Occasionally, I’ve been sending e-mails over to AECM about rising European discontent with respect to IFRS. I’ve been regularly poo-pooed as a result. After all, I’m an anti-IFRS guy and am thought to be creating rumors of imaginary IFRS difficulties in an attempt to delay American adoption of IFRS. But I simply read a lot (especially European publications Accountancy Age and Financial Times). There have several stories quoting EU and member-state politician concerns over the IASB’s IFRS.
Well, the bad news has jumped the pond, to be reported in the venerable Wall Street Journal. I refer specifically to three stories by Simon Nixon in the Heard on the Street column:
- Paris Mounts the Barricades Against Global Standards, November 6, 2009, p. A32.
- New bank-accounting proposals meet resistance, November 13, 2009.
- EU’s Go-Alone Approach, November 20, 2009.
Similar stories appear in European newspapers. If accurately reporting reality, it all leads one to conclude that there is a reasonable possibility that the EU will back away from IFRS to either (1) modified IFRS, or (2) unique European GAAP. If either were to happen, wouldn’t it have an impact on IFRS consideration in the U.S.? I would hope so.
In Paris Mounts the Barricades, Nixon concludes, “French minister Christine Lagarde plans to lobby other G-20 finance ministers meeting in Scotland on Friday (Nov. 6?) to accept greater political control of the standard-setting process.” Later in the article, Nixon says:
Paris’s real objection is to the IASB itself, which it believes is too focused on investor interests and not sufficiently accountable to politicians. Never mind that the G-20 in Pittsburgh specifically endorsed the independence of standard-setters. Never mind the G-20 also endorsed efforts by the IASB to improve its accountability by establishing a monitoring board and consulting more widely with stakeholders such as regulators. Ms. Lagarde’s objective is a greater role for national governments.
Consistent with Shyam Sunder’s brilliant analysis, such an objective is rational, natural and to be expected.
Nixon concludes with, “Instead of tighter convergence on accounting, that would lead to fragmentation, which is in nobody’s interest.” Mr. Nixon, you are wrong. It is in France’s national interest to manage its own economy and be responsive to its own citizens. You see, having accounting standards that promote national interests is important to every country in the world.
In New Proposals … Meet Resistance, Nixon describes new a new IASB standard on financial instrument valuation as an improvement, but only partly effective. He says,
But before further progress can be made, the IASB must overcome a bigger obstacle: French resistance to the current watered-down standard. … Demands for political control of standard-setting appear to be gathering support in Europe.
He concludes with:
“This is worrying. Standard-setting must be independent if it is to command investor confidence. Global convergence is too important a goal to let slip.”
Mr. Simon, I wish you knew something about accounting and international finance. It has been shown, time and time again, that global convergence of accounting standards leads to a grossly sub-optimal economic result. You see, capital markets are mostly local or national. Let’s say that an American company with $100 million in sales were to float its IPO. Its costs to raise capital are much less if it only markets its securities to American investors. Marketing its stock to European investors would incur prohibitively huge transaction costs and be exposed to currency fluctuation losses. Moreover, international investors would largely be reluctant to participate in the offering, fearing that any potential investment returns would be wiped out by foreign currency fluctuations.
Finally, in EU’s Go-Alone Approach, you report (or more accurately, your analysis leads you to conclude):
The decision to appoint a low-key Belgian as president, the European Union’s newly created top job, and an obscure unelected British official as foreign-policy chief is a blow for the 27-member bloc’s global ambitions. … France and Germany now look free to decide Europe’s two top economic jobs, which become vacant in January. The European commissioners for competition and the single market have real power to shape Europe’s economic destiny. …
If French and German nominees end up holding these economic posts, investors should brace for a shift in EU policy. Important dossiers await the new commissioners, including financial-system overhaul, sensitive state-aid decisions on banks and auto makers, and a revamp of bank-accounting rules. France, for example, wants greater political control of accounting standards, threatening to undermine the Group of 20 industrial and developing nations’ goal of convergence.
Many European observers agree with you. This gives me reason to jump for joy, and it should for you too.
All of this isn’t too surprising. Why? Ten months ago the European Union offered to completely fund all future IASB operations. As discussed in E.U. Bids to Buy IASB, this was attempted because the E.U. (and your respected Charlie McGreevy) desired to own the IASB, lock stock and barrel. After being rebuffed, it isn’t surprising for me to hear that the E.U. wants to go it alone. I’ve been predicting it.
Mr. Nixon, your stories are too biased, promoting one side of a very controversial issue. Unless placed on the editorial page, readers expect stories to have more meat and less opinion. Please tone it down.
Debit and credit – - David Albrecht