SEC Supports Monitoring Group for IASB as Debate Rages on Role and Composition

In an effort to deflect the criticism that the IFRS standard setter is not answerable to securities regulators, the oversight trustees of the International Accounting Standards Board have proposed a Monitoring Group composed of the SEC and other securities authorities. The SEC welcomes the creation of the Monitoring Group as a way of providing organized interaction between the IASB and national securities regulators responsible for the adoption or recognition of accounting standards for listed companies.

The Monitoring Group will be composed of the SEC Chair, the European Commissioner for Internal Market, the IMF managing director, two IOSCO senior officials, the Commissioner of the Japanese Financial Services Agency, and the President of the World Bank. At the same time, CESR’s bid for a seat on the Monitoring Group appears to have failed and banking regulators have been excluded.

At a recent IASB roundtable, SEC Deputy Chief Accountant Julie Erhardt said that there was a need to create a mechanism for the interaction between securities authorities and the oversight trustees that approximates the historical relationship between securities authorities and accounting standards setters, such as the relationship between the SEC and FASB. In turn, she continued, this will enable securities authorities that allow or require the use of IFRS to effectively discharge their own mandates relating to investor protection, market integrity and capital formation. The SEC has been assured that the Monitoring Group will not affect the independence of the standard setting process.

According to Oversight Chair Gerrit Zalm, the Monitoring Group provides the IASB with a link to securities regulators. The group will have the ultimate say in appointments of oversight trustees. The SEC agrees with Mr. Zalm that the Monitoring Group should be transparent and keep in touch with and inform other stakeholders.

Currently, IASB oversight trustees are self-appointed. There is no reporting or influence from the SEC or other public authorities even though IFRS have a great influence on national economies. The Monitoring Group ends the self appointment of trustees by getting a veto power on new trustee appointments. And the group will judge whether the trustees are doing their work properly since the trustees will now report to them. Moreover, there will be regular meetings between the trustees and the Monitoring Group.

Chairman Zalm noted however that, while the Board voluntarily agreed to give power to the Monitoring Group and be publicly accountable to it, there will be no transfer of the power to organize the IASB or control its agenda. The chair also emphasized that the Monitoring Group will not have the ability to appoint trustees; but will be able to veto new trustees recommended by the oversight trustee group.

At a recent IASB roundtable, all the participants supported establishing the Monitoring Group. It was seen as an essential safeguard because, when a jurisdiction adopts IFRSs, it surrenders its sovereignty over accounting standards. While agreeing that it is essential that securities regulators be represented on the monitoring group, however, some commentators expressed concern about the absence of other market regulators such as banking agencies. In addition, some participants noted that the proposed monitoring group does not include a regulator directly involved with small and medium-sized companies, for which the IASB is developing a separate IFRS.

Also, many participants in the roundtable said that it must be made crystal clear that the oversight trustees are responsible for the governance of the IASB. The participants want to ensure that the Monitoring Group does not, in any way, compromise or impair the IASB's independence, especially its ability to set the technical agenda. Some suggested that the Monitoring Group should be viewed as equivalent to an independent audit committee.

The Monitoring Group must also avoid getting involved in operational aspects of the IASB and avoid conflicts of interest. In their view, the Monitoring Group should monitor the trustee appointment process and approve actual appointments, but it should be precluded from nominating trustees directly. A key question, which has not been addressed, is whether the Monitoring Group will have the power to remove trustees who, in their opinion, were performing unsatisfactorily.

A CESR senior official made a spirited bid to give CESR a seat on the Monitoring Group because CESR represents the securities regulators of Europe and has a keen interest in ensuring the right strategy, as well as the operational effectiveness, of the IASB. Javier Ruiz also noted that CESR members have enforcement authority over 2,500 IFRS companies.

Chairman Zalm appeared to reject CESR’s request when he noted that that the Monitoring Group is already at a correct size. Further, if CESR gets a seat, he said, there might be demands from other parts of the world because if Europe is represented by the Commission and by CESR, for example, the US or Japan may demand two members.