Transnational expert-driven standardization –
accountancy governance from a professional point of
view
Sebastian Botzem∗
[email protected]
Paper presented at the ECPR Meeting
Granada, April 2005
Workshop: Transnational Private Governance
in the Global Political Economy
This paper is a first draft. Comments and discussions are very welcome, but
please do not quote without the authors’ permission.
∗
Social Science Research Center, Berlin / Free University of Berlin
1
Abstract
Transnational standard-setting in accountancy has been under way for three
decades. The governance structures are analysed to provide some insights
for the debate on transnational private governance. A historical view on the
development of transnational standardization underlines the roots of private
rule-making in which professional experts and their associations have played
an
important
part.
Current
governance
arrangements
display
less
associational influence, but still rely on core principles such as self-regulation
and highlight the importance of expertise. Theoretical inspirations can be
drawn from the sociology of professions in which social closure and the
struggle over professional jurisdictions are emphasized.
Empirically, the paper traces the developments in accountancy with particular
reference to the organisational genesis of a self-regulatory body for the
auditing profession on the one hand and a transnational regulatory agency
for accounting standards on the other. The historical asymmetry is reflected
in the paper, giving more room to the case of accounting standards. In a first
step, the paper aims at identifying the particularities of transnational
governance structure in accountancy. Distributed agency and dispersed
authority are at the center of the findings. The concluding section tries to
draw some lessons for systematic thinking of private transnational
governance considering the role of professionals under these conditions.
2
1. Introduction
In the debate about transnational private governance in the global economy,
private standardization is a feature increasingly arousing attention. In addition
to technical standardization, rule development and rule-setting is particularly
prominent in international financial markets. Even in financial market
regulation, the field of accountancy seems to be an exception: Whereas in
other areas such as monetary and fiscal policy, corporate governance or
financial regulation and supervision, the issuing bodies are intergovernmental
organisations, such as the IMF, OECD or Basel Commission for Banking
Supervision, standardization in accountancy is dominated by two private
sector bodies1. Considering the tremendous corporate failures in the past
years, such as Enron, Worldcom, Parmalat and others that were blamed on
flawed application of accounting standards and the misuse of the auditing
profession,
it
seems
particularly
intriguing
that
standardization
in
accountancy is still in the hands of private international organizations.
As transnational standardization is increasingly relevant for corporate actors
but also for national regulatory agencies, the governance structure of
accountancy deserves some more detailed attention. The paper sets out to
analyze transnational private governance arrangements in the accountancy
field looking at professionals, their associations and the mechanisms to
secure professional rule beyond the nation state. As accountancy is
considered a vital determinant of corporate governance structures potentially
affecting national economic systems as a whole, the research questions to
be answered are: How do professional experts shape and influence
transnational standardization? What are the consequences for transnational
private governance?
The paper starts out with a brief theoretical overview and than turns to the
empirical case of accountancy from a historical perspective. Governance
structures are analyzed and some particularities highlighted. The paper
1
The Financial Stability Forum, founded in 1999 by the G7 Ministers and Central Bank
Governors has identified 12 standards vital to sound financial systems. See 12
standards in Table 1 of Appendix. For the genesis of the FSF, see
http://www.fsforum.org/about/genesis_of_the_fsf.html.
3
closes with drawing some preliminary conclusions for the debate on private
transnational governance.
2. Theoretical background
For the discussion on transnational governance in the field of accountancy
two points of departure are considered, the debate on global standards as
well as the sociology of professions.
2.1 Global standards
Increasing cross-border activity and economic integration, customer
demands and professional services offerings are part of the globalization of
economics (Simmons 2001). Closer economic interaction has led to the
development of rules and regulations beyond the nation state. Standards are
one such form of rules to regulate cross-border economic activities
(Braithwaite/Drahos
2000).
Their
character
as
voluntary
rules
(Brunsson/Jacobsson 2000) makes standards particularly suitable because
they can be introduced alongside existing regulation and be confined to
precisely defined areas. Regardless of the social and political character
expressed in standards, the individuals involved paint a rather technical
picture of their task. Striving for the most appropriate solution, discussing
advantages and disadvantages in a rational manner seems to be the
understanding of experts involved, even though social science research has
pointed to the political dimension of standardization (Tamm Hallström 2004,
Voelzkow 1996). Differing interests play an important role in the processes of
drafting and disseminating standards.
From an institutional economics point of view, standards are considered
central to establishing cross-border coordination (Abbott/Snidal 2001,
David/Greenstein 1990, Genschel/Werle 1996). However, the global
dimension of standards has also been identified by the institutionalist
literature on rationalization (Boli/Thomas 1999, Meyer et al. 1997). This
approach stresses the importance of global diffusion of rationalized
governance, in particular underlining the role of professionals in theses
processes (Drori et al. 2004: 4f.). Other streams of literature, particularly in
4
political science have focus on standardization arrangements from a multilevel perspective (Mattli 2001, Mattli/Büthe 2003, Schmidt/Werle 1998). Mattli
describes in detail the interrelatedness of public and private governance
structures. He focuses on multi-level dependencies and the public private
interactions and labels it “joint standards governance” (2003: 217ff.).
The broader context for the discussion of transnational standardization can
be seen in the debate on private authority. It underlines the growing
importance of non-state actors in global affairs (Cutler et al. 1999, Higgott et
al. 2000, Kahler/Lake 2003). Contrary to what the term private authority might
suggest, public actors still play a role. What is stressed by Cutler and others
is the focus on alternative sources of authority outside the state (Cutler et al.
1999: 4ff.). Particular importance is given to corporate actors and their
capacity to self-regulation, but business associations are also considered
relevant in spanning national borders.
