Last week, two individuals with corporate backgrounds were named to the IASB. According to a news release, the new members are Dr. Elke König, a former member of the executive board and CFO of the reinsurance company Hannover Re Group in Germany, and Darrel Scott, CFO of the FirstRand Banking Group of South Africa.
Historically, investors have infrequently secured representation on the IASB and its predecessor organizations. Typically, IASB members have a large audit firm background, but a large minority of members have corporate accounting backgrounds. Of the current 15 member group, only two or three members can be said to have primarily an investment background. It is most definitely true that the numbers are stacked against investors!
This is a significant event, with serious ramifications. Although accounting standard setters claim that they are after “the best” accounting rules, in practice no such thing is possible. The reason being that accounting rules have economic consequences. The major competing interests–corporations against investors–have decidedly different information needs. Corporations prefer flexible accounting rules so that similar transactions can be accounted for differently by companies or even by a single company. Investors prefer more rigid accounting rules so that transactions are accounted for in a uniform manner.
Corporations and auditors claim that flexible accounting will provide more informative disclosures. Investors are skeptical, referring to the many incentives in place to cause corporate executives to provide falsified financial reports, and incentives in place to prevent audit firms from forcing proper accounting.
Investors in the United States should be made aware of the difference in focus between accounting rules under FASB and IASB. In the United States, the purpose of financial accounting is widely viewed as providing information to investors so they can make the best investment decisions. In contrast, the purpose of financial accounting under the IASB is to help companies raise capital. In practice, accounting rules can differ markedly under the two emphases.
Despite the regulated state of the American capital markets system, accounting scandals are fairly common in the United States. It is widely thought that investors stand little chance of receiving unbiased information under IFRS.
Debit and credit – - David Albrecht