IFRS Outlook - July, 2009
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16 Iulie 2009 |
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Responding to the financial crisis
An interview with Hans Hoogervorst
“Financial reporting only played a minor part in the current credit crisis,” Hans Hoogervorst clarified upfront. “The crisis was caused by a combination of poor management by banks and insufficient oversight. However, financial reporting can be improved and also the role of the auditors as gatekeepers to the system may have to be looked at.”
As co-chair of the Financial Crisis AdvisoryGroup (FCAG) of the IASB and the FASB,Mr Hoogervorst and his committee have spent a considerable amount of time over the last couple of months discussing and analysing the root causes of the crisis, the role of financial reporting, the relationship with prudential regulators and the steps needed to improve financial reporting and accounting standard-setting.
The FCAG will release its report later this month and plans to meet again in December2009 to discuss subsequent developmentsand conclude whether there is a more permanent role for a committee like this.“The FCAG has proven to be a valuable bridge between the accounting and regulatory world.”The FCAG’s report will remain high-level, although it will also contain a couple of detailed proposals for improving financial reporting, the relationship between prudential regulators and accounting standard-setting.
Mr Hoogervorst commented “for example, we recommend that the Boards change the current requirement to take into account their own credit risk when fair valuing liabilities. Recognising a gain in the income statement due to a deterioration of own credit standing is counterintuitive and potentially undermines to the credibility of financial reporting.
We also urge the two Boards to work together and converge their standards. We support an expected loss model for loan loss provisioning by banks, where part of the interest rate margin is set aside to cover expected losses. We have also addressed the pro-cyclicality of financial reporting. However, we want the loan loss model to be transparent and not unduly influenced by prudential regulatory requirements.
Accounting standard-setting must remain independent from regulatory and political interference. It is not for the politicians to discuss detailed technical accounting issues. This is a matter for the experts. However, those experts should not operate in a vacuum; they must be fully accountable for their work. Standard-setting should not be an ivory tower exercise, rather, it should be embedded in the society it is intended to serve, taking account of the role financial reporting plays in a wider sense.”
The growing interest in financial reporting and the recent political pressures from the US Congress (on the FASB) and the European Union (on the IASB) are among the reasons why a Monitoring Board was set up earlier this year by the IASC Foundation.
“Last September, the IASB gave in to EU demands to change its standard on financial instruments, bypassing normal due process. This has set a dangerous precedent. To achieve our goal of global accounting standards, it is absolutely key that the IASB remains an independent accounting standard-setter. As soon as the US or Asia have the impression that the IASB is dominated by Europe or capitulating to EU demands, they will lose interest.”
The role of the Monitoring Board is to observe and reinforce the public interest oversight function of the IASC Foundation, while preserving the independence of the Board. Mr Hoogervorst was appointed as the first chair of the Monitoring Board when it was established earlier this year. The Monitoring Board’s Charter states that the members are representatives from two committees of IOSCO, the European Commission, the Financial Services Agency of Japan and the US SEC. “The European Commission has not yet signed up to the Monitoring Board as the European Parliament wants to see concessions from the IASB in the area of fair value accounting first,” explained Mr Hoogervorst. “It may have been one of the reasons why someone with a political background like me was asked to chair the Monitoring Board.” Mr Hoogervorst was Ministerof Finance and Minister of Health, Welfare and Sports in the Netherlands before he was appointed as chairman of the Dutch Securities Regulator in 2007.
Mr Hoogervorst finished by discussing the recent developments in financial instruments. “It is clear that the current financial reporting requirements for financial instruments need to be simplified. The rules are patchy, very complex and hardly understandable for users. It should not come as a surprise that IFRS is criticised for this and politicians weigh in. I welcome very much the current steps by the IASB to work together with the FASB on reducing complexity in the standard on financial instruments.”