The literature on global governance is also debating certain organizational
forms of transnational governance. Particularly networks (Thompson 2003)
and expert communities come into focus. Epistemic communities (Haas
1992) emphasize the role of technical experts and their involvement in
regulatory arrangements. Instead of limiting epistemic communities to the
formulation of ideas as part of the agenda-setting process, communities can
be ascribed other tasks. Van Warden and Drahos (2002) point out the
importance of epistemic communities as channels for exchange and
information that makes them a source for cross-border policy convergence. A
similar understanding is the basis of Brunsson’s concept of normative
communities (Brunsson 2000: 28f.). Sugarman operates with the notion of
interpretative community (Sugarman 1995) when stressing the contestations
between differing professionals and their representative organizations. The
emphasis on rule-shaping by argumentation is underlined by concepts such
as transnational discourse communities (Bislev et al. 2002).
2.2 Professional self-regulation
The sociology of professions is focussing on professionals and their
associations to asses their governance contribution in modern societies. The
5
approach centres on selected groups of actors that display a high degree of
autonomy and self-organizing capacity, such as lawyers, engineers, doctors,
consultants or accountants. Their roles and the contributions in capital
market societies are analyzed. To differentiate between professional
groupings, Reed (1996: 586) suggests three characteristics, namely
knowledge base, organizational form, and power strategy of the different
expert groups2. These three elements have been debated in detail in the
literature of professions.
Participants of standardization processes often characterize the knowledge
base in accounting as technical but influenced by academia. In practical
terms, the relevant knowledge for auditing is influenced by business aspects
of customer relationships. More than the other two categories, knowledge
base reflects national variations. In the continental European systems the
contribution of academics is considered to be more important, while in AngloSaxon countries the knowledge base is characterized much more by practical
considerations in a case oriented and therefore more localized system of
knowledge generation (Nobes/Parker 1985, Nobes/Parker 2004).
Traditionally, the dominant organizational form in accountancy (self-)
regulation is the professional association. Associations are organized as
collegiate bodies with clearly defined tasks. To a high degree, power is
derived from the control of entry barriers via education and issuing of
certificates (Ramirez 2001). This is a basic feature of associational
organization of self-regulation (Macdonald 1995). Prestige and credibility
were important to secure the status of accountants and auditors, particularly
in early times, when professionals established their businesses to earn
money with corporate failures and fraudulent behaviour of others. Especially
in countries like the UK and the US where capital market investments
historically play an important role for the funding of enterprises, financial
auditing was vital (Covaleski et al. 2003: 327). In the UK the profession
developed out of bankruptcy legislation in the second half of the 19th century
2
In Reed’s setting, accountants are not explicitly mentioned. However, they are most
similar to lawyers with a collegiate form of organization and a power strategy aiming at
monopolization. Reed’s division along the lines of knowledge base is less convincing.
His suggestion of the knowledge base categories such as abstract, rational and esoteric
knowledge (1996: 584) remains rather cryptic.
6
(Willmott 2000), in Germany and the US auditing was made mandatory after
the economic crises in the 1920s. Their quasi-public role, makes auditors
view themselves as independent treasurers auditing corporations (Willmott et
al. 2000).
Closely related to the disposal over knowledge and the self-regulatory
organization is the power strategy. Its strongest expression can be seen in
the establishment of jurisdictional configurations. It is crucial for an
occupational group to control its abstract system of knowledge in order to
claim professional stature (Abbott 1988: 8f.). Jurisdictions comprise formal
control over key definitions of professional services and the language used in
describing the techniques and the actual conduct of work performed by
practitioners (Abbott 1988: 62). Professional associations are competing with
other, neighbouring professions over the construction of the professional field
(Dezalay/Sugarman 1995). The sociology of profession has put particular
emphasis on rivalling professions. Due to its status as semi-public auditors in
accountancy, formal control is particularly relevant. This needs to be
balanced out with a wide array of other actors, amongst which are the state,
other occupations, educational institutions, and customers (Macdonald 1995:
189). Control needs to be re-established over time, making the contestation
over jurisdictional control a continual endeavour.
“Such formal control provides power, but as soon as a professional
field is fully translated into the rules and programs or becomes
codified, the profession’s power disappears. Therefore, it is necessary
for a profession to continually re-generate its abstract system of
knowledge, thereby extending its jurisdiction to possible enrcoach
upon that of adjacent professions” (Covaleski et al. 2003: 325).
Particularly between the field of law and accountancy competition is quite
intense (Dezalay/Sugarman 1995, Sugarman 1995). After World War II,
accountancy has successfully invaded the sphere of law. Mainly through an
increase in the market for taxation and management services (Sugarman
1995: 228). However, jurisdictional competition is not simply to be seen as
accountancy triumphing over law. Particularly in Anglo-Saxon countries, law
remains the language of the state. Intellectually and culturally law is still
7
influencing accountancy. Remarkably, both rivalling professions see the state
in a very similar way. They are united “by their common ideological
inclinations, their commitments to laissez fair and individualism and their
mutual hostility to the state, their common enemy” (Sugarman 1995: 235).
Another way to describe the power strategy of professions aiming at
monopolization is social closure (Macdonald 2000). By means such as
education, membership control, and certain behaviour, insiders determine the
rules for others to participate.
In the case of accountancy, studies have identified the multiple roles experts
play and underline the social and political dimensions of their actions.
Particularly striking is their role in standardizing. Experts are characterized as
“policy players” that choose their roles according to what suits them best. In
setting
accounting
standards,
experts
are
“members
with
several
organizational affiliations besides that of being an expert belonging the
accountancy profession” (Tamm Hallström 2004: 92f.). Central actors are
largely, but not exclusively stemming from professional accounting
associations. They consider themselves to be technical experts looking for
optimal solutions. However, in the processes of rule-making it becomes quite
clear that they also act interest-oriented. They are both neutral experts and
representatives of certain interests (Tamm Hallström 2004: 94).
Recent literature has pointed to shifts within the accountancy field and put
emphasis on auditing firms as powerful organizational units. Auditing firms
intermediate between differing contexts and span the boundaries of nations
as well as organizations (Ansell/Weber 1999). Under the circumstances of
globalization, auditing acquire global scope (Greenwood et al. 1999). Also,
they are increasingly dominating the configuration of associations challenging
the national logics inherent to associations (Greenwood et al. 2002: 64f).
