04 September 2013

FEE commented on financial reporting and auditing in the EU for the period of 2014-2020

The strategic dimension of global financial reporting standards should be taken into account

In 2002, the EU has shown clear leadership by adopting IFRS and leading the way toward global standards. The EU leadership is recognised on the world stage and should be maintained. This matter should be considered from an economic and strategic perspective. Global standards are critical to enhance transparency and reduce cost to all market participants. From an EU standpoint, globally accepted standards contribute significantly to attracting foreign investment at a time it is most needed. Therefore further encouraging the global spread of IFRS is a legitimate objective and in Europe’s benefit. Conversely, having specific EU financial reporting standards or different EU interpretations of IFRS would be detrimental to Europe.

These are important public interest reasons and the main motives why FEE has always supported global, high quality, principles-based standards.

The G20 Leaders have rightly acknowledged that global markets need global accounting standards and indications of a potential return to European or national standards would be a significant retrograde step.

This important public interest debate should be objective and duly informed

In addition to these broad critical strategic considerations, this debate should be fully informed and objective. It is highly regrettable that the debate on global financial reporting standards and the body that Europe has entrusted to set these standards (the IASB) is often compromised by matters that are only loosely related to the issue or are based on ill-informed and unsubstantiated arguments, promoted by a small but vocal minority. This is detrimental to a constructive dialogue and thus is not in the public interest.

It would be equally wrong to take a purely technical or dogmatic approach to this matter. FEE thinks that founded criticism is healthy and should be expressed. FEE has itselves criticised the IASB on certain specific topics, but has always strived to provide robust, technically sound and factually correct arguments. This is the only way to win the argument and achieve long term credibility.

In this respect, FEE is concerned that some of the amendments proposed appear to be largely based on misunderstandings or misinterpretation of the facts; this may undermine not only the credibility of those who propose them, but also Europe’s credibility on the world stage.

Consideration should also be given to the fact that the European Commission is fully involved in the governance of the IASB, as an influential member of the Monitoring Board of the IFRS Foundation. Similarly it is an observer at the EFRAG Supervisory Board, which comprises three public policy members. IFRS are endorsed in the EU which means they are assessed independently by the EU institutions, with the technical advice provided by EFRAG, against the criteria set by the 2002 Regulation.

It is counterproductive to undermine the IASB

It is also important to take a realistic and pragmatic stance and those who seem to aim at compromising the IASB’s independence should reflect on the available alternatives.

The IASB is the only body that has the global credibility and expertise to set high quality standards. Developing an alternative solution, if at all possible, would consume a significant amount of time and resources. In addition, the independence of standards setters is essential to investors’ confidence. A standard setter that would be exposed to industry lobbying or political tinkering would lose credibility.

Europe should not move backwards

A European standard setter producing European standards would not only be costly but more importantly it would isolate Europe on the world stage, which would not contribute to Europe’s economic recovery.

It is unlikely to be successful and would move back the debate on financial reporting to a battle between national differences amongst the Member States. In practice, apart from IFRS, the EU has a poor record in harmonising accounting rules as shown by the recent debate on the accounting directives; as a telling example, the legislative debate has proved unable to reduce the number of Member States’ options, although this was one of the stated political objectives. The choice of having global standards for Europe’s listed companies was a highly positive move in the collective benefit of Europe.

IFRS have improved financial reporting and enhance transparency

There is no credible objective evidence that IFRS have contributed to the crisis. On the contrary, the use of fair value and comprehensive disclosures has helped to identify the problems that were building up in the financial system.

Financial reporting should not be used as a scapegoat for other problems. For instance, financial reporting contributes to improved corporate governance, but it does not replace it. It also does not and cannot preclude unethical attitude from management or others.

Press release

Comment letter

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