Blog Post

Why the Issue of Convergence Should Remain on Backburner

Ahead of the G20 summit in Pittsburgh, Resident Scholar Nicolas Véron argues that the project to converge standards between the American Financial Accounting Standards Board and the International Accounting Standards Board has moved too hastily. He recommends that the issue of convergence should be left on the backburner and that the FASB and the IASB […]

By: Date: September 22, 2009 Topic: Banking and capital markets

Ahead of the G20 summit in Pittsburgh, Resident Scholar Nicolas Véron argues that the project to converge standards between the American Financial Accounting Standards Board and the International Accounting Standards Board has moved too hastily. He recommends that the issue of convergence should be left on the backburner and that the FASB and the IASB should instead focus on ensuring high-quality accounting to meet the needs of capital providers.

The G20 this week in Pittsburgh will reaffirm its mantra, that accounting standard-setters should make progress towards "a single set of high-quality global accounting standards". But doubts are emerging about both global accounting harmonisation and standards quality, measured against the information needs of the financial reporting audience.
Last October, the International Accounting Standards Board, its hand forced by the European Union, enabled banks to limit their use of fair value (aka mark to market) accounting and avoid reporting losses if market conditions deteriorated. In April, under pressure from Congress, the Financial Accounting Standards Board in turn adopted changes to its financial instruments standard, allowing banks to not book some of the bad news. The two boards then claimed they would work together on the next steps. But in July, the IASB published a draft standard that potentially restricts the scope of fair value, while the FASB hinted at expanding it. On this most important issue, the "convergence" strategy pursued by standard-setters since 2002 seems to have gone off track. Meanwhile, the US Securities and Exchange Commission has become more wary of mandating rapid IFRS use by domestic issuers. In Europe, the lure of going it alone is palpable: in April, France’s top central banker Christian Noyer said that "Europe can well reclaim its freedom" and could "decide to take back control and write the accounting rules . . . without following the IASB".
The convergence project had been pushed too hastily. After the success of EU adoption, IASB chairman David Tweedie has wanted to secure IFRS endorsement in the US, the ultimate prize, before his term ends in 2011. With this focus, the IASB and its Trustees neglected to consolidate support, both in Europe and among their ultimate constituents in the global investment community.
They did not rise to their new-found public responsibilities, failed to adequately address non-accounting audiences such as parliaments, and were not proactive in reforming their governance to improve accountability. As a result, the IASB found itself with few friends when the crisis hit. It has little choice but to accommodate EU pressures, at the expense of IFRS quality.
To judge from past banking crises, allowing banks to reduce transparency in the middle of the storm will be regretted by policymakers. It is ominous that the leading advocate of "suspending fair value" in early 2008, Martin Sullivan, was then chief executive officer of AIG. But critics of fair value dominate the European ground. Governments are too keen to quickly shore up "their" banks to care about financial reporting quality, and the EU investor community is weak and fragmented. The ability of the US to exert counteracting pressure is limited, as the SEC, weakened by its failures, is fighting for survival in the regulatory overhaul, and even though US
investors, including public pension funds, might eventually assert themselves in the accounting discussion.
The reasonable recommendation made by the Financial Crisis Advisory Group (a blue-ribbon committee belatedly set up by the IASB) and others, to further disconnect regulatory capital standards from financial accounting, goes mostly unheeded. On the contrary, the Basel Committee, which co-ordinates capital standards-setting and where Europeans retain disproportionate clout, has intruded in IFRS standard-setting.
The financial system would be better off if convergence was left on the backburner, and the emphasis reverted to truly high-quality accounting to meet the needs of capital providers. If IFRS become the superior standard, the US will adopt it. But breaking the vicious circle would require more vision and leadership than the main players seem able to display. The crisis has been a harsh test for international accounting standard-setting, and the next steps are likely to lead further downhill.

Nicolas Véron is a research fellow at Bruegel and author of Smoke & Mirrors, Inc.

This op-ed was published by Financial Times on 24th September 2009.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

Xi, Biden switching strategies for dominance

The US now sees Asia more through an economic lens, while China shifts toward a security focus

By: Alicia García-Herrero Topic: Global economy and trade Date: May 25, 2022
Read about event
 

Past Event

Past Event

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 19, 2022
Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read article
 

Blog Post

The EU needs transparent oil data and enhanced coordination

The EU lacks the coordination structure and transparent data necessary to most effectively navigate an embargo on Russian oil.

By: Agata Łoskot-Strachota, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: May 16, 2022
Read article
 

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read about event More on this topic
 

Upcoming Event

Jun
23
14:00

BRI 2.0: How has the pandemic influenced China’s landmark Belt and Road Initiative?

China's Belt and Road Initiative is undergoing a transformation after two years of pandemic. How is it changing and what are the consequences for Europe.

Speakers: Alessia Amighini, Eyck Freymann, Alicia García-Herrero and Zhang Xiaotong Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read article More on this topic
 

Opinion

For Europe, an oil embargo is not the way to go

Even at this late hour, the European Union should consider taking a different path.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 9, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article
 

External Publication

The Global Quest for Green Growth: An Economic Policy Perspective

A review on green growth and degrowth arguments.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Global economy and trade, Green economy Date: May 5, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Global trade Down Under

A conversation on the global trading landscape.

By: The Sound of Economics Topic: Global economy and trade Date: May 4, 2022
Read article More on this topic
 

Opinion

A tariff on imports of fossil fuel from Russia

A tariff on imports of Russian fossil fuels would allow Europe to hit Russia's energy sector without great suffering.

By: Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Load more posts