Recent research suggests a clear shift from professional associations to
professional services firms in terms of organizational power (Suddaby et al.
2005). Despite the shifts in actor constellations audit firms have always
played important roles in the associations. What is changing, however, is that
instead of having a “disproportionate say in its (a professional association’s)
affairs” (Macdonald 1995: 203), big firms to greater extend now exercise their
8
influence openly and directly, which means independently of professional
associations.
3. Cross-border dynamics in accountancy
Even though accounting rules and their application and evaluation through
auditing procedures appears rather technical, the social and political
dimensions in accountancy are evident (Hopwood/Miller 1994). For corporate
actors, accounting rules are vital because they determine how economic
realities are displayed and influence publicized profits of firms3. Other actors
also have a high stake in accounting rules and auditing procedures, such as
stock exchanges and financial investors that use financial reports as
guidelines for investment. Public agencies that aim at ensuring investors’
protection, risk control and in some cases draw in accounting rules for
taxation purposes.
National
differences
need
to
be
considered
when
thinking
about
harmonization and standardization on a global scale. In their model of
accounting systems, Nobes and Parker used to differentiate between the
micro and macro approaches of accounting, and the type of regulation
applied (2004). The duality between countries following Anglo-Saxon
accounting principles on the one hand (US, UK, Canada, Australia, and the
Netherlands among others) and the ones following a continental European
approach on the other hand (Germany, France, Belgium, Italy but also
Japan) resembles differences in a variety of spheres (Nobes/Parker 2004:
66). Generally, Anglo-Saxon countries can be characterized as capital
market based. Accounting rules are developed incrementally and resemble a
common law understanding. The rules are investor oriented and put
emphasis on the representation of a true and fair view, which means they
aim at identifying the companies’ situation for a defined period of time.
3
International comparisons underline the consequences of differences in financial
reporting. In 1993 the German Daimler Benz corporation issued group accounts under
the more conservative German accounting norms as well as the US-Generally Accepted
Accounting Principles (US-GAAP) to be able to list on the New York Stock exchange.
While the German group earning were reported to be of 165 million DM for 1993, under
US-GAAP Daimler Benz group claimed a loss of 1,8 billion DM (Glaum 2000: 37).
9
Continental European logic puts much more emphasis on the protection of
creditors. The linkage of financial reporting and taxation has also led to a
wide spectrum of reserves and an approach to financial reporting that
focuses on long-term stability. Accounting rules complement a system of
bank financing. In this sense, accounting principles fit to traditional national
economic
configurations
and
resemble
institutional
complementarity
(Hall/Soskice 2001).
Recent classifications of national accounting regimes have considered the
increasing importance of financial markets and divide the developed
economies along another line of thinking. The proposal aims at differentiating
between strong and weak equity. In practice, this leads to the same
categories, grouping Anglo-Saxon countries in the strong equity class and
the continental European ones in the weak class (Nobes/Parker 2004: 69).
The duality is also displayed in the national governance of standard-setting.
Particularly in Anglo-Saxon contexts, above all in the UK, professional
associations are powerful and resourceful actors that have managed to
implement self-regulation and thereby influenced standard-setting. In
continental Europe, associations have also been important in standardsetting, but public actors have played a bigger role. In all cases however, it is
the task of national associations to determine auditing rules. They set ethical
standards and ensure their application. They participate in and sometimes
oversee the education of new professionals.
3.1 Historical roots of international standardization
Since the late 19th century experts in accounting and auditing were interested
in cross-national exchange to improve their own knowledge and to provide
better services to customers. Back then, professional congresses were the
first important fora (Mueller 1979: 2). Congresses continued between the two
world wars, particularly in continental Europe, but it was not until after WW II
that accountancy became an issue of intergovernmental activities. Initiatives
were first debated under the auspices of UNESCO and later on by the OECD
with a focus on developing sound macro approaches in public accounting as
10
well as international harmonization of private accounts of multinational
enterprises (Samuels/Piper 1985).
Early steps in standardization were taken by the European Commission. A
first drafts of accounting directives to harmonize corporate reporting was
issued as early as 1964 (Nobes 1985). However, the accession of the UK,
Ireland and Denmark made it necessary to include the more capital market
oriented principles into the directives. Under these circumstances, the two
central directives to European accounting (the 4th and 7th directives of 19784
and 19835 respectively) were rather general guidelines accepting all differing
national accounting principles and procedures.
Coherent and precise standards could not be developed without resolving the
differences between the continental European and Anglo-Saxon accounting
principles. As a reaction to these problems the European Commission
abandoned the idea of setting its own standards on the basis of the
directives. In 1995 it drastically changed its position on accounting
standardization. In its “New Strategy vis-a-vis International Harmonisation“
(European Commission 1995) the EU decided to accept the International
Accouting Standards (IAS) issued by the International Accounting Standards
Committee (IASC) if they were in congruence with European directives.
The harmonization project of the IASC is based on an Anglo-Saxon initiative
of professional self-regulation. First step was the creation of the Accountants
International Study Group (AISG) in 1966, a union of British, Canadian and
US-American accountings practitioners with the aim to issue “comparative
studies as to accounting thought and practice in participating countries”
(Thomas 1970: 60). Professional sprit and expertise were regarded vital
criteria for participating in the AISG. In Thomas’ view this meant being “fully
au fait with international developments” and having a wide professional
background as well as an aptitude for research (Thomas 1970: 63).
4
5
Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the
Treaty on the annual accounts of certain types of companies.
Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g)
of the Treaty on consolidated accounts.
