CHINA GETS ANOTHER SEAT AT THE TABLE

Monitoring Board Machinations:

The People’s Republic of China has attained added stature as host of the early September meeting of the Group of 20. There, Pres. Obama and other world leaders are scheduled to drop in, mix, and help pronounce, via a communique and other statements.

Last month, China upped its financial world street cred, just a bit more, in another way. The PRC’s Ministry of Finance formally assumed a seat at the table of the International Financial Reporting Standards Foundation Monitoring Board.

How China’s finance ministry got there could be an interesting tale, at least by the limited public evidence available. Much remains to be learned. It’s difficult to tell the tale fully.    

A tantalizing element in the latest admission event features Mary Jo White, chair of the U.S. Securities and Commission. She abstained in a key April 26 vote of leaders of the major national and regional securities regulatory agencies who sit on the board. The members, who generally ride herd on the International Accounting Standards Board and its parent IFRS Foundation (including the latter’s funding), numbered seven at the time.

The monitoring board formally announced Aug. 19 that China’s admission ticket had been punched. That was about a week after the Ministry of Finance signed the IFRSF Monitoring Board’s charter, signaling its pledge to abide by it, a necessary step to admission.

From White, a Vote to Not Block.

Decisions on whether to admit new members to the IFRSF Monitoring Board “shall be made by consensus,” according to the monitoring body’s charter. Apparently, if White had voted no on China’s admission, that would have been enough to prevent consensus. However, she also  didn’t vote to support China’s seating.  

So why did the SEC chair abstain? I don’t know. The commission, through a spokeswoman, declined to comment Aug. 30 when I put that question and a related one to her.

A Japan Financial Services Agency official acting as press person for the monitoring board—the chairman of which is a high-ranking FSA official in the board’s rotating chairmanship arrangements—responded to a similar query to state that he had received it. However, he hasn’t provided a substantive response as of Sept. 2.   

Educated Speculation.     

I spoke with four veterans of rulemaking in accounting and securities regulation to lay out the above scenario on the voting and admission. Their responses—which could be labeled educated speculation—point to institutional politics on a world stage.  

Here are possible explanations —which aren’t necessarily mutually exclusive, of course —as told to me:

 

  • One source suggested that if White had voted against the seating of the Ministry of Finance, she and the SEC would have a much more difficult time effecting an important, brewing (?) deal for the U.S. Public Company Accounting Oversight Board to do audit inspections in China;

  • Two sources posited that the abstention was done to essentially send a message of displeasure about the lack of access in China for the PCAOB in seeking to carry out audit inspections; and 

  • The fourth source suggested that the SEC’s vote to abstain (and not cast an outright no vote) was a way to prevent negative readings about the PRC’s perceived failure to meet admission criteria to be aimed also at the SEC.

As speaking and documentary sources attest, both China’s Ministry of Finance and the US Securities and Exchange Commission are vulnerable to analyses that would conclude neither should be sitting on the monitoring board.

A key criterion for membership on the monitoring board, according to its charter, is that the “jurisdiction has made a clear commitment to moving towards application of IFRSs and promoting global acceptance of a single set of high quality international accounting standards as the final goals.”

The charter continues on that criterion: “This commitment is evidenced by the jurisdiction mandating or permitting application of IFRSs to consolidated financial statements of companies raising capital in its relevant market with the effect of actually exhibiting prominence of IFRS application, or having made a decision on a transition to such a status to take place in a reasonable period of time.” 

China and the US both appear to have problems when it comes to meeting that provision about “clear commitment to moving towards application of IFRSs.” Neither has shown much inclination to supplant national accounting standards as domestic registrants’ main accounting rules of the road.

However, both countries are the heaviest of heavy hitters in capital markets and they cast a big shadow (and the SEC played a key role in the setting up of the full-time IASB in 1999-2001).

Relevant Reading.

Here’s some relevant reading from a book published last year, “Aiming for Global Accounting Standards,” by Kees Camfferman and Stephen Zeff (Oxford University Press) [Zeff, a professor at Rice University, is a leading U.S. historian of accounting.]:

“In June 2014, the position of the founding members [of the monitoring board, including the U.S. SEC] was reviewed for the first time, and the Monitoring Board saw its way to the conclusion that ‘no member was found non-compliant with the membership criteria.’ … the continued membership of the SEC could have been justified only by considering the use of IFRSs by foreign registrants as evidence of ‘prominence of IFRS application’ in the U.S. capital market.

On the last point, there are hundreds of “foreign private issuers” listed in the United States which have a very large collective market capitalization. Since 2008 the SEC has accepted those companies’ IFRS-based financial filings without reconciliation to U.S. generally accepted accounting principles.

Camfferman and Zeff point to a second criterion, that “IFRSs to be applied” in a particular jurisdiction “should be essentially aligned with IFRSs developed by the IASB.” The authors wrote, “The requirement that the standards to be applied should be ‘essentially aligned’ with IFRSs was apparently meant to open the way for China” to a seat on the monitoring board.

To be continued—with, I hope, someday, more fleshing out of the reasoning behind the admission vote of April 26.

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