Home Accounting and Auditing The political lobbying behind IFRS and how its skews our understanding of...

The political lobbying behind IFRS and how its skews our understanding of the world

471
0

A common language for accountants is important, since it allows comparisons between companies and countries.

It started in 1966 with the creation of the Accountants International Study Group (AISG) by the professional accountancy bodies in Canada, the UK and US.

The AISG issued 41 International Accounting Standards (IASs) by 2001 before being replaced by the International Accounting Standards Board (IASB). Out of this came the lingua franca of accounting standards, the International Financial Reporting Standards (IFRS), with listed companies in the EU mandated to adopt these standards from 2005. Other countries, including SA, gradually fell into lockstep.

As capital raced around the world at the speed of light, it was essential that all countries spoke a common accounting language. It was deemed important to wrest control of accounting standard setting away from national bodies and vest this duty with the IASB, so that an investor sitting in London could evaluate a company in Nigeria with the same surety as one in South Africa.

This was a process known as harmonisation, though some countries – notably China – opted to keep their local standards while making a gradual effort to converge with IFRS over time.

IFRS was a great step forward for the world economy. It promoted greater understanding of accounting numbers, more transparency, lower cost of capital – all of which it was postulated would promote better share prices. It made accountants more mobile, allowing them work in any country in the world using the same IFRS standards as everyone else.

Various studies show the voluntary adoption of IFRS results in more volatile earnings performance, in large part because the recognition of losses is more immediate than was previously the case under local accounting standards.

IFRS serve as the key financial accounting language used worldwide. More than 130 countries around the globe are applying IFRS, although sometimes using versions that differ from “full IFRS” as issued by the IASB.

“The adoption of IFRS has impact on a country’s national statistics. Data on productivity, efficiency and profitability are often times collected by the government statistical authority for national reporting,” says a study published by the Mediterranean Journal of Social Sciences.

More recently, there’s been debate about the political lobbying behind IFRS and how this can be used to skew reported company financial statements, which in turn distorts nationally reported economic activity.

“Just a small change in accounting standards may substantially alter the flows of economic benefits to affected parties. These may have strong incentives to influence the process of standard setting. Competing goals create conflicts about the content of accounting standards,” according to a study on lobbying to influence accounting standards published in the Copernican Journal of Finance & Accounting.

Says Nicolaas van Wyk, CEO of the SA Institute of Business Accountants: “The way accountants prepare financial statements is not a politically neutral affair. Every year millions of companies prepare their financial statements using a set of standards developed by an international organisation, the IFRS Foundation. The world’s profits are literally determined by one organisation. Evidence suggests (and logic would dictate) that the process of issuing and adopting these standards are subject to lobbying. Does this lobbying favour large conglomerates, special interests, Big Four audit firms, or does it potentially harm job creation and economic development in Africa?”

One of the most recent IFRS standards to be internationally adopted was IFRS 16, dealing with leases. A University of Naples study found evidence “that lobbying activities success is linked to the impact that the respondents have on the viability of the IASB.”

In other words, the bigger the organisation, the more it is likely to influence the standard setters. IFRS 16 forces companies to bring previously off-balance sheet lease assets on the balance sheet, where they belong. This results in a corresponding increase in financial liabilities on the balance sheet, which in turn impacts measures such as the leverage ratio and return on capital. For many companies, the introduction of IFRS 16 sweetened their balance sheets in the eyes of banks. It makes sense that some companies and their audit firms will have lobbied furiously for this outcome.

IFRS 15 explains when revenue can be recognised. Since revenue is different to cash, companies engaged in land sales can count revenue even though the first cash may only be banked several years into the future. This is where Tongaat fell foul of IFRS, counting land sales as part of revenue before there was a realistic chance of wrapping up the sales. There are all sorts of nuances in revenue recognition that would suit some companies more than others, with considerable judgment and variability written into the standard. Again, it is hard not to imagine that the bigger companies lobbied hard for a standard that suited their book. The more judgment allowed, the better it suited them.

Van Wyk points out that lobbying is an inevitable part of economic life, but then where are the SA lobbyists at the IASB?

“We need to look more closely at the accounting standards we are using. It seems we may have blindly adopted standards that were influenced by lobbyists in Europe or the US, and that these standards suit the developed countries but not us.”