11
The strategy of the study group was to strengthen private standard-setting as
an alternative to supranational regulation and clearly reflects the influence of
Anglo-Saxon professions and their tradition of self-regulation. Also, the
private mode of standard-setting was in the interest of Anglo-Saxon auditing
firms trying to open up new markets in continental Europe. The IASC’s
primary goal was to establish a set of universally acceptable standards: “It
was intended that the IASC would produce basic standards that would be
capable of rapid acceptance and implementation worldwide” (Samuels/Piper
1985: 70).
The professional project was explicitly established to counterbalance the
European attempts of developing a set of conservative accounting standards.
Above all, British professionals were uncomfortable with a regulation that was
developed under statist European influence: “It is claimed that the hidden
agenda of the IASC was to issue standards that reflect Anglo-American
practice, which the UK (and similarly minded countries) could use as
ammunition in its endeavours to stop the European Union from imposing
accounting rules that conflicted with British practice” (Flower 1997: 288).
The establishment of the IASC laid the foundation of a governance structure
for standardization beyond the nation state. In the beginning, the focus was
clearly on accounting standards. Up until the late 1990s the issues of auditing
were not in the spotlight of global accountancy. Only recently has auditing
become a global issue.
3.2 Organisational differentiation: the dual structure of standardization
Transnational governance in accountancy is closely related to the IASC
which is
the centre of the transnational network in accountancy
(Braithwaite/Drahos 2000: 121). The committee was founded in 1973 after a
decision of the 10th international congress of accountants. It took another five
years, however, to found an organization that would steadily represent
national accounting associations world-wide. The International Federation of
Accountants (IFAC) was established in 1977 to have an institutionalized body
to deal with global matters in auditing. IFAC and IASC were linked up through
a mutual agreement in 1982 with IFAC becoming the organization overseeing
12
IASC’s activities. Officially, IFAC nominated the Board members and
provided funding for IASC. IFAC’s task was to foster the worldwide
proliferation of International Accounting Standards (IAS) among other things
through influencing national standard setters (Haller 1993: 1297).
3.3 Setting accounting standards: The creation of the International
Accounting Standards Committee (IASC)6
In 1972 the Accountants International Study Group invited professional
bodies of six other nations to set up a proper organisation to organize crossborder standard-setting. In 1973 the International Accounting Standards
Committee (IASC) was founded and included representatives from the
national professional associations of Australia, France, Germany, Japan, the
Netherlands, and Mexico in addition to the study group members form UK,
US and Canada.
Three different phases can be distinguished. The first phase comprises the
establishment of IASC as the standard-setting arena by building up links with
other important actors (1973-1987). The second phase can be characterized
as the consolidation of IASC when standards were brought in line with
financial market requirements and the institutionalization continued (19882000). The third phase (see 3.4) marks the organisational separation
between IASC and IFAC and transformation from IASC to IASB7 (since
2001).
1973-1987: establishing first ties and extending relationships
From the beginning, IASC attempted to connect to international organizations
in the field of financial markets. In 1976 they sought relations with the ‘Group
of Ten’ Bank Governors, later met with the OECD’s and the UN’s working
group on accounting and reporting. Contrary to the UN initiative, which aimed
at supporting developing countries to make corporate actors behave
6
7
For historic development see IASPlus (DeloitteToucheTohmatsu 2003) and IASC
discussion paper “Shaping the Future” (IASC 1998).
From its establishment in 1973 to a major organizational overhaul in 2001 the
international standard-setting body was called International Accounting Standards
Committee (IASC). In 2001 the name was changed to International Accounting
Standards Board (IASB).
13
responsibly and giving governments and civil society a useful tool to measure
and react to corporate activities, the OECD gave much consideration to the
needs of corporate actors from the North (Hopwood 1994: 252, in Note 1.),
thus being close to the IASC in its attempt to link up with corporate actors
and financial market players.
In addition to intergovernmental cooperation, IASC began joint projects on
specific
accounting
issues
with
national
standard-setters
from
the
Netherlands, the UK and the US in 1980. In the mid 1980s the organization
developed closer ties with the US-American Securities and Exchange
Commission (SEC) which is an independent regulatory agency overseeing
securities markets in the US.
The most important changes were opening up the IASC board and to co-opt
powerful actors into advisory bodies. The board is the central organ of power
in which the relevant decisions are taken. Board members were delegated by
national professional associations. Each country has one vote but usually
sends two delegates and in addition a technical non-voting expert. In 1977,
the constitution was amended for a first time, allowing for two more countries
to be members of the board. In 1982 a special constitutional bias in favour of
the nine founding members was abandoned and the number of board
members rose to 17. Up to the reform in 2001, board members were
executing their assignment without salary of IASC. Like other individuals
involved, they were sent to the organization by their national associations
and were in most cases on the payroll of private actors, often international
auditing firms of which many board members were partners.
Of the additional board members agreed upon in 1982, 4 seats were
reserved for representatives of organisations with an interest in financial
accounting. This marks a departure from territorial representation allowing for
organized interests of financial market actors to have the same say as
national professional associations. Departing from the mode of territorial
representation underlines the eagerness to incorporate specialized expertise,
in particular strengthening the position of users of financial reports. In 1986,
the International Coordinating Committee of Financial Analysts is the first
such organisation getting a seat on the IASC’s board. The enlargement of the
14
board,
however,
never
threatened
the
dominance
of
Anglo-Saxon
professions or those likeminded. In fact, the inclusion of financial analysts
can be seen as an additional way of linking up to the private sector
establishing communication with them and allowing them privileged access.
In addition to the expansion of the board, in 1981 the Consultative Group was
formed to advise IASC on projects and priorities. The group grew in size and
at a later stage comprised representatives of users and preparers of financial
statements as well as from national standard-setting bodies. Representatives
form intergovernmental international organizations were also included to
formalize and strengthen the relationship between IASC and other actors.
From the beginning IASC showed great flexibility in modifying its internal
structures and altering the organizational configurations.
