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EU Makes Funding for Accounting Authorities Contingent Upon Reforms

Roberta Holland | March 19, 2014

European Parliament last week agreed to continue its share of funding for international accounting standards groups, but attached conditions to the funding on the governance of the groups as well as on the standards themselves.

Members of Parliament approved the European Commission's co-funding package for the International Financial Reporting Standards (IFRS) Foundation, the European Financial Reporting Advisory Group, and the Public Interest Oversight Board (PIOB). The decision provides annual funding of €4.3 million to IFRS Foundation, which accounts for 17 percent of the IFRS budget, and €0.3 million for PIOB, which totals 22 percent of its budget, from 2014 through 2020. The EFRAG funding was approved for a shorter period, from 2014 through 2016, in the amount of €3.4 million each year, according to the European Commission. That represents 43 percent of EFRAG's budget, according to the commission.

Since its 2005 adoption in the European Union, IFRS has been under fire by critics who claim the financial statements prepared using IFRS can present a skewed picture of a company's health. Critics also say the standards are overly complex and do not take into account the notion of prudence. Lawmakers ordered the review of IFRS, with a report from special advisor Philippe Maystadt delivered this past fall. Maystadt endorsed the continued goal of a single, global set of accounting standards, but recommended changes to the way those standards are set, including the makeup of EFRAG. EFRAG and the International Accounting Standards Board, the branch of the IFRS Foundation which develops the standards, have been criticized for being too closely tied into the industry they regulate and for failing to push the European point of view.

MEPs tried to move the bodies toward resolving those issues with a series of conditions attached to the funding. Those included calling on the groups to ensure any standards require financial statements and accounts give “a true and fair view,” be understandable, and focus on the concepts of prudence and reliability. In regards to EFRAG, parliament said the group needs to be exposed to views of national standard-setters, governments, and regulators as well as the other stakeholders. It called for more transparency of its dealings with the IASB, and said decisions should only be made after consulting with national standard-setters.

Parliament is asking the commission to report annually on EFRAG's progress on the recommended reforms, as well as its performance, with the first report requested by the end of this month. Parliament also called on EFRAG and the IASB to be more transparent as to its membership and other sources of funding, and to avoid conflicts of interest.  

Funding for all three groups will be awarded on an annual basis through operating grants. Two leading members of parliament on the subject indicated those renewals are not automatic, and funding could be pulled after a year if conditions aren't met, according to published reports this week.

“Questions have been raised by the European Parliament about the governance structures and lack of transparency of these bodies, as well as their close links to the accounting industry,” MEP Sharon Bowles of the U.K. told The Telegraph this week. “The release of these EU funding streams will therefore only be forthcoming upon sufficient reform to prevent conflicts of interest, which will bring about much-needed trust and scrutiny on how these highly influential public bodies operate.”

Bowles also told Accountancy Age last week that taking a closer look at how the IFRS Foundation and EFRAG are governed “has not made for pretty reading.”

“Any potential conflicts of interest have to be weeded out, and if they are not, then the Parliament has shown that it has the power to withhold funding, which sends a powerful message,” Bowles told Accountancy Age.

MEP Syed Kamall, also of the U.K., told The Telegraph he questioned the decision by the EU “to outsource standard-setting to what is, in effect, a private sector body funded by public money.”

The Telegraph brought to light last month compliance lapses by the IFRS Foundation itself, which turned in late or incomplete filings with Companies House. Those lapses increased calls from lawmakers for reforms. The foundation later acknowledged those missteps and said problems have been corrected.

A spokesman for the IFRS Foundation told Accountancy Age in response to the latest concerns that the group takes the issues seriously, and has already begun work on its in-house review, required every five years. The spokesman said the foundation welcomes any suggestions for improvement.

Internal Market and Services Commissioner Michel Barnier said parliament's action will allow the groups to move forward as the reforms take shape.

“High-quality, international financial reporting and auditing rules are of vital importance not only for transparency, comparability, and the smooth functioning of capital markets, but also for the economy at large,” Barnier said in a statement. The decision will ensure the groups continue to play a key role in setting standards “and that the EU's interests are properly taken into account in that process.”

Barnier also said he was eager to see the EFRAG reforms recommended by Maystadt implemented quickly, and would keep parliament informed of EFRAG's progress.