By Bengt Ljung and Susan Webster (Arlington, Va.)
BRUSSELS—The European Commission proposed Jan. 26 to contribute directly to funding of the International Accounting Standards Committee Foundation, the parent body for the International Accounting Standards Board, as part of a broader initiative to support specific activities in the field of financial services, financial reporting and auditing.
In addition to funding for IASCF, the EC also proposed to provide funding to the Public Interest Oversight Body, and the European Financial Reporting Advisory Group. The EC said the proposal is aimed at keeping these entities free of conflicts of interest.
As part of the same package of reforms, the EC also agreed to facilitate decisionmaking by EU-wide entities supervising financial entities, including the Committee of European Securities Regulators, the Committee of European Banking Supervisors, and the Committee of European Insurance and Occupational Pensions Supervisors. The move is intended to set up a clearer framework and to reinforce current financial stability arrangements.
“The financial crisis has demonstrated the need to further strengthen EU supervisory arrangements and has reminded us of the importance of transparency and independence, especially when setting financial reporting and auditing standards,” EU Internal Market Commissioner Charlie McCreevy said in a statement.
“An essential move in this direction is to reinforce the role of key bodies in these fields, at both the European and international level, and to provide them with financial support,” he added.
The commission financing proposal would establish an EU program with direct EU budget funding to IASCF, EFRAG, and PIOB, as well as to the three European supervisory committees, CESR, CEBS and CEIOPS. These groups need funding to be stable, diversified, sound, and adequate to enable them to remain independent and efficient, the commission said.
“Generally speaking, we think there should be independent financing of these organizations, so that they don't rely on unclear funds or funds given by people who are involved in that decisionmaking,” the commission's spokesman for the internal market, Oliver Drewes, told a news briefing.
According to the EC proposal supporting its funding statement, the EC is planning to budget 5 million Euros each year for the IASCF starting in 2011 and continuing until 2013. Funding for EFRAG is proposed at 3 million Euros for each year beginning in 2010. The PIOB would be funded at 300,000 Euros each year beginning in 2010.
Criticism of voluntary nature of funding for the IASCF has been a central feature in the debate over whether the IASB qualifies as an independent standard-setter—a milestone the U.S. Securities and Exchange Commission has identified as a necessary precondition before the United States would change to international financial reporting standards.
The IASCF has been seeking to reform its voluntary funding process for a few years, and has been working with individual countries–both within the EU and around the globe—to encourage establishment of levy processes under which funds are provided automatically from entities and organizations supporting publicly traded companies. While it was not immediately clear, the EC proposal appears to assume that EU member countries would continue to fund the IASCF on an individual basis as well. A spokesman for the IASCF declined to comment.
The EC proposal on IASCF funding comes after the EC last October year pressured the IASB to change accounting standards to give more leeway on certain financial instruments (4 APPR 901, 10/17/08). Some prominent observers of international standard setting objected that the IASB decision to bow to EC pressure demonstrated that the IASB was not independent (4 APPR 941, 10/31/08).
The IASCF sought $32.1 million in total funding for fiscal year 2008 (4 APPR 735, 8/22/08). It is currently seeking funding for fiscal year 2009. It plans to update its funding status in April at a trustees meeting in London, a spokesman said.
In its statement supporting the funding proposal, the EC said, “The reform of the IASCF's funding regime is a necessary but not sufficient condition to enhance the IASCF's independence and the former thus needs to be assessed within the broader context of the IASCF's proposed governance reforms” which should be complete before the EC finalizes its funding plans.
EFRAG and PIOB
The commission also hopes to strengthen the European Union's contribution to the international accounting debate by increasing EFRAG's resources. The EC noted that EFRAG's work is constrained by lack of resources, meaning that EU business and economic interests “are not sufficiently represented at international level in the course of the discussions with IASB” and its interpretive committee.
In regard to the PIOB, the key concern “is to avoid the reliance of the PIOB for its funding over nondiversified, voluntary funding from interested parties which have a direct interest in auditing standards,” the EC said in its statement. It also observed that the EC has approved international audit standards developed by groups under the PIOB for adoption in the EU.
In total, EU contributions would amount to 36.2 million euros for the period from Jan. 1, 2010, to Jan. 1, 2014. The European Parliament and the Council of Ministers—the EU finance ministers, in this case—would have to approve the financing proposal.
Revisions to Supervisory Groups
The EC also revised the framework for the three European committees with responsibility for banking, insurance and securities.
The commission's decision includes a non-exhaustive list of tasks for the committees with the aim of safeguarding financial stability. The decision replaces qualified majority voting in the committees when consensus cannot be reached. While the committees' decisions are non-binding, regulators have to comply or explain in cases where they do not.
“Already, these three committees have a very important role in advising the commission. But for the future, we also envisage that they will have a stronger role, for example, in banking supervision. And in our proposal on credit rating agencies, CESR will be more of an overarching body,” the commission's spokesman for the internal market, Oliver Drewes, told a news briefing.
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