1988-2000: linking up with the heavyweights and co-opting veto-players
In 1988 IASC introduced another institutional innovation, which was opening
its political nucleus for special organisations granting them an observer
status. The observer status on the IASC board was given to the USAmerican standard-setter the Financial Accounting Standards Board (FASB)
in 1988, to the European Union in 1990 and the International Organization of
Securities Commissions (IOSCO) in 1996. In the 1990’s IOSCO was the
single most important player in transnational accounting influencing the
procedures and outputs of IASC.
Historically, IOSCO’s development is rather recent as the organisation
acquired global scope only in 1983. Before that, IOSCO was an interAmerican regional association (created in 1974) to supervise securities
exchanges to maintain efficient and sound markets8. IOSCO powerful vetoplayer position derives from its authority over national stock markets. As a
representative body of national supervisory agencies of stock markets,
IOSCO issued requirements the International Accounting Standards (IAS)
needed to reflect in order to be eligible to be used by corporate actors when
listing at foreign stock markets. Starting in 1988, IOSCO and IASC agreed on
the comparability and improvements projects that aimed at defining capital
8
http://www.iosco.org/about/about.cfm?whereami=page15. 27.05.04.
15
market friendly characteristics of IAS. The decision not to approve IAS up to
2000 (IOSCO 2000) can be seen in the light of internal quarrels between
different members of IOSCO and points to a clear US-American dominance.
While most European members were in favour of instant endorsement of the
14 standards considered acceptable in 1993, it was the Securities and
Exchange Commission’s (SEC) position to recognize and endorse IAS only
after a complete set of core standards had been developed. A list of core
standards was decided upon in 1993 and completed in 1998. In Europe
many stock exchanges allowed the use of IAS for foreign listed companies
long before 2000. While some encouraged IASs’ use, Germany’s Neuer
Markt even required the use of non-local GAAP (Generally Accepted
Accounting Principles) from 1997 onward. This means, that German
companies were reporting either under IAS or US-GAAP when listed at the
Neuer Markt.
1988 was also the first year when regular members of the board were
expelled in favour of new members. During the 1990s the rotation of
countries from the global South and Asia continued, but did not weaken the
position of Anglo-Saxon and Commonwealth countries which were never
rotated out of the board once they occupied a seat. Of the four board seats
reserved for other organisations with an interest in financial reporting, only
three were occupied up to the organisational make-over in 2001. After the
early accession of the Financial Analysts in 1986 it took a number of years
until the Federation of Swiss Holding Companies (1995) and the Association
of Financial Executives (1996) moved on board.
The integration of the European Commission in 1990 was an important step
in paving the way for change in the Commissions accounting strategy. All
along, IASC had also developed close ties with the European association of
professional accounting bodies, the Fédération des Experts Comptables
Européens (FEE). FEE was always a strong advocate in convincing the
Commission that adopting IAS rather than developing its own standards is a
superior strategy. The official change of the Commission towards a new
strategy for harmonising accounting standards in 1995 also has to do with an
increasing number of big European corporations opting for US-GAAP as
16
internationally accepted standards. The increasing trend of big corporations
to use US-American standards posed a threat to European institutions and
led to the Commission’s decision to endorse IAS after an examination of the
Commission (European Commission 1995).
A third body was set up in 1995. The so called advisory council was made up
of 10 personalities of the financial community was set up to foster reputation
and to provide alternative financing (Kleekämper 1995: 420). The changes of
the 1990s also include an amplification of the Consultative Group. It included
the US-American standard-setter, the Financial Accounting Standards Board
(1988), the European Commission (1990), and representatives of actuaries
(1997). The objective of this body that assembles more than a dozen
international organizations9 was to discuss particular standards under
development with the board (Kleekämper 1995: 420).
While the reputational aspect was important and securing international
recognition of IASC improved, it was vital for the organizational development
to come to terms with the forces that had to decide about the implementation
of accounting standards. In addition to the national standard-setters these
were stock exchanges and their oversight bodies. In its quest for authority,
the IASC managed to incorporate the relevant players of the field and to work
with the forces of securities’ markets to gain acceptance for their regulatory
output (Tamm Hallström 2004).
3.4 Changes in accountancy governance: transnationalization of
standard-setting
The year 2001 marks a turning point with the formal separation of the
International Federation of Accountants (IFAC) and the International
Accounting Standards Committee (IASC). The division of labor between the
two bodies is being resembled in the new governance structure. IFAC’s
responsibility was refocused on the self-organization of the global accounting
9
The Consultative Group included intergovernmental and private international
organizations such as the International Chamber of Commerce, the international
Federation of Trade Unions, the International Banking Association, the World Bank,
OECD, and United Nations bodies.
17
profession while the future IASC was exclusively dedicated to setting
accounting standards.
As the global body of national professional associations, IFAC currently
comprises 163 member bodies of 119 countries and represents more than
2,5 million accountants of public practice, industry, commerce, government
and academia (IFAC 2005). Its governance rests with its council, in which
each member organisation is represented. The IFAC board is made up of 17
indivduals responsible for setting policies and overseeing the organisation’s
operations, the implementation of programs, and the work of committees and
task forces. The objective is to strengthen the accountancy profession, to
contribute to the development of strong international economies by
establishing and promoting adherence to high-quality professional standards,
and to further international convergence of standards (IFAC 2004). This
stresses the self-regulatory character of the profession, setting standards for
its members and practitioners associated to member organizations.
Currently IFAC is undergoing a process of reorganization. While the structure
is not yet entirely clear, the position of the big auditing corporations will be
strengthened. They have founded a new organ called the Forum of Firms
which they use to centralize their power and to influence IFAC. Via the
Forum, the interest of the global auditing firms can be inserted into the IFAC.
A reform proposal dating from September 2003 explicitly includes the Forum
into the IFAC leadership group (ILG): “The ILG members are the President,
Deputy President, and the Chief Executive of IFAC, the chairs of the
IAASB10, the TAC, and the Forum of Firms, and up to four other members
designated by the IFAC Board” (IFAC 2003: 18).
