Written statement by Governor Susan Schmidt Bies
At the International Accounting Standards Committee Foundation Meeting, New York, New York
June 3, 2004
Thank you, Mr. Chairman, for the opportunity to speak today on matters relating to the review of the constitution of the International Accounting Standards Committee Foundation (IASCF) and the International Accounting Standards Board (IASB). I would like to focus my remarks on several issues the Trustees' Constitution Committee has identified for further consideration. These issues were posted to the IASB web site on March 22, 2004. The IASCF selected these issues after reviewing the comments it received following the publication of its November 2003 consultation document Identifying Issues for the IASC Foundation Constitution Review.
The Federal Reserve has been working to promote common high-quality accounting standards around the world, with a focus on the global standards-setting activities of the IASB. The goal of common global accounting standards will require a high degree of convergence between U.S. and international standards, and efforts toward full commonality are well under way. The potential financial stability benefits are significant--high-quality global accounting standards can lead to enhanced transparency, which will, in turn, improve market discipline and foster stable financial markets. I believe that your efforts and this constitutional review are very important because they will lead to more effective oversight and expert advisory arrangements that will help ensure that high-quality international standards will be developed based on sound principles and appropriate due process, and in a manner consistent with the public interest.
Addressing The Challenges Facing Small- and Medium-Sized Entities
The committee has also indicated that it recognizes that educational activities could play a role in reinforcing these objectives and that special mention of the organization's educational efforts could be included in the constitution. I support the inclusion of such language directly into the constitution since this would highlight the IASCF's recognition and commitment to more comprehensively address the implementation needs of important constituents.
Number of Trustees and Their Geographical and Professional Distribution
The committee believes that the trustees should remain responsible for the selection of new trustees when vacancies arise, and the committee notes that the trustees have advertised the need for applicants for all vacant positions. It has been pointed out that the trustees have consulted with the relevant organizations in the region where the vacancies arose in order to achieve an appropriate balance of professional backgrounds. In addition, the committee suggests that the requirements regarding professional backgrounds should be relaxed and that the following language should be added to the constitution:
Oversight Role of the Trustees
Funding of the IASC Foundation
Composition of the IASB
It is difficult to determine the appropriate number of part-time board members. There are advantages and disadvantages associated with having part-time board members as well as full-time members. One advantage is that part-time members may bring a useful appreciation for and direct contact with the application of the standards in practice. On the other hand, this could detract from the perceived independence of the board. Trustees need to weigh carefully, in light of experience with the existing part-time positions, whether or not the overall effectiveness and balanced perspective of the board is likely to be enhanced by continuing to appoint some part-time members. If the conclusion is that some part-time positions should be retained, consideration should be given to allowing the trustees some flexibility in deciding how many part-time members should be appointed at any one time.
The committee is also suggesting a modification to the constitution that would relax the requirements regarding specific professional backgrounds. Instead, the constitution would require that the board reflect an appropriate mix of practical experience among auditors, preparers, users, and academics, and that at least one IASB member have recent experience in each of these fields.
I support this suggested modification. However, I hope that the trustees will explicitly recognize that central banks and banking supervisors are extensive users of financial statements, including those prepared in accordance with IASB standards. In my view, the trustees need to ensure a proper mix on the board in terms of the balance among both different accounting traditions and different professional backgrounds. A lack of balance is not conducive to building widespread support and acceptance for the IASB's standards. In particular, I recommend that the IASB have a larger percentage of members with professional experience in implementing accounting policies and procedures for financial instruments and related risk disclosures including, for example, an understanding of the problems and practical issues associated with fair-value accounting. Furthermore, the trustees should be responsible for ensuring that the board, as a whole, has the necessary diversity of expertise, skills, and professional backgrounds.
Although the trustees need to ensure that a variety of professional backgrounds are represented on the board, it is not necessary or desirable for the constitution to specify precise quotas for particular backgrounds. For this reason, the committee's suggested flexible approach seems reasonable. It should be noted that even if the board's skill base is strengthened, appropriate consultation and collaboration with external experts (for example, the Standards Advisory Council and other advisory groups) should remain an important part of the IASB's due process.
Appropriateness of the IASB's Existing Formal Liaison Relationships
The constitution refers to developing accounting standards that require high-quality, transparent, and comparable information in financial statements to help participants in the capital markets and other users make economic decisions. Although it is acknowledged that the needs of investors are a key consideration in setting accounting standards, the needs of other users also should be given appropriate weight. The IASB should always seek to develop standards that meet the needs of both investors and other user groups. Central bankers, banking supervisors, and other prudential regulators are all major users of general-purpose financial statements, and this is reflected in the significant resources the Federal Reserve, the Basel Committee, and others devote to analyzing and commenting on the IASB's proposals and providing technical advice to the IASB. In addition, banks themselves and other financial-services institutions make extensive use of financial statements in making lending and other decisions. The IASCF needs to focus on securing the involvement of users in this wider sense rather than merely focusing on investors and analysts.
