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An unprecedented privatisation of mandatory standard-setting

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Raushan Madiyarova

on 4 November 2014

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Transcript of An unprecedented privatisation of mandatory standard-setting

An unprecedented privatisation of mandatory standard-setting: The case of European accounting policy
The European accounting standard-setting system in 2005 and 2006
Simplified structure of the IASB. Source: www.IASB.org
Review of literature

Late stage of the rule making process in accounting involve the political activity (most studies)

Early stage of the rule making process in accounting include:
Powers of regulatory agencies
Composition of boards
Overall structure of regulatory arrangements
Privatization (production and monitoring) of Accounting standard-setting (Chiapello & Medjad, 2009, 450)

The Budget Question
Arguments that co-regulation saves money, in return for taking the back seat, the EU obtains internationally recognized standard for its financial markets for free and due to their private nature these standards are supposed to be a reflection of market.
The use of the IASB can be seen as a PPP justified by efficiency and pursued to suit globalization.
However, indirect costs could outstrip the potential savings
The origins of the drift into privatisation
The sovereignty paradox
Private sector involved in the regulatory process

In order to facilitate comparison btw European countries all listed companies must comply w/accounting standards enacted by IASB

Bef2002 Member States had a degree of freedom to preserve national traditions (accounting frameworks)

Aft2002 new regulation: Member States obliged to enforce standards issued by the IASB (private body w/no control by EU) for a unified system

History of accounting private self-regulation by and for the accounting profession SCANDALS state got involved in the process public object

Research Methods
Description of the institutional framework of the production of European accounting standards
Study normative processes (Comitology)

Comparison of the standard-setting system
US system: FASB, SEC, US Congress
Privatization of the standard-setting process
Finance, governance, legal nature of the produced standards (Chiapello & Medjad, 2009, 450)

IASC Foundation (22 trustees)
Standards Advisory Council (SAC)
IASB Board (14 members)
International Financial Reporting Interpretations Committee (IFRIC)
Reports to
Structure and governance of the IASB
Incorporation of IASB standards into EU law
a complex procedure (comitology)
standards are reviewed from a technical standpoint (by the EFRAG)
political approval to the ARC
If approval is given the Commission can issue a regulation for adoption
EFRAG is operated similar way to the IASB
The 24 members of its Supervisory Board are appointed by the organisations that founded- and finance- the EFRAG.
TEG (11 members) - a mix of geographical areas within the EU.

IASB was the only organisation able to offer divided Member States a set of common standards acceptable to all.
Appeared in the 1960s when the European Commission when the European Council delegated some of its regulatory powers, the council is advised by committees constituted by various stakeholders- experts and representatives of Member States.
There are 3 types of comitology procedures-advisory, management procedures and regulatory.
The political significance of comitology is ambiguous.
The EU also does not control the contents of the standards produced by the IASB
Another differentiating factor is the resort to private organizations, similar 2-tier models were applied in the regulation of banks, insurance and pension funds but were state-created.
The need to take into account public interest is necessary, this is important because in the Anglo-Saxon countries that gave birth to the IASB, Financial and Taxation accounting are disassociated in contrast to countries like France and Germany.

European accounting Policy and Comitology
Comparison with other European co-regulatory arrangements
Accounting is the only field in which the private sector has a monopoly for setting standards, In setting technical standards, Member States have an option to make the standards mandatory into soft laws(with few exceptions as the case maybe)
The relinquishment of sovereign prerogative is 2 fold as the EU has no say in how things are done and can not decide when a given accounting issue should be examined.

Independent Bodies
Comparison of the IASB and other IAAs. Similarities exist in the sense that both lie outside the hierarchical powers, there is no supervisory state control. The difference lies in the independence, the state appoints members of the Boards of IAAs but the EC has no power to appoint members of the IASB.

Also, for IAAs any loss of independence stems from the state’s power to appoint whereas for the IASB the risk stems from the Lack of a constituent organization, private financing and high demand for expertise.

The new policy of rekindling of public scrutiny in accounting standard-setting
- The pressure from the new stakeholders,
European Commission, the Financial Services Agency of Japan, the IOSCO and the US Securities and Exchange Commission

Information accessible to companies, auditors bankers and investors employees, citizens and States and ultimately serve as a basis for calculating a number of economic rights

The efforts towards a new governance
The geographical representation of the trustees had been improved and the number of IFRIC members was increased from 12 to 14

The new policy of rekindling of public scrutiny in accounting standard-setting
The control over the EFRAG

-Standards Advice Review Group

-EFRAG being financed by the EU

The IASB/IASCF now has an institutionalised monopoly for the preparation of standards destined to become compulsory, and by withdrawing without any guarantees of objectivity and control, the EU has simply reversed the roles, finding itself through its own doing in a position where it has to lobby the IASB.
How reversible is this situation?, Two observations can be made already.
- First, most of the measures contemplated by the EU to reassert its role share a common feature: they have a – sometimes significant – financial cost.
- Second, and more importantly, the extent of this re-nationalisation of accounting standard- setting depends almost entirely on the goodwill of the IASB/IASCF.
Chiapello, E. & Medjad, K., 2009. An unprecedented privatization of mandatory standard-setting: The case of European accounting policy. Critical Perspectives on Accounting, 20(4), pp. 448-468.

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