The executive committee of the Forum of Firms is the Transnational Auditors
Committee (TAC). By way of the IFAC constitution, TAC is one if its
committees, but separated organizationally (IFAC 2004). “The Forum will
bring together firms which perform transnational audits and involve the firms
more closely with IFAC’s activities in audit and other assurance-related areas
10
The International Auditing and Assurance Standards Board (IAASB) is where IFAC’s
most important standards, the International Standards on Auditing (ISA) are drafted and
decided upon (IFAC annual report 2003: 21).
18
thereby supporting IFAC's mission” (FoF 2003: Part 1.2). Part seven of the
Forum’s constitution defines the institutional cross-over relationships: The
Forum of Firms “shall have the right to be represented by up to five members
on the International Auditing and Assurance Standards Board and up to two
observers on IFAC’s other assurance-related committees and the Education
Committee” (FoF 2003: Part 7.63).
In turn, the board of IFAC “shall have the right a) to be represented at
meetings of the Forum, the TAC and their subcommittees and task forces by
up to two representatives and b) to propose matters for consideration by
meetings of the Forum, the TAC and their sub-committees and task forces;
such matters may include recommendations for changes to this Constitution.
The Forum, the TAC and their sub-committees and task forces as
appropriate shall consider such matters and shall report the results of such
consideration to the IFAC Board” (FoF 2003: Part 7.64).
This structure makes quite clear how power is distributed in IFAC. While the
Forum has the right to be represented in the IFAC organisation, IFAC bodies
in turn only the right to be present. This important difference characterizes
the power relations within IFAC. Global auditing firms successfully managed
to reserve for themselves a secure position within the IFAC structure to
directly influence the organizations policies.
In contrast to IFAC’s rather slow emancipation, changes in the sphere of
accounting standardization were more profound. The transformation from
IASC to the International Accounting Standards Board (IASB) aimed at
improving the organizational structure. After having completed the core
standards’ programme with IOSCO, new organizational challenges came up.
In addition to developing and issuing standards, the new IASB had to ensure
the global diffusion and implementation of its regulatory output.
In terms of the advisory structure, the external relations of IASC were
continued by IASB. During the reconfiguration, the organization has taken
over most of the IASC’s advisory bodies such as the Standards Advisory
Council
(49
members)
and
the
International
Financial
Reporting
19
Interpretations Committee (12 members) both appointed by IASB’s new
trustees and an advisory group appointed by the board.
The most drastic change can be seen in the exchange of board members.
Instead of having delegates from national professional associations, IASB
established special relationships with national standard-setters. The
organization’s new structure needed to be suitable to “bring about
convergence between national accounting standards and practices and highquality global accounting standards. To this end, IASC needs an effective
infrastructure the will bring its experience and current work together with
those of national standard setters” (IASC 1998: 3). To this end, the IASC
itself initiated the debate over the new structure.
In a number of ways IASB is different from its predecessor. Instead of being
officially controlled by the worldwide association of professions (IFAC), now a
foundation, the International Accounting Standards Committee Foundation
(IASCF) has the task of securing funding and nominating the new board
members of IASB. The foundation is made up of a Board of Trustees with 19
members that largely come into their position through cooptation. The
trustees were able to generate more than 10 million Pounds Sterling for the
yearly operations coming from corporate actors (50%), auditing companies
(30%),
national
and
international
governmental
entities
(8%)
and
associations (6%). The considerable increase in expenses arose because
IASB operational staff increased considerably. Also, the position of the now
14 members of the IASB board has changed to full-time membership (with
two being on a part-time assignment) and includes payment.
The new IASB constitution applies different criteria for the composition of the
board and the idea of jurisdictional representation for national delegations is
further weakened. Except for seven core countries in financial reporting (US,
UK, CD, AU/NZ, JP, FR, DE) which can nominate one delegate to the board,
no regional representation is provided for. Even though, the “foremost
qualification for membership of the IASB shall be a technical expertise”
(IASCF 2002: section 20) there is a clear reference that regional
representation is no longer the guiding principle: “The selection of members
of the IASB shall not be based on geographical representation” (Section 21).
20
The importance of global audit firms is further underlined by the constitutional
provision of IASB board members. “To achieve a balance of perspectives
and experience, a minimum of five members of the IASB shall have a
background as practicing auditors, a minimums of three a background in the
preparation of financial statement, a minimum of three a background as
users of financial statements, and at least one an academic background”
(IASCF 2002: section 22). To issue drafts and standards a majority of 8 out
of the 14 members is required. This makes it unlikely to come to relevant
decisions that seriously threaten the positions of global auditing firms.
The structural reform of IASB in 2001 can be characterized in two ways.
First, IASB reorganized its institutional setting and streamlined its operations.
Second, the organization spun an even denser net to influence and
incorporate national and international organisations holding power to
implement, evaluate, and enforce accounting standards. IASB acquired
legitimacy to extend its objectives well beyond the original stated task of
standard development. In particular, the special relations IASB is keeping
with the seven national standard-setting bodies points to the special status of
the most powerful countries. IASB has established a stable network crossing
organisational, sectoral and also national borders. IASB appeals not only to
Anglo-Saxon countries, but more importantly to countries with a different
regulatory background.
These countries, namely France and Germany and to a lesser extend Japan,
have given up their traditional ways of generating standards characterized by
the once dominant principles of prudence and long term consideration. It has
been argued elsewhere that one key to successful integration of differing
national, sectoral and organisational logics is to be seen in the procedures of
international
standardization,
namely
the
organizations
due-process
(Botzem/Quack forthcoming).
The current governance arrangements in accountancy can be characterized
by a separation between standardization for auditing and accounting, by
organizational growth in terms of services, manpower and financial
resources, by a reconfiguration of the modes of representation, and by an
increasing influence of globally active auditing firms. An overview of the
21
organizational characteristics of standardizing bodies in accountancy is
provided by table 2.