Consultative Arrangements of the IASB
The observance of due process and transparency are essential elements of the standards-setting process and I urge the trustees to consider how to achieve improvements in both areas. The IASB has already made efforts to act transparently--for example, by publishing summaries of its discussions on its web site and in monthly updates--but more can be done in this area.
Lessons can be learned from the protracted debates over the revision of IAS 39 in terms of how to demonstrate to stakeholders that the IASB fully understands and has properly considered all their views. One lesson is the potential value of public hearings on controversial issues. The IASB should be accountable to the trustees for how it exercises its discretion in this respect. The length of time that elapsed between the publication of the IAS 39 Exposure Draft in June 2002 and the publication in December 2003 of a "final" text has highlighted the need for the IASB to give greater attention to the issue of transparency in its process for finalizing standards once public consultation has ended. The Board could, for example, consider making some of the current working text of a proposed standard public before the standard as a whole has finally been agreed on. The value of opening board meetings to the public is reduced if observers are denied access to the papers needed to properly follow the board's discussions. I am very pleased to learn that consideration is now being given to making IASB papers available to observers. In my view, this would be a major step forward.
The process followed by the IASB in developing new standards allows for public comment on published exposure drafts. The IASB provides feedback on major points made by commenters by explaining its reasons for accepting or rejecting them. The regular board meetings are public and information about IASB's decisions is provided regularly through various periodic publications. In addition, each exposure draft and final standard is accompanied by a "Basis for Conclusions" to help readers understand the reasons for the board's decisions and the main alternatives the board considered. In theory, these procedures should help ensure that due process is followed in the standards-setting process.
In practice, however, the process would run more smoothly and achieve greater consensus if there were more opportunity for input at an earlier stage. I have heard concerns from some constituents that the IASB seems to have already carefully examined the significant accounting issues involved in a project and have sometimes developed a predetermined mindset or bias--before the start of public consultation. To improve the due process and the efficiency of the consultations it would be highly desirable if public consultation were initiated at an earlier stage of the discussions. The IASB has the capability to publish, and invite comments on, discussion papers at an earlier stage in the standards-setting process, but this is not required. The IASB should make more use of such discussion papers and be required to specifically consider their use in relation to all of its projects.
I believe that the public roundtables held in 2003 on IAS 32 and IAS 39 helped the board reach a better understanding of a number of the issues and concerns raised by commenters. The IASB should consider making greater use of such public hearings in the future. I also believe that the IASCF could consult more with the Standards Advisory Council as it seeks to address issues associated with the technical agenda of the IASB.
Voting Procedures of the IASB
I do not believe that requiring a two-thirds supermajority vote would necessarily lead to effective and timely decisionmaking, and such procedures could ultimately stymie the efforts of the IASB to issue high-quality standards within reasonable time frames. I believe that retaining the simple majority vote or moving to a nine-vote requirement, as mentioned in the committee's paper, could be an appropriate approach for all matters before the IASB involving exposure drafts, standards, or final interpretations.
Resources and Effectiveness of the IFRIC
In the context of the implementation of international accounting standards in a number of countries in the near future, many questions about interpretation are likely to arise. I share the concerns of many commenters that IFRIC may not be able to address all these questions in a timely manner. I am therefore encouraged to hear that a review is underway of the working practices of IFRIC and the resources available to it to meet its important responsibilities.
Composition, role, and effectiveness of the SAC
I strongly support the changes suggested by the committee. I believe that the SAC should select its own chair, rather than the IASB chair continuing in the role, because the SAC needs to be seen as independent of the IASB. In addition, as mentioned previously, I recommend that the trustees should have, at least annually, an in-depth confidential meeting with the SAC--that is, without the IASB being present--to obtain the SAC's candid views and advice on the IASB's agenda, proposals, and standards, as well as on its actual due-process practices. I am encouraged to see that the trustees are seeking feedback from SAC members on how the SAC can more effectively meet its stated objectives in the future. The SAC could operate more effectively by ensuring that sufficient time is given to key topics, such as financial-instruments accounting and risk disclosure. This would allow for better discussions at SAC meetings and the opportunity for the SAC to give clearer advice to the IASB. Moreover, the use of new discussion techniques (for example, smaller discussion groups of SAC members) should be considered as a means of improving the functioning of the SAC.