debates.
The report offers three options: 1) transform EFRAG; 2) transfer
EFRAG’s duties to the European Securities and Markets Authority (ESMA); or 3)
replace EFRAG with an agency of the E.U. Noting the opposition to Option 2 and the budgetary
constraints working against Option 3, the Maystadt report recommends the
adoption of Option 1.
Option 1: Transform
EFRAG. The transformation of EFRAG would aim at
reinforcing its structure and maintaining, at the same time, its mixed
composition that covers both public and private interests at the European level.
The new structure would fulfill its current technical role, but would also be
able to carry out a strategic analysis of the economic impact of the accounting
standards under scrutiny, relying on adequate conceptual and technical means.
The new structure would allow EFRAG to provide the IASB and the
Commission with analyses on both technical and economic considerations. Under
this first option, EFRAG would remain a private organization and the
Commission, as a guardian of the European public interest, would still be
responsible for making decisions on the strategic and political issues involved
in the accounting debate, under the control of the Council of the European
Union and of the Parliament.
Option 2: Fold
EFRAG into ESMA. The interest of ESMA is to
ensure that the IASB produces standards which are sufficiently clear to allow for
the consistent application of IFRS but also to protect markets. ESMA has solid
expertise in the field of implementation and the interpretation of accounting standards
at the European level. As part of its duty to coordinate at the E.U. level the enforcement
activities performed by national regulators on the consistent application of
IFRS, ESMA identifies cases where standards have been implemented in diverse
ways and, if necessary, submits them to the interpretations committee of the
IASB.
The report said that this would present the possibility to integrating
EFRAG into ESMA. Mr. Maystadt emphasized the advantages of this option, while
also recognizing the strong opposition to it. The option would merge two
European organizations, EFRAG and ESMA, active in the field of IFRS and allow
for the rationalization of human and financial resources, as well as the
integration of the endorsement and enforcement processes, thus making the
overall process of IFRS development more coherent.
It would also endow the European Union with a structure more
similar to the SEC. Moreover, the role of spokesperson for the European Union
and the influence over the strategic guidelines in the field of international
accounting standards would no longer belong to a private entity.
However, this option has run into massive opposition from
stakeholders. They claim that ESMA has a restrictive view on accounting
standards and considers IFRS only from the perspective of informing and
protecting investors, without taking into consideration macro-economic impacts,
prudential aspects and the concerns of preparers of financial statements. In
addition, certain Member States are reluctant to give more power to ESMA.
Noting that the development of standards and enforcement should
not be mixed, some people fear that ESMA would grow into a stock market
watchdog similar to the SEC. Further, sentiment has been expressed that the
IFRS standards are based on principles (unlike US GAAP), and that therefore the
regulatory influence should remain moderate in order to maintain this
characteristic and to avoid IFRS becoming more rules-based.
For all if these various reasons, the report concludes that
Option 2 cannot be adopted. But Mr. Maystadt still wants ESMA to have an
enhanced role in the European accounting standard setting process. For this reason, in Option 1, the
report recommends that ESMA propose a member for the Board of the new and
transformed EFRAG. ESMA could also share with the Commission the role of
observer at the International Financial Reporting Standards Interpretations Committee.
Option 3: Replace
EFRAG with a public agency. The major
advantage of this option is the fact that it would no longer be necessary to entrust
the roles of advisor to the Commission and of spokesperson in relations with
the IASB to a private entity (EFRAG). This would clearly show that European
public interest must prevail in these matters.
However, this option is unrealistic in the current budgetary
context. In particular, the scope of this agency would seem to be too limited
to justify the creation of such a structure, especially because it would
inevitably generate costs, not only for salaries, but also for bigger pensions.