Formulating international accounting standards

The 1999 Asian financial crisis and the slide of the euro have highlighted the importance of transparency and information in the global economy. The harmonization of financial reporting, auditing and governance are the three corners of a virtuous triangle of business conduct. While a number of global initiatives are under way to harmonize financial reporting and auditing standards, corporate governance standards are harder to establish. While it is not easy to come up with a global lexicon, progress will be made if initiatives are inclusive, consider the element of competition and cultural diversity, and do not emphasize only the interests of the institutional investors and minority shareholders.

The European Commission has responded (30 April 1999) to the invitation of the International Accounting Standards Committee (IASC) to comment on its consultation document, "Shaping IASC for the future". The consultation document proposes a strategy for the IASC following on from its completion in 1998 of a core set of international accounting standards which it hopes will be accepted by the International Organisation of Securities Commissions (IOSCO), thus equipping it to become accepted as the predominant global accounting standard setter. Whilst the Commission agrees with some of the proposals, it argues that they will not deliver the greater credibility needed for acceptance as the global body defining financial reporting rules for business. "We want to move towards the greater use and official recognition of International Accounting Standards within the European Union (EU) to ensure the comparable, transparent and reliable financial information which is essential for an efficient and integrated capital market", commented Financial Services Commissioner Mario Monti. "But unless the IAS are defined in a legitimate manner and well-enforced, they will not be credible for use either within the EU or beyond". The Commission argues that credibility must be based on political legitimacy in the way standards are set and on creating the conditions for effective enforcement of standards. The Commission argues that wider representation would produce not only more political legitimacy but also better quality standards. The current IASC proposals would reduce the involvement of people with practical experience of industry in the standard setting process, thus reducing the quality of standards, not increasing it. The Commission offers a series of alternative proposals which it believes would strengthen the IASC's candidacy as the global accounting standard setter.