- Table 2 about here In practice, IASB remains the most important organization in international
standardization in accountancy. So far, standardization in auditing has largely
been in the shadow of accounting. IFAC is in the midst of reformation
establishing new governance arrangements. Currently, its task is defined by
developing guidelines for international auditing practices, accounting training,
and organizing future international congresses11.
Behind the façade of conflict-free standardization lies continued contestation
of rules, procedures and standards’ contents that are constantly fought over
by the participating actors. Both cases of accounting and auditing reflect
these dynamics in their governance structure. Actor constellations are
constantly in flux and are being reshaped by the actors themselves but also
by outside influences when dealing with application and enforcement. Private
actors such as stock markets are able to compete with but also complement
public actors. On the other hand, the EU is becoming more involved in
international accounting standardization. In terms of audit control, the USAmerican Securities and Exchange Commission (SEC) has reacted with
traditional regulatory policies to the corporate scandals.
Private actors influence IASB and IFAC through financial contributions. As
the addresses of international standards, multinational corporations become
involved in their development. Stock exchanges decide about cross-border
listings and financial analysts determine the credibility of harmonized rules by
making them the foundations for their investment decisions. However, special
attention needs to be given to the remaining global auditing companies,
called the Big 4. Professional services firms (PSF) are the single most
important type of actor in international accountancy today. They provide
finances and know-how. Most of the individual experts are or have been
employed by them. The wide acceptance and their powerful role is clearly
displayed in the reorganization processes. They have managed to be directly
11
http://www.ifac.org/About/. 21.05.04.
22
integrated into the governance structures and their position is largely
unchallenged. They have established themselves as credible organizations in
providing expertise to global standard-setting.
4. Conclusion and theoretical implications: governance under the
conditions of distributed agency and dispersed authority
The empirical analysis of the accountancy field displays a transnational
governance structure with certain characteristics in terms of agency and
authority:
First, actor constellations have been in constant flux. Over time, differing
actors and groupings have shaped developments. Two features become
visible. On the one hand, there is an increase in the number of actors
participating. The development of IASB showed how different types of actors
have been systematically integrated. Actors relying on and fostering a
financial market logic were the most prominent. On the other hand, there
have been changes in the organizational forms of professionalism. In
standardization, they are marked by a clear shift away from professional
associations to professional services firms. In both cases, in auditing and
accounting, it can be concluded that agency is distributed over a wide variety
of actors. Even though the number and constellation of actors varies in the
two spheres of standard-setting, the multiplicity of actors is evident.
Second, authority is not confined to public actors. A number of sources and
locations of authority have developed. At the moment, less influence of state
actors appears to be visible, but powerful veto players like the US-American
Securities and Exchange Commission, IOSCO, or in recent times the EU
play a role. In addition, private actors such as users and preparers of
financial statements, as well as stock exchanges are also becoming vital in
the accreditation of standards. They exercise private oversight and give
legitimacy to standards developed by private organizations. In terms of
authority it can be argued, that the multiplicity of important actors has lead to
23
diffused authority. Authority is dispersed between public and private actors
and across different levels of governance.
Distributed agency and dispersed authority make up the background for the
debate on the relationship of governance structures and professional
standardization. To conclude, three points will be suggested, on how
professional thinking can inspire the discussion of private transnational
governance.
(1) Changes in organizational forms: Actor constellations point to more
complex and sophisticated regulation. Therefore it becomes easier for
resourceful actors such as large accounting firms and transnational
corporations to play the game. In addition to resources, these actors also
dispose over most of the expertise deemed relevant in the field. At the same
time, their economic weight enables them to influence governance
arrangements. It is not by coincidence, that from the beginning global
services firms have had a high stake in harmonizing cross-border
accountancy rules. In contrast, small firms often lack sufficient resources and
expertise. They do not have the same tools available as big corporate
players and continue to rely on associations. Increasing complexity could
also prove to be a barrier for public agents as they often do not dispose of
the relevant expertise and resources to deal with transnational accountancy
issues. In contrast the national arena, they also lack the authority to regulate
professional behaviour. Therefore, globally operating economic actors
embody
the
most
important
organizational
forms
in
transnational
standardization.
(2) Shifts in the power strategies: Shifts from associations to private actors
(both PSF and transnational corporations) can be observed on all levels, the
national as well as the transnational. Professional associations have lost their
positions as central actors, but the professional conviction of such selfregulation has remained important. This has led to a transformation of social
closure. Traditional power strategies of professional associations serve no
longer
in
transnational
standardization.
Nevertheless,
professional
24
attributions such as expertise, status, and being part of the community
continue to be relevant organizing bases of transnational governance. Social
closure, it could be argued, is finding new forms. Expert culture is still very
much dominated by an understanding of professional behavior, expert
exchange,
and
rather
technical
standardization,
but
transnational
communities have replaced associations as reference groups.
(3) Need for public authority: With the increasing importance of transnational
private organisations in standard-setting, the role of public actors needs to
change. The loss of national regulatory traditions, less room to define the
content of rules, as seen in continental Europe, highlights the challenges.
Instead of directly influencing standardization processes, public authority is
largely limited to the application and enforcement of rules. However, there is
a need to debate and define the requirements of transnational governance
arrangements. Questions of transparency, accountability and participation
are to be addressed. Above all, the role of public actors can be seen in
formulating
requirements
and
defining
procedures
of
legitimate
standardization. It is not enough if private actors – as in the cases of
accountancy even written up in the constitutions of both IASB and IFAC –
claim to act in the name of public interests. These interests need to be openly
debated and authorized by public actors.
