27 June 2012

IFRS Foundation Trustees' Chairman, Michel Prada, on development and future of international standard-setting

Mr Prada's speech began with an overview of the history of standard-setting. Firstly, after several decades of failed attempts to develop a pan-European set of accounting standards, Europe decided in 2002 to switch tack and instead adopt, from 2005, the fledgling IASs, now known as International Financial Reporting Standards or IFRSs, for the consolidated accounts of listed companies on regulated markets. Overnight, this transformed the IASB from an interesting but somewhat obscure accounting think-tank into Europe’s accounting standard-setter.

Secondly, in the United States a series of accounting scandals challenged the infallibility of US GAAP, which led the FASB to consider its own fundamental reform of its standards. It made perfect sense for the IASB and the FASB, under the Norwalk Agreement of 2002, to reform IFRSs and US GAAP in parallel, and so began a decade of work to improve the respective standards and bring about their convergence.

Thirdly, the rapid growth experienced by emerging economies meant that they too needed high quality, internationally-recognised financial reporting standards. Many of these economies have well‑developed capital markets that are home to major multinational companies. Most have the ambition of developing their own global financial centres, and the use of IFRSs is increasingly seen as a prerequisite for such financial centres to exist.

Finally, the global financial crisis that began in 2007 and continues today provided a very clear illustration of the globally connected nature of financial markets and the pressing need for a single set of high quality global accounting standards. That is why repeated G20 communiqués, including the one that was issued at the recent G20 Summit in Los Cabos, have supported the work of the IASB and called for a rapid move towards global accounting standards.

Michel Prada continued with a description of three main findings of the Trustees' strategy review. First, it was clear from the feedback the Trustees received that there are efficiencies to be gained in the way that IFRSs are developed. Over the last few years, the Trustees have overseen a substantial increase in the number of the IASB’s technical staff. At the same time, the Trustees have seen a corresponding increase in the depth and breadth of the IASB’s consultation and outreach activities.

However, as the IASB adapts to become the global accounting standard-setter, the Trustees must also recognise that no single organisation can do this on its own.

Standard-setting has long been a collaborative exercise. The quality and robustness of many recently developed standards owe a great deal to the many organisations and individuals who offer advice and guidance to the IASB throughout the life cycle of the standard-setting process. Perhaps the best example of this is the interaction between the IASB as an international standard-setter and those national and regional organisations with an interest in accounting standard-setting.

Second, the Trustees’ strategy review recognises that the goal of global accounting standards will be illusory if those standards are not endorsed and enforced on a globally consistent basis. That means everyone adopting the same set of standards, and those standards being applied in the same way.

The IASB is not a regulator and does not have enforcement capacities. Neither does it have the resources or the expertise to monitor global adherence to the standards. Thankfully, there is an existing organisation, the IOSCO, that does and deals with investor protection and quality of financial information.

The IOSCO has recently completed a restructuring of its leadership and operational activities. The Trustees have already begun discussions with IOSCO about how they can deepen their co‑operation. The IOSCO network is also well placed to provide extremely valuable practical input on how IFRSs are working in different parts of the world, which in turn will benefit the work of the IFRS Interpretations Committee and the IASB’s post-implementation review of major new Standards.

Finally, the Trustees’ strategy review recommended a series of further enhancements to the IASB’s standard-setting process. These enhancements build on the already impressive due process framework and include recommendations on the transparency of the IASB’s agenda-setting process, the development of an agreed methodology for field visits and effect analysis and more rigorous oversight of due process through the Trustees’ Due Process Oversight Committee.

Full speech

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