It is a well-established fact that international accounting standards have been influenced by political lobbying, most usually by the most powerful nations.
This is no small matter. A few percentage points shift in what is defined as “profit” spills over into a host of other measures, from GDP to GDP per capita and even inflation. And it is these measures that in turn influence foreign direct investment (FDI) flows.
Accounting standards are a “social construct” and are not set in stone. There are many ways of explaining business or socio-economic realities to different stakeholders. According to researchers in this field, “many aspects of our life may have been undemocratically administrated without being noticed, because the fair value accounting is presumed to be fair, while it is not.”
In a recent proposal to Finance Minister Tito Mboweni and Trade, Industry and Competition Minister Ebrahim Patel, Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba) suggests SA adopt the Indian and Chinese model of “carve outs” when it comes to abiding by international accounting standards. The United States, too, though home to the International Accounting Standards Board (IASB) which is the international standard setter, has itself opted out of many of these standards by adopting the “modified cash basis of accounting” or “American GAAP”, which is advantageous to US companies.
“Financial statements that are reliable, relevant, and comparable enhances the ability of the country to attract FDI and has the potential to increase GDP,” says van Wyk. “However, it is our submission that the basis on which financial statements are prepared are subject to political influence and lobbying from nations and large corporates that compete with South Africa for FDI.
“We believe that the Financial Reporting Standards Council (FRSC), if constituted and funded in an appropriate way, can provide significant support to the Ministries of Finance, and Trade, Industry and Competition to achieve the goal of increasing FDI and GDP.”
National authorities should therefore have a strong interest in the quality of the financial reporting supply chain that causes financial statements to be prepared.
“However, a bigger concern should be whether the actors working within this chain, share or support either directly or indirectly, and by way of compulsion or self-interest, the most beneficial outcome for the people of South Africa.”
This process is informed by a set of standards as determined by the International Accounting Standards Board (IASB) a structure organised under an independent foundation, the International Financial Reporting Standards (IFRS) Foundation. The IFRS Foundation is a non-profit corporation created under the laws of the State of Delaware, United States of America, on the 8 March 2001. This registration is somewhat ironic as the US does not follow IFRS but has developed their own financial reporting standards to benefit their local economy.
The Minister has flexibility to opt out of certain IFRS standards
Van Wyk says the Minister has relative flexibility in prescribing IFRS, and “which we believe ought to have been used more often to assist South African Corporates derive the benefits as enjoyed by Indian, Chinese and US Corporates.”
The SA Financial Reporting Standards Council (FRSC) was established in terms of the 2008 Companies Act to provide consultative support to the Minister prior to the Minister issuing regulations prescribing financial reporting standards. “It is our view that the Minister is not obligated to prescribe financial reporting standards, but may do so,” adds Van Wyk.
Section 29 of the Act requires that if a company provides financial statements to any person those statements must:
- satisfy financial reporting standards as to form and content, if such standards has been prescribed by the Minister;
- present fairly the state of affairs and business of the company, and explain the transactions and financial position of the business of the company;
- show the company’s assets, liabilities, equity, income and expenses.
- in addition, financial statements prepared by a company must not be false or misleading, or incomplete materially.
We do not believe that the Minister is required to indiscriminately adopt and issue International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as those standards may not necessarily create employment or economic growth once adopted in South Africa.
The US/Euro-centric standard setter, the IASB, favours adoption, meaning a country fully implements the standards as set by the IASB (ironically with the exclusion of the US). Competing interest in countries such as India and China favour convergence. Convergence allows for the harmonisation of IFRS with local conditions, freeing local jurisdictions from standards that might harm their local economies.
Saiba proposes the formation of a specialist committee under Section 191 of the 2008 Companies Act, or alternatively a Ministerial Advisory Committee, to advise the Minister and the Commissioner of the CIPC, on ways and means to re-establish the FRSC, including the funding model in line with a national mandate to promote economic growth and employment.
The Chinese approach
Of special interest to South Africa, as part of the BRICS nations should be China’s approach to IFRS “adoption” whilst ensuring that their national interest is protected and enhanced. Chinese standard setters are “…careful to tailor IFRS to its needs, excepting certain provisions when crafting its domestic IFRS-based standards, and in one particular case, working with the IASB to modify IFRS itself to meet Chinese interests”, this cautious and politically motivated approach is believed by some to have protected the Chinese economy during the 2008 – 2009 financial crises.
Similarly, Tata Steel in India has been able to influence Indian standard setters to create IFRS exceptions for specific situations.
Many African countries had to make the transition from protectionism to market liberalisation in the 1990s. This was done with the encouragement of foreign direct investment campaigners such as the World Bank, which has particularly encouraged emerging markets to engage in reforms that would among other benefits, make them attractive to foreign direct investments as a means of stimulating their economies. This involved opening up the market to competition and improved efficiency.”
SA needs to move closer to the Chinese model, says Saiba.
While countries that adopt IFRS have experienced positive impacts on FDI as this reduces information asymmetry between local and foreign investor, those that have adopted standard “carve outs” have been able to improve on their FDI flows.