The politics of standard setting

Tom Ravlic

We obsess with the politics of almost anything that goes on in Canberra that we forget there are other arenas in which politics plays out to the detriment of simpler, easier to follow regulation.

Consider the constant barrage of news about comments from different political parties on the issues of the day that are then analysed by commentators, panel programs and opinion pollsters until the horse is well and truly flogged to death.

What tends to be concealed from view because, frankly, it is typically of little interest to people other than your columnist are the political moves made in the realm of accounting standard setting that impact on the manner in which accounting standards are developed.

This political dynamic exists for several reasons internationally and domestically but let’s focus on the domestic scene first.

Most people are not that interested in blow-by-blow developments in the setting of documents that shape how numbers fall in a set of financial statements.

The media is poor at tracking the process generally speaking and the standard setters can fly below the radar if they wish. Coverage of that process is considerably less noticeable that the coverage of matters related political leadership, scandals such as sports rorts and anything else that has a slight whiff of inappropriateness.

A further problem is one mentioned in Banking Day previously. The Financial Reporting Council meets behind closed doors in Australia while its international counterpart meets in public. The FRC is the oversight body in Australia and as such provides safe harbour for public servants and other commentators to say things that should be publicly heard about a process for which the taxpayer pays.

Two pivotal directives in the early part of the FRC’s existence involved political moves by people with varying degrees of interest in the outcomes. The adoption of IFRS, for example, was a directive that came in late June 2002 without the AASB chairman at the time, Keith Alfredson, even knowing what was going to transpire at the fateful FRC meeting.

It should never be lost in the discourse that taxpayers fund the standard setter and the oversight body and the publication of the accounting and auditing standards online. There was a time when the accounting standards were the copyright of accounting bodies, but these days they belong to everyone.

The other problem with the domestic process is that the board tends to receive moderate numbers of submissions on technical standards from Australian constituents. Huge numbers of submissions are a rarity except for circumstances where there is an organised lobbying process and people submit a form letter just to add to the numbers presented on a specific view.

Some standard setters view those campaigns as being rather cynical to the point where multiple form letters were counted as one letter for the purposes of the due process. There are differing views on the legitimacy of that tactic.

The first is that counting the form letters as a single submission even if there were 50, 75 or 100 is an abuse of process because people declared they agreed with an articulated position. How dare standard setters just consider the 50, 75 or 100 submissions as one just because they all said the same thing.

There is another possible perspective that I have heard standard setters refer to and that is the fact that submissions provide a board with peripheral vision. Proposals for changes to the way in which companies and other entities prepare accounts may have consequences that are not immediately seen by the standard setter.

Campaigns resulting in a wad of letters sitting in front of board members reading the views that are the same do not provide that additional intelligence, the risk management that can sometimes only be provided by those not involved in the process of drafting accounting rules.

The politics of professional lobbying through associations may have a place in the everyday campaigning handbook of some people but standard setters may choose to ignore this completely.

The same is true for the international scene but the International Accounting Standards Board has bigger problems than its Australian cousin.

Australia’s standard setters just have to worry about the internal processes but the IASB concerns itself more with the global politics of regulation.

You know the complexity debates where accounting is concerned? The complexity discourse is in part due to the fact that the gorilla of the accounting world, the United States, invites itself to the picnic and has the habit of getting its way.

Back in the day before the IASB existed there were national standard setters that were focused on principles-based accounting. Australia, the United Kingdom, Canada and New Zealand are amongst them. The United States was the outlier because its standard setter, the Financial Accounting Standards Board, operated at the behest of the Securities and Exchange Commission.

The SEC is the cop on the beat. It chases companies down for abuses of their regulatory framework and prescriptive, enforceable accounting standards suit the regulator just fine, thanks very much.

You might think that the United State should side with the majority approach given that key countries with a solid accounting standard setting culture focused on principles.

That is not what happened. The United States and the IASB began dancing their tango and the American perspective on prescriptiveness got its way.

The IASB has no jurisdiction unless people buy the product it manufactures. It is a global body that depends on people adopting the international standards. There is no international or legislated mandate that it can draw on.

More prescriptive standards are the reality today because the IASB needs America to adopt its product for the world to be consistent.

It is a product that is so much easier to sell home on the range when you’ve been involved in embedding your logic and methods in the text.