25
Appendix:
Table 1: 12 Key Standards for Sound Financial Systems
Area
Standard
Issuing Body
Macroeconomic Policy
and Data Transparency
Monetary and financial
policy transparency
Code of Good Practices on Transparency in
Monetary and Financial Policies
International Monetary Fund
(IMF)
Fiscal policy transparency
Code of Good Practices in Fiscal
Transparency
Special Data Dissemination Standard/
General Data Dissemination System1
International Monetary Fund
(IMF)
International Monetary Fund
(IMF)
Insolvency
2
World Bank
Corporate governance
Principles of Corporate Governance
Accounting
International Accounting Standards (IAS)
Auditing
International Standards on Auditing (ISA)
Organisation for Economic Cooperation and Development
(OECD)
International Accounting
Standards Board (IASB)3
International Federation of
Accountants (IFAC)3
Payment and settlement
Core Principles for Systemically Important
Payment Systems
Data dissemination
Institutional and Market
Infrastructure
Recommendations for Securities Settlement
Systems
Committee on Payment and
Settlement Systems (CPSS)
Committee on Payment and
Settlement Systems (CPSS)/
International Organization for
Governmental Securities
Commissions (IOSCO)
The Forty Recommendations of the
Financial Action Task Force/
8 Special Recommendations Against
Terrorist Financing
Financial Action Task Force on
Money Laundering (FATF)
Banking supervision
Core Principles for Effective Banking
Supervision
Basel Committee on Banking
Supervision (BCBS)
Securities regulation
Objectives and Principles of Securities
Regulation
International Organization for
Governmental Securities
Commissions (IOSCO)
Insurance supervision
Insurance Core Principles
International Association of
Insurance Supervisors (IAIS)
Market integrity
Financial Regulation and
Supervision
Source: Financial Stability Forum (FSF) 2002: 12 Key Standards for Sound Financial Systems. Last updated 11
March 2005. Retrieved 14 March 2005 from
http://www.fsforum.org/compendium/key_standards_for_sound_financial_system.html.
1.
2.
3.
Economies with access to international capital markets are encouraged to subscribe to the more stringent
SDDS and all other economies are encouraged to adopt the GDDS.
The World Bank is co-ordinating a broad-based effort to develop a set of principles and guidelines on
insolvency regimes. The United Nations Commission on International Trade Law (UNCITRAL), which adopted
the Model Law on Cross-Border Insolvency in 1997, will help facilitate implementation.
The International Accounting Standards Board (IASB) and the International Federation of Accountants (IFAC)
are distinct from other standard-setting bodies in that they are private sector bodies
26
Table 2: Organizational characteristics of standardizing bodies in
accountancy
Name
International Federation of
Accountants (IFAC)
(as of 2003)
Foundation
Objective
1977
Strengthen accountancy
12
profession worldwide
Membership
National professional
associations (currently 163)
National professional
associations represented IFAC
Council (one per member
organization)
Up to 20 members (IFAC
board elected in Council
meetings)
Oversight
function
executed
through
Board
members
International Accounting
Standards Committee (IASC)
(as of 2000)
International Accounting
Standards Board (IASB)
(as of 2003)
1973
Formulate and publish
accounting standards; improve
13
harmonization
National professional
associations (same as IFAC)
IFAC
2001
Develop, promote, and diffuse
14
global accounting standards
Up to 17 members (delegated
by member organizations or
co-opted by the board itself
No membership
International Accounting
Standards Committee
Foundation, IASCF (19
Trustees)
IASB Board: Currently 14
members (12 full time, two part
time)
Pattern of
board
representatio
n
Territorial
Territorial, functional
Functional, expertise-based,
special representation of
liaison countries
Authoritative
pronouncements
-
-
International Accounting
Standards, IAS
Interpretations, SIC
Conceptual Framework
-
-
International Standards on
Auditing, ISA (since 1991)
Ethical standards
Educational standards
Funding by
-
Membership dues
publications
-
Direct funding by
members (associations)
Indirect funding by private
business through
delegation of members
and technical personal
Publications
-
-
-
-
-
-
International Financial
Reporting Standards, IFRS
Interpretations, IFRIC
Conceptual Framework
Funding organized by
Foundation
Publications
Amount of
funding
9 Mio. US $ (2003); (in 2000: 2
Mio. US $)
2 Mio UK £ (2000)
11 Mio. UK £ (2003)
Employees
29 (in 2000: 13)
21
60
Via Forum of Firms:
influencing IFAC,
representation and delegation
Indirect financial support
(delegating members)
Indirect rule-making via
delegation of professions
Direct financial support
(providing 30%)
Direct rule-making authority
through reservation of a
minimum of 5 out of 14 board
seats
Sources: Official documents of IFAC and IASCF (IASC 1998, IASCF 2002, IASCF 2004, IFAC 2004).
Influence of
global
auditing firms
12
13
14
IFAC (Amended And Restated International Federation of Accountants Constitution, November 2004):
“The mission of IFAC is to serve the public interest, IFAC will continue to strengthen the accountancy
profession worldwide and contribute to the development of strong international economies by establishing and
promoting adherence to high-quality professional standards, furthering the international convergence of such
standards, and speaking out on public interest issues where the profession’s expertise is most relevant. IFAC
will carry out this mission within the framework of this Constitution and the manner hereinafter provided for.”
(PART 1, 2.)
IASC (as quoted in Discussion Paper Shaping IASC in the future, December 1998):
“The objectives of IASC as stated in its Constitution are:
(a) to formulate and publish in the public interest accounting standards to be observed in the presentation of
financial statements and to promote their worldwide acceptance and observance; and
(b) to work generally for the improvement and harmonization of regulations, accounting standards and
procedures relating to the presentation of financial statements.”
IASB (IASC Foundation Constitution):
“The objectives of the IASC Foundation are:
(a) to develop, in the public interest, a single set of high quality, understandable and enforceable global
accounting standards that require high quality, transparent and comparable information in financial
statements and other financial reporting to help participants in the world’s capital markets and other users
make economic decisions;
(b) to promote the use and rigorous application of those standards; and
(c) to bring about convergence of national accounting standards and International Accounting Standards and
International Financial Reporting Standards to high quality solutions.” (Part A, 2.)
27
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