As the financial and corporate worlds digest the implications of the Sarbanes- Oxley Act, and the implementation by the Securities and Exchanges Commission (SEC) of its provisions, the work of the International Accounting Standards Board (IASB) has been attracting less attention.

Yet the move towards the adoption of international accounting standards is probably the most important underlying development underway in international financial markets. Accounting standards may not set the pulse racing for those outside the profession, but there is nothing that matters more for the health of capital markets than ensuring that the raw material on which investors base their decisions is of good and even quality around the globe.

My own involvement in accounting standards began in 1999, when Arthur Levitt, then Chairman of the SEC, asked me to take part in an exercise to reconstruct the governance arrangements for the IASB. The establishment of new IASB governance has been a very significant development. Although much excellent work had been done by the old IASB under Bryan Carsberg, the process of developing a set of standards which would attract widespread international support was blocked.

It had become the victim of one of those periodic transatlantic misunderstandings which plague an otherwise successful relationship. The US perceived the European Union as wanting an oversight structure for international accounting standards which was far too political in nature, and subject to too much influence by non-accountants.
While, by contrast, the European Commission and others in Europe perceived the US as lacking commitment to the IAS process, and as harbouring secret designs to impose US GAAP on the rest of the world, and to enshrine the Federal Accounting Standards Board (FASB) as the global standard-setter.

The securities regulators, with Arthur Levitt in the lead, took the initiative to break this impasse by aiming to devise a governance arrangement that would go some way towards responding to the concerns of both sides. The solution we came up with has proved an artful compromise, and one that indeed is already being seen as a possible model for other global standard-setting bodies in related areas.

The Nominating Committee for the IASB itself was deliberately designed to be a self-extinguishing body. While it lived, it was very active. I and the other members of the Committee met several times to agree a slate of trustees who would oversee the process in future. That required a delicate balancing act to produce a team who would build confidence among the wide range of constituencies with an interest in accounting standards. This was not an easy task, but under Paul Volcker’s inspired chairmanship, I believe the trustees have generated the needed support. The trustees were then responsible for appointing a strong professional board, including the most influential and skilled accounting standard-setters in the world, under the chairmanship of the distinguished accountant David Tweedie, who has the personal authority to carry with him his professional colleagues from all around the world.

But the establishment of the board would not have been so significant had it not been accompanied by another development in which we, the Financial Services Authority, were also closely involved. Unless securities regulators, particularly the SEC, were prepared to envisage the adoption of international accounting standards for listed companies in their jurisdiction, the board would be wasting its time. So the agreement in April 2000 by the members of the International Organisation of Securities Commission (IOSCO) to work through the approval of a set of international accounting standards, with a view to their adoption for listed companies around the world, was of the highest significance.

A third key milestone was the European Union agreement in June 2000, to adopt International Accounting Standards across the EU by 2005. These developments created the basis for a new legitimacy for the IASB and gave the board itself the authority and intellectual horsepower it needed to overcome the significant obstacles which remained in its path. And they generated a broad constituency of support for the process which had been lacking before. The trustees quickly attracted a substantial degree of funding, which meant that the process could then begin in earnest, in a systematic and detailed way.

The task of agreeing a set of global accounting standards received a significant boost in October 2002 when the FSAB and the IASB published their Memorandum of Understanding agreeing to add a short-term convergence project to their active agendas. In this project, they would use their best efforts to propose changes to US and international accounting standards, to reflect common solutions to specifically identified differences. Many of us in Europe were pleasantly surprised by this agreement, and look forward to seeing some tangible results from it in the next few months. Because if IASs are to attract broad international support, they should be seen to incorporate the best of the international standards available.

In my view, there is a clear need for global accounting standards which provide that businesses undertaking similar activities should be subject to broadly the same accounting treatment wherever they are. But global standards will only work if they are principle-based. It is clearly not realistic or desirable to try to write detailed rules for universal application in more than 150 countries.

If one accepts the argument for principle-based standards, their success depends on three key corporate governance controls. There must be senior management in companies who want to get the right answer. There must be auditors who are independent of management, and aware of their broader public role in support of efficient capital markets and the interests of investors. And there must be an independent-minded audit committee, or the equivalent, to monitor the relationship between management and auditors. In addition, there will need to be enforcement arrangements in each major jurisdiction, in which we can all have confidence, and which provide a sound basis for mutual recognition.

The corporate scandals we have seen in the US and elsewhere highlighted deficiencies in corporate governance in many companies. In the US, the Sarbanes-Oxley Act has been the most outward and visible response by the authorities to these problems, and the provisions of that Act will undoubtedly have a major impact on boards of directors and, specifically, on audit committees in the US and, perhaps, elsewhere. Regardless of legislation elsewhere, the British Government has, with participation from the FSA, been engaged in a number of reviews to assess, in the light of recent experience, whether our own corporate governance arrangements remain “state of the art”. Those reviews have taken into account the IOSCO principles on auditor independence and auditor oversight, and the role of company boards in maintaining that auditor independence.

Earlier this year reports on the role of non-executive directors and of audit committees were published by the UK government. They contain specific recommendations to strengthen the role of non-executive directors, to increase their number, to emphasise the need for a split of responsibilities at the top of corporations between the Chairman and the Chief Executive, and to clarify and strengthen the role of audit committees.

In my view, the UK approach to corporate governance, with Codes of Practice developed in the private sector, yet enforced through the Listing Rules, overseen by a statutory authority, is a good one. Corporate governance is an organic subject and we learn more about how to optimise it as we go along. It makes sense to operate a system that allows rapid change to be made, yet permits appropriate flexibility, without needing to resort to legislation.

A third significant review in the UK at the start of this year concerned the oversight of auditors and, crucially, the enforcement of accounting standards. In the US there has, for some time, been a proactive development in the enforcement of accounting standards, with reviews of a sample of companies carried out by the SEC. In the UK, that has not been the case, although the Financial Reporting Review Panel has been effective in securing rectification of accounts where shareholders or others have drawn their attention to possible problems. We have now agreed that there needs to be a proactive element to our regime.

The UK government has also announced an overhaul of our regime of auditor oversight, to make it somewhat more independent of the accounting profession. The changes will also make our regime rather simpler operating under the Financial Reporting Council, on which the FSA sits.

In the light of these changes, I hope we can now move towards developing a basis for mutual recognition of standards between UK authorities and the US Public Companies Oversight Board, established under the Sarbanes-Oxley Act. In the wake of last year’s difficulties, a number of countries have now overhauled the legislative and regulatory requirements surrounding company accounts, corporate governance and the regulation of the auditing profession. This new and more solid basis of regulation is a good platform for the launch of the fully comprehensive set of international accounting standards in 2005.

For more information, contact:
Robin Gordon-Walker
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Tel: +44 (0) 207 6763324
Fax: +44 (0) 207 6761021
E-mail: robin.gordonwalker@fsa